Corporate subsidies have often been criticized for their undesirable economic effects and for discriminating in favour of certain sectors or companies. Nonetheless, they continue to be very present in Quebec’s economy: While Quebec produces just 19 per cent of the Canadian provinces’ total GDP, it grants nearly 29 per cent of the subsidies paid out by them.
Governments have at their disposal a multitude of measures to “support” economic development by targeting certain sectors, and sometimes specific companies. Notably, these include transfer expenditures (the best-known form of subsidies), tax credits, interest-free or reduced-interest loans and loan guarantees.
Taking only the first two of these, namely transfer expenditures and tax credits, total corporate subsidies granted by the Quebec government calculated based on the public accounts come to a minimum of $3.1 billion in 2016–17, while government receipts from taxing the income and the capital gains of private companies amounted to $7.5 billion.
This means that for each dollar the government collects from companies, at least 41 cents are spent on various forms of subsidies. Indeed, the real figure is likely higher, since the amount of certain types of subsidies cannot be evaluated precisely, like those stemming from interest-free or reduced-interest loans and portfolio investments. Moreover, one must factor in the loss of capital if the company is not able to reimburse the loan or if the value of shares falls. In both cases, it is the government, and hence the taxpayer, who ends up footing the bill.
Statistics Canada data shows that corporate subsidies occupy a particularly significant place in the Quebec economy. For every $100 generated by its economy, the government spends 86 cents on various forms of subsidies. For provinces like Ontario, Alberta, and New Brunswick, the corresponding amounts are just 40, 39, and 29 cents respectively. If Quebec subsidized its companies at a level similar to these provinces, it would spend around $1.5 billion less each year.
The disproportionate use of subsidies by the Quebec government does not result in a higher level of wealth per capita. Indeed, Quebec’s GDP per capita was $47,443 in 2016, compared to $74,343 in Alberta and $58,585 for the provinces together but not including Quebec.
Supporting the economy with subsidies is not a winning recipe, since such a high level of intervention entails adverse effects that undermine growth. Increasing taxes to finance these subsidies creates distortions in the economy, reduces households’ purchasing power and discourages productive activities.
Also, the existence of subsidies gives rise to “rent-seeking.” Instead of trying to be more competitive and better satisfy consumers, entrepreneurs have an incentive to spend time and resources to try to collect their share of subsidies. For their part, politicians have an incentive to use subsidies to help certain sectors or companies to which voters are more attached, without regard for their economic viability, in order to increase their chances of being re-elected.
By behaving in this way, the government essentially ends up confiscating money from more successful companies to benefit others that have not succeeded in convincing private investors of their profitability. And even if it manages to turn a profit from such activities, the government thereby politicizes entrepreneurship, which prevents an optimal allocation of resources.
The harmful effects related to the collection of taxes and their redistribution in the form of subsidies have long been known. The Quebec economy would be in much better shape if the government substantially reduced corporate subsidies and, in return, reduced the corporate tax burden as well. Such a reform would not have a significant effect on public finances but it would improve the competitiveness of all companies, reduce economic distortions and facilitate wealth creation.
Alexandre Moreau is a Public Policy Analyst at the Montreal Economic Institute and the author of “Quebec Is Still a Corporate Subsidy Champion.” The views reflected in this op-ed are his own.
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