By Robert Roach
Canadians are sometimes derided for not being ruthless enough in the international economy. It is ironic, therefore, that we are so willing to cut one another's economic throats here at home.
Governments in Canada routinely seek to lure economic development away from other Canadian jurisdictions by offering subsidies and tax breaks. The end result is a race to outbid one another for something that should not be bought in the first place.
Subsidies are used as a lure because many politicians in Canada still believe that they, rather than a highly-educated workforce, minimal red tape, a competitive tax regime and top-notch infrastructure, lead to economic growth and job creation.
The latest example comes courtesy of the Ontario government, which is offering subsidies to video game developers and publishers to move to Toronto, likely at the expense of the existing video-game industry in Vancouver and Montreal.
Much like the temptation of eating that big piece of chocolate cake that you know you shouldn't eat because it's just empty calories, the temptation to buy economic development with what are essentially bribes to business is extremely powerful because it is very satisfying in the short term.
Governments love announcing that Company X is setting up shop in their backyard. This means more jobs and more economic activity. The tactic, however, results in more problems than it solves.
In some cases, the cost to the taxpayer is greater than the economic boost promised, and there is no guarantee that a company lured by public subsidies will not move on when an even bigger pile of public money is thrown at them by another government. Governments also find themselves picking winners - something they are ill equipped to do - and subsidized businesses tend to get soft as they come to depend on public dollars to compete.
In addition, when a company is lured away from one part of Canada to another, the country as a whole is worse off. The bitter regional rivalries created by the use of subsidies undermine the nation's economic performance. It is bad enough when foreign jurisdictions play dirty pool by bribing businesses to choose them over Canada, but it is even worse when we do it to one another.
There has been plenty of discussion recently around our lack of international competitiveness. Interprovincial barriers to trade have been identified as one cause, and governments are taking some steps to reduce internal barriers and their impact on competitiveness.
However, industrial subsidies have the same effect. As businesses are lured from one part of the country to another, the national economy becomes less competitive and resources are wasted as governments compete against one another. Ultimately, the short term winners in the subsidy game run the risk of becoming long-term losers.
Governments in Canada would be better off if they refused to steal economic activity from one another through subsidies and tax breaks.
Of course, there may be fewer ribbon cutting ceremonies and industry associations will cry bloody murder, but economic development strategies that forsake propping up existing industries or luring new ones with subsidies and tax breaks will, over the long run, put Canada onto more solid economic ground.
Giving up on subsidies would mean bracing ourselves for companies that fail or leave for seemingly greener pastures. But while we will still have to deal with foreign jurisdictions looking for plunder, at least we won't have to look over our shoulder for members of our own family doing the same.
Governments should focus on enhancing our comparative advantages – the availability of skilled workers and excellent infrastructure - rather than on direct subsidies. Such an approach would avoid the problems created by direct subsidies while creating a more even playing field for all industries.
There would still be plenty for governments to do in developing the economy. They would still have to wisely invest public dollars in education and infrastructure; they would still have to find creative ways to provide excellent public services at a competitive level of taxation; and they would still have to ensure that the regulatory regime is as light as possible while still protecting the public interest. This is enough to do without getting into the habit of dangling tax dollars in front of businesses.
