Ever since the federal government signalled an open bar for subsidies for the electric vehicle industry, the list of companies wanting to set up shop in this country in exchange for taxpayer cash just keeps growing. We learned recently that both Honda and Toyota have added their names to it. If the past is any guide, there’s a good chance Ottawa will give each of them a wad of Canadian taxpayers’ money.
Companies can’t be blamed for asking for money, especially if their competitors have already received handouts. But the government needs to ask itself some basic questions about the rationale for these expenditures, especially when its underlying hypotheses are challenged by the Parliamentary Budget Officer, who noted, for instance, that the final price tag for those subsidies would be higher than initially estimated due to tax implications, and that it would take the government much more time for its spending to break even than what was announced by federal officials.
The most important thing missing from the government’s considerations is any recognition of the most basic concept in economics: opportunity cost. If the government did not spend this money on mega-subsidies, what would be the impact on the economy and how would it compare to the battery expenditures’ anticipated effects?
In general, it’s better to leave money in taxpayers’ pockets than to use it to heavily subsidize large companies. Consider the money already allocated to EV battery plant projects in Canada. After Volkswagen was promised $13.2 billion of production subsidies, Stellantis insisted on its turn at the cookie jar and came away with $15 billion. Then Swedish manufacturer Northvolt grabbed a share, for a total — so far — of $32.8 billion in public funds.
The subsidies that will be paid out represent over $3 billion per year until the 2032-33 budget year. To put that sum in perspective, it is larger than the additional revenues stemming from the new tax bracket introduced by the Trudeau government in 2016, which amount to $2.88 billion this year, according to the PBO.
When governments decide to take more money out of taxpayers’ pockets, it leaves them with less for things like groceries, car payments, and savings. It may also make them less likely to become entrepreneurs. A person who is more heavily taxed has less money with which to start a business. Indeed, the economic literature finds a clear link between an increased tax burden and slower business creation in Canada.
The 2016 increase kept many entrepreneurs from starting a business. If not for that increase, some 9,820 Canadian companies could have been launched between 2016 and 2020, thus contributing to the country’s prosperity. But instead of following this path, the government preferred to tax Canadians more and use the new revenue, or at least an amount equivalent to it, to subsidize foreign multinationals.
This kind of decision has negative effects on self-employed workers, too. Given their diminished number since the start of the pandemic — 150,000 across the country — it is clear that they need help, and probably more than the multinationals behind battery and electric vehicle manufacturing plants do. Thousands of new businesses would certainly have created value far and wide, with no need for the government to decide, through the tax system, how Canadians should spend their own money.
Canadians’ prosperity does not depend on how many EV battery plants there are in the country, but rather on the success of all sectors of the economy and all economic actors, from the corner garage to the big Bay Street bank. Canada will be better off when Ottawa understands its role is neither to be the country’s biggest venture capitalist, nor to tax us all so heavily as to be a drag on entrepreneurship.
Emmanuelle B. Faubert est économiste à l’IEDM et Gabriel Giguère, un analyste en politiques publiques à l’IEDM. Ils signent ce texte à titre personnel.