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Thirteen Reasons Why Government Should Stop Subsidizing Business
by Dean Smith, Canadian Taxpayers Federation

It comes under many different banners - economic development, regional prosperity, diversification, government stimulation of the economy, mega-projects, but they all translate into one meaning; taxpayer sponsored handouts to business. And all these descriptions have proven to be abysmal failures.

The following are 13 reasons why government should stop subsidizing businesses.

#1 -- Government chooses the winners and losers

In a 1983 study undertaken at Queen's University, Dan Usher evaluated the benefits and costs of five federal business grant programs. He found in 40% of the cases, the government grants represented 50% of the company' s net worth. In 20% of the cases, the grants represented 175% of the company' s net worth. Since these grants constituted a significant increase in the individual' s wealth, "the federal government may be in the business of appointing rich men as a natural and inevitable consequence of the grants program."

Roger Douglas was New Zealand s finance minister when their country hit the debt wall. He stated that the ending of business subsidies in their country provided a more even and fairer playing field for all businesses. He also stated that by stopping these type of handouts, the NZ government was no longer helping to pick the winners in the business world. If the billions of dollars spent on government subsidies were returned to taxpayers, it would give all businesses an equal chance at getting this money.

#2 -- It distorts the market place

On August 30, 1992 Western Economic Diversification announced it would be providing a $5 million interest free loan to a paper company to help it build a tissue plant in Redcliff, Alberta. Robert Stewart, the CEO for Scott Paper headquartered in Vancouver reacted quickly. In a news release he claimed that the tissue market was already saturated. "Additional production in the tissue industry can only mean one of two things: if the mill is successful it will cost jobs elsewhere in Canada. If the mill fails, taxpayers will foot the bill..." he said.

WED has since withdrawn this funding and there is no indication if it will still be built. Nevertheless, government assistance can entice businesses to invest in areas they otherwise would avoid due to market conditions.

#3 -- It produces a welfare mentality

When you go through the federal public accounts, which lists all those groups and businesses receiving assistance in excess of $100,000, you repeatedly find the same businesses there year after year.

This is no more evident than in the Atlantic Canada Opportunity Agency (ACOA). In the 1993-94 Public Accounts, we find in the ACOA section that 91% of the New Brunswick companies had received previous assistance from that agency. Nova Scotia companies came in second at 79% with PEI and Newfoundland following at 73% and 70% respectively. Though ACOA has only been in operation since 1987, a number of companies have already received assistance over 10 times.

Companies repeatedly at the tax trough indicates that government handouts are not producing financially sound businesses but a dependency on government help. If a business needs government assistance to get it going, it often needs government help to keep it going.

#4 -- It becomes job redistribution, not job creation

Politicians eagerly take credit for government-created jobs in their constituency. They fail to recognize, however, that these jobs have simply been redistributed.

Two years ago, the Alberta government provided funding for a new restaurant in the city of Edmonton. To succeed, this restaurant either had to entice new people to eat out or it had to take business away from existing restaurants. As a result, the jobs being created at the new location could easily be offset by job losses in other locations as their competitors' revenues dropped. The end result would not be job creation but simply job redistribution.

The irony is that politicians are quick to take credit for the new jobs, but they take no responsibility for the job losses.

#5 -- It puts tax dollars at risk

Despite the government's help, billions of tax dollars have been lost through business closures or repeated bailouts. At the provincial level one of the largest boondoggles was Novatel, a cellular phone manufacturer in Alberta where over $614- million provincial tax dollars was flushed away.

The federal government has also lost billions of dollars in bad business ventures. In 1986, Ottawa paid out $1.8 billion in loan guarantees on behalf of Canadair and $586 million on behalf of de Havilland. This resulted in nearly $2.4 billion being added to the federal debt due to these two deals alone. More money was spent on these two boondoggles than the entire Federal Department of Industry's budget.

Although horrific in terms of dollar amounts, these deals represent just the tip of the iceberg in terms taxpayer losses on a provincial and federal level. Many smaller isolated instances never receive the publicity the massive boondoggles do.

#6 -- It's our money

Some time back we got a call about an article we ran in The Taxpayer concerning a group of businesses that had received some assistance to attend an overseas trade show. The caller was concerned because the government funding had provided a number of valuable contracts and contacts. He asked us if we were opposed to government funding when the result was new jobs and more business.

The fact is if you provide enough assistance there are bound to be some success stories. However, is this where taxpayers - who pay nearly 50% of their income to taxes - want their money spent?

It s also an issue of priority. Should governments be pouring money into business subsidies because of a few success stories, when health care is being cut back and our country is plunging head over heels into debt?

#7 -- It can put political decisions over economic ones

As long as there are politicians, there will be patronage. The best one can hope for is simply to reduce the opportunity for it. A few months ago, a government official told us he was approached for financial assistance by a local business that had already been turned down by the banks. After going through the company's books, the project was considered too risky and the loan was declined. Not surprisingly politics often plays a role in determining who gets government assistance. Three weeks later this official got a call from his head office saying the loan was to be approved. Apparently phone calls to local politicians had changed what should have been an economic decision into a political one.

