Bombardier and Canada's corporate welfare trap

In the land of government plenty that vast landscape populated with the tax dollars of Canadians there is no shortage of politicians willing to hand out and defend subsidies to business and no dearth of corporations willing to take the cash.

Bombardier Inc., which recently announced it would lay off 1,700 people, has been one chronic seeker and a regular recipient of such taxpayer assistance. The Montreal-based aerospace company is thus a useful example of corporate welfare in action, the tax dollars at stake, and the regular, inflated claims about the beneficial effects of such subsidies.

Bombardier's corporate welfare began, at least federally, in 1966 when it received its first disbursement of $35 million from the federal department, Industry Canada. In the decades since, various Bombardier iterations received over $1.1 billion (all figures adjusted for inflation) in 48 separate disbursements from just Industry Canada. That includes two 2009 cheques worth $233 million.

Most of the money, excepting $55-million in grants, came in the form of conditionally repayable contributions conditional loans where repayment depends on the performance of a particular project.

That $1.1 billion does not include tax dollars received from any other federal department or other governments, including in Ontario, Quebec and even Great Britain ($298 million in the latter case). But if taxpayers wish to know how much money has been repaid out of just the amounts above, they're mostly out of luck.

Publicly, Bombardier claims it has repaid $275 million on two government loans originally worth $187 million. That ignores the dozens of other disbursements and much larger amounts loaned to the company.

Some other scraps of information are available though. In 2008, Industry Canada's department performance report noted a $108.4 million loan guarantee write-off. The department did not specify which company benefitted when taxpayers covered the loan, but media reports noted it was for government guarantees connected to Bombardier's turboprop aircraft.

Beyond such glimpses, my Access to Information requests to Industry Canada are regularly returned with the repayment records of most companies (not just Bombardier) blacked out. Under the federal Access to Information Act, the department must, legally, withhold such information if a company might suffer financial loss or have its competitive position undermined. In addition, Bombardier has also filed in Federal Court to prevent access to such numbers.

There are even larger corporate welfare recipients than Bombardier--for example, Pratt & Whitney has garnered $3.3 billion from Industry Canada since 1970. But if subsidies are so commercially sensitive, it should be obvious that governments potentially harm competitors when they interfere in an open market and at taxpayers' expense. Then there is the fact that the money governments hand over is first taken from someone else, either a private citizen or another Canadian business. Corporate welfare is not a costless activity.

More generally, despite the multiple claims for subsidizing businesses with tax dollars higher economic growth, more jobs and extra tax revenues the justifications wilt when examined closely.

For instance, one of the world's foremost experts on business subsidies, Professor Terry Buss, has noted how the various claims often result from correlation-causation errors. (That the rooster crows and the sun rises, does not mean the former caused the latter.)

Also, the government and industry studies that promulgate such myths fail to account for how gains to one region are necessarily offset by losses elsewhere.

The simplest example of this substitution effect occurred back in 1986 when Industry Canada helped pay for the construction of a new fish processing facility in Quebec at a cost of $2.2 million. The justification was that an additional 250 jobs would be created when the new plant opened its doors. However, as the Auditor General noted in 1995, the nearby existing fish-processing facility (which also received federal subsidies) soon closed with job losses equivalent to those created by the new market entrant. Net employment gains were zero because jobs were transferred not created at the cost of taxpayer subsidies.

Corporate welfare is not inevitable as policy. Back in the 1990s in Alberta, after a plethora of loans and loan guarantees signed during the Peter Lougheed years went south, leaving taxpayers with a $2.2 billion loss, the then government of Ralph Klein decided it was out of the business of being in business. It was a pledge and a legislature-approved policy to which the Klein government mostly stuck.

There is nothing contradictory about wanting Bombardier, Pratt & Whitney, or other businesses to thrive and yet opposing taxpayer subsidies based on the empirical evidence. Corporate welfare is costly and taxpayers don't need to be continually dragged into corporate battles for market share.