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How Industry Canada Blew $13.7 Billion In Corporate Welfare

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The well-known quip -- "The definition of insanity is doing the same thing over and expecting different results"--is often attributed to Albert Einstein or Mark Twain. Accurate attribution has never been confirmed.

What is certain is how the cliché applies to governments of every partisan stripe when they dress up past, failed corporate welfare strategies in ever-new language. Predictably, they get the same results for taxpayers: billions of tax dollars in up-front losses due to how governments hand out grants to business. And billions more foregone because of poor repayment records when tax dollars are even required to be repaid.

The newest example comes from a look at Industry Canada over the past three decades. During that time, the department has managed literally hundreds of programs that give or loan money to businesses -- every type of entity, small and large, from gas stations and craft shops to aerospace and automotive companies.

In information gleaned from a recent Access to Information request to the department, I found that between 1982 and 2012, the federal Department of Industry spent $13.7 billion on subsidies to business (not adjusted for inflation).That works out to $456.6 million per year on average from a single federal department.

Of the $13.7 billion, $6 billion (44.3 per cent) was disbursed with no repayment expected -- grants, in other words. A much smaller amount, $236 million (1.7 per cent) was paid out after various businesses defaulted on loans previously guaranteed by Industry Canada.

Another $7.4 billion (54 per cent) was in the form of loans ("repayable contributions" in government language). Where repayments occur, the track record is poor. Of the $7.4 billion expended since 1982 in repayable contributions, just over $2.1 billion (28.8 per cent) has been repaid to taxpayers.
Successive Industry Canada ministers (Liberal before and Conservative now) assert that taxpayers should be patient; that such "investments" will one day roll back in to the federal treasury.

But let's examine this claim. Consider one Industry Canada program, the Defence Industry Productivity Program (DIPP). It was in existence from 1968 until 1995 and transferred billions of taxpayer dollars to Canada's aerospace companies. For contracts that required repayment, Industry Canada disbursed just over $2.1 billion but only $767 million has been repaid. That is a 35.6 per cent repayment record in a program that has been defunct for 17 years.

On DIPP's successor program, Technology Partnerships Canada, just $789 million (or 25.2 per cent) has been repaid of the $3.1 billion doled out in repayable contributions between 1996 and 2006. In its public statements about the usefulness of such corporate welfare, Industry Canada regularly asserts that predicted repayments "are on track."

However, a 2005 analysis prepared for the department by consultants about Technology Partnerships Canada undercuts that claim.

Back then, the consultants, Hickling Arthurs Low, noted that expected total repayment estimates, including in all future years, have been reduced by 55 per cent since the original contracts were signed. It is thus not accurate to claim that repayments are in line with forecasts when forecasts are routinely revised downwards.

Another bit of information also reveals how many companies get a great deal courtesy of Industry Canada - though not so great for taxpayers.

Over the past three decades, only $9 million in interest was ever paid to the department. That amounts to barely more than 1/10th of one per cent of the original $7.4 billion disbursed in repayable loans.

The $13.7 billion in corporate welfare at Industry Canada is one part of a much bigger problem. In a previous study from 2009, I found that $202 billion was spent on subsidies to business across Canada by every government between 1994 and 2007, or over $15,000 per tax filer who paid tax in those years.

Corporate welfare is a losing proposition. Peer-reviewed research on business subsidies does not support (political and recipient) claims that corporate welfare is responsible for economic growth or job creation, two of the most oft-heard claims. At best, a generous interpretation of the literature suggests that subsidies may, in very specific locations, produce some effect on local economic behaviour.

Problematically, even that limited impact is typically offset by losses elsewhere in the economy from tax rates that are greater than would be the case without business subsidies. The literature also finds the supposed benefits are also a mirage because when one government bribes business to stay or to move to its region, lost jobs and lost tax revenues show up somewhere else.

Unfortunately, political action to cut back on taxpayer subsidies to business is rare. But when governments engage in the corporate welfare habit, the results, and the folly of doing so, are entirely predictable.