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Business Commentary Business subsidies are a huge waste of money. Why governments should just say no

Mark Evans/ istock

Prime Minister Justin Trudeau can say his government’s unusual level of interest in the fate of SNC-Lavalin was ordinary due diligence, but his efforts to help the legally challenged Quebec engineering giant give off a nasty stench. Politicians and bureaucrats shouldn’t be so obviously eager to rush to the aid of businesses that happen to be located in politically sensitive jurisdictions.

Here's the thing, though: It's easy to understand why Ottawa officialdom appears so deeply confused on the issue. For years, Canada's elected leaders and their chosen bureaucrats have regarded doing favours for business lobbies as a necessary part of their jobs.

The result is a mess of sweet deals for this industry or that sector. The federal and provincial governments justify these arrangements with flimsy economic alibis that, for the most part, don't stand up to inspection. But who objects? Many of the biggest offenders are folks who portray themselves as sturdy icons of capitalist independence—think small businesses and farmers, for starters. In reality, the system they've helped create isn't about capitalism at all. It's about handing out special dispensations from government.

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Much of Canada perceives these favours as flowing disproportionately toward Quebec, and it’s easy to see why—the biggest corporate recipients are so brazen. Ottawa has poured endless subsidies into Bombardier, the aviation company that can never quite get itself off the ground. Nearly as bad is the Trudeau government’s eagerness to kiss and make up with SNC-Lavalin, which is alleged to have committed bribery and fraud in Libya.

But Canada's eagerness to cut deals for businesses doesn't stop at provincial boundaries or party lines. Consider the bailout of Ontario-centric automakers during the financial crisis. More recently, there was the decision to buy the Trans Mountain pipeline to get oil flowing from Alberta. Add in Labrador hydro dams, Newfoundland greenhouses, New Brunswick sports cars and Prairie upgraders, and the history of government boondoggles is truly an all-party, all-Canadian epic.

Governments have learned little from their misadventures. Last year, John Lester, an executive fellow at the University of Calgary’s School of Public Policy, estimated the federal government and the four largest provinces spent $29 billion subsidizing businesses in the 2014–15 fiscal year. Just under half of overall subsidies failed to improve economic performance, he estimated, while the amount of questionable spending was close to 60%.

It may not shock you to learn that some of the biggest beneficiaries were sectors that pride themselves on their self-reliance. The largest subsidy program of all consisted of $7 billion or so for small businesses, courtesy of lower tax rates.

This doesn’t make sense. There is a case for subsidizing young, innovative, fast-growing companies with global ambitions. They can spur growth. However, there is no rationale for cutting a deal for corner stores and dry cleaners. These are small businesses that intend to remain small.

The list of other sectors that get special favours is, as you might expect, pretty much endless. Farmers benefit from supply management and government lending programs. Filmmakers enjoy tax credits for shooting in Canada. Miners depend on flow-through shares and tax credits for mineral exploration. Manufacturers feast on tax incentives for investing in new machinery. Even media companies now seem to be joining the subsidy parade.

It's no mystery why these programs proliferate like new varieties of Coke. Industries and sectors become addicted to goodies, while politicians enjoy the power that comes from dispensing treats.

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Isn't there a better way? Lester says more transparency would help. Governments already publish some numbers on subsidies, but these figures tend to be scattered and incomplete. The next step would be a comprehensive annual report that collects information on all subsidies through all channels—program spending, and tax credits and deductions, as well as incentives and loans delivered through government business enterprises. This would allow taxpayers to see who's getting subsidized and by how much.

The even better option would be an independent assessment, perhaps through the Parliamentary Budget Office or provincial auditors, of each program's purpose and whether it's actually achieving that goal. Programs that can't clearly demonstrate an economic payoff or undeniable social benefit should be pruned.

A tough-minded approach would direct funds to areas that have tangible benefits. Just as important, it could help improve politics. Elected officials might be more willing to stand up to lobbyists if they knew any aid would be subjected to rigorous analysis. And right now, we need politicians with spines.

Ian McGugan is an award-winning Globe and Mail writer. Reach him at imcgugan@globeandmail.com or on Twitter @IanMcGugan.

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