In these situations, it's not just tax dollars that are in jeopardy, but even the business itself. If the project is not viable it could cause the business to go bankrupt. Government assistance could actually result in a reduction of jobs. Although a bank's refusal to lend money is often in its own best interest, it's often in the best interest of the company as well.

#8 -- Lack of accountability

In a many instances there seems to be no accountability on how the government spends your tax dollars. Each year departments are given a fresh batch of money whether they spent last year s budget effectively or not.

A good example of poor accountability is seen in the funding provided to the Myrias Research Corporation of Edmonton, Alberta. Myrias was trying to establish a facility to produce and market super-computers. In 1990, it received five interest free loans from Western Economic Diversification. Myrias got $526,990 on January 16, 1990; $1,466,725 on April 17; $686,695 on May 30; $775,847 on August 9; and $517,225 on October 5. Then just two weeks later, on October 26, 1990 the company was put into receivership. Heads would have rolled if any bank manager would have made such a goof.

#9 -- Can become business bribes

Another negative side effect of government subsidies is the tendency for businesses to put themselves up for sale to the highest bidder. Over the past few months, a number of provinces have become involved in bidding wars to attract new businesses. New Brunswick has been aggressively enticing business by offering loan guarantees and other incentives. The Globe and Mail even got a copy of a letter sent by the Mckenna government to a car insurer owned by the B.C. government.

Since New Brunswick is one of the major benefactors in terms of federal transfer payments, they are using tax dollars from other provinces to lure businesses away from those very same provinces.

#10 -- Stifles entrepreneurial spirit

It s frustrating for businessmen to watch their tax dollars being used to subsidize their competition.

In 1991, MacDon industries, an agricultural manufacturer in Winnipeg, ran an ad in a local newspaper. Signed by A. Macdonald the CEO of MacDon Industries and W. Wattier President of the MacDon Employees Association, they were expressing their concerns about the announcement of a government subsidy provided to a competing business.

"We cannot compete with the government, and if you continue to interfere in the market place by bailing out those who fail, there will likely, in time, be no one left in the farm equipment industry except those the government must support."

"Your loan of our tax money...will hurt us. They will now be in a better place to compete in the market. Our employees will suffer. We do not know how many jobs were saved by your support. It is difficult to calculate the loss to our employees..."

Between 1989 and 1991, MacDon industries poured $5 million of its own money to expand its facility and to upgrade its equipment, and now this was at risk because of a government bailout.

How can we expect businesses to invest their own capital and time, if they are repeatedly faced with competition from the government?

#11 -- It can promote bad decisions

If businesses are not risking their own money, it s easier to become involved in high risk ventures with little chance of success. In his 1992 report to Parliament, Canada s federal Auditor General made this point very clearly when discussing loan guarantees. When a business need funding, banks will often only provide it if the government provides a loan guarantee. The Auditor stated, "When a lender assumes no risk, it has no incentive to lend prudently." He also noted that the business receiving the loan guarantees also assume little risk, but can enjoy any gains. This principle applies not only to loan guarantees, but to any type of government assistance.

#12 -- Would they do it anyways?

After decades of government handouts, Canadian governments have created a climate where businesses who don t need assistance are getting government help.

In an interview on CTV s Canada Am, Ted Newall, the CEO of Novacorp of Calgary, said that he believed that government s should get out of the business of subsidizing business because in many instances government s are providing assistance to highly successful businesses who would go ahead with the project whether they received help or not.

Because government departments have taken a lot of heat for bad losses over the years, there is a temptation to provide assistance to projects with a higher degree of success. Consequently, we have businesses receiving government money, when they would have gone ahead with or without the help, simply because it made economic sense. Any ultimate success had little to with the government subsidy.

When you see large multi-national corporations such as Pratt and Whitney, Boeing, Rolls Royce and McDonnell Douglas getting government assistance, you have to wonder why they would need public funds.

As Newall stated in his interview, "If the government is giving out money you have to go out and get your share."

#13 -- It subsidizes inefficiencies

Invariably, government assistance is also used to prop up businesses that few people want. In 1990, Dianne Francis (Financial Post business editor) wrote a story about a small newspaper by the name of "Le Courrier de la Nouvelle-Ecosse" in Nova Scotia.

That year it received $400,000 from the Federal Government, $250,000 from the Nova Scotia government and $150,000 from Quebec. The money was used to "ensure that Le Courrier does not die and is a means by which Nova Scotia's francophone can communicate."

The small weekly French newspaper which had been going for 53 years only had a circulation of 3,400 at that time, so the assistance works out to $240 for each subscriber.

Should taxpayers fund a venture when there isn't enough interest in the market place to warrant its existence? If the paper did close down, many of its subscribers would no doubt turn to other publications for their reading materials. So in fact government subsidies hurt efficient and successful companies.

DECLARATION OF CANADIAN INDEPENDENCE

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