Should governments subsidize businesses?

Grants and local procurement policies can make industries more competitive, but not in a good way

Credit: Kagan McLeod

Grants and local procurement policies can make industries more competitive, but not in a good way

The year 1972 was big for the political left in Canada. In B.C., Dave Barrett led the provincial New Democratic Party to a stunning victory over W.A.C. Bennett and the Social Credit Party. And in the federal election campaign of that year, NDP leader David Lewis took his party to a new high, thanks to the memorable phrase “corporate welfare bums,” coined by Lewis to describe companies that benefit from lavish government subsidies and tax breaks. The issue cut across the political spectrum back then. Now, 45 years later, the executives at Bombardier Inc. have proved it to be a durable concern.

The money-losing Quebec-based aerospace and transportation manufacturer picked up another $372.5 million in government loans this year, bringing its total government loans and subsidies to about $4 billion since 1966, according to think tank the Montreal Economic Institute. Then it caused public outrage by promptly announcing hefty bonuses to its executives.

So it appears the public may have drawn a line on shovelling tax dollars to a pampered corporation. But if that kind of overt government financial support is now political poison, what kinds of government assistance are considered kosher?

Canadian governments have regularly felt a practical or political need to support, maintain or even create particular domestic industries, such as aerospace and green technology. On the downside, this can result in a kind of moral hazard where the companies involved realize that their real clients are not those who buy the products but the officials who write the cheques. Their business becomes subsidy-seeking.

Canadian cultural industries have long been placed in a different category than more industrial concerns. They are treated rather like native flora and fauna endangered by invasive species—small local amphibians elbowed out by massive transplanted bullfrogs. Canadian media and entertainment have been protected against the flood tide of American popular culture through a mix of subsidy and regulation. (This magazine, for instance, benefits from protective tax regulations aimed at U.S. publishing giants.) CRTC Canadian content regulations for radio created a demand for Canadian music that led to a thriving and internationally successful music industry.

Telefilm Canada (originally known as the Canadian Film Development Corp.) was established in 1967 to help fund a domestic film industry and has been doling out grants ever since. According to one local film producer, there was a time when you could make a decent living in the Canadian film business as a grant farmer. “The old development process put more focus on the idea than on the applicant’s track record,” he says. “This led to a lot of funding for people who didn’t end up getting movies made.”

On the other hand, failure is part of developing a film industry. “Early in my career I got a lot of funding for projects that didn’t happen,” the producer admits. “I’d like to think that those experiences taught me how to get movies made. But it doesn’t change the fact that a lot of funding went into developing projects that went nowhere.”

Telefilm took note. Several years ago it changed its funding guidelines, putting more emphasis on a proven ability to get the job done. “This probably makes it harder for new talent to access money,” the Vancouver-based producer says, “but it’s a more practical approach.”

Canadian content regulations for radio, while not universally beloved, had an undeniable impact in creating a strong national music industry, and without subsidies. Unlike the CRTC, Telefilm can’t mandate a guaranteed number of screens for Canadian films. Radio is free, but movies cost money, and forcing people to buy tickets for certain films isn’t possible. Thus, Telefilm notwithstanding, the most effective initiatives for the Canadian film industry have come at the provincial level via tax breaks to attract foreign productions, such as the Film Incentive BC tax credit.

Few would deny that the B.C. film industry is vibrant and offers employment for thousands. And yet film tax credits amount to lost government revenue as surely as the money handed out to Bombardier. Is that a double standard? Or just sensible strategy?