Yahoo Finance Jack Mintz: Corporate welfare for those that don’t need it
In case you missed the news, our indebted federal government is forking out $220 million from its Strategic Innovation Fund to Quebec’s Rio Tinto to increase the production of critical minerals and reduce carbon emissions.
Rio is not the first multi-billion company to be enriched by Canadian taxpayers nor will it be the last. Whether it’s Ontario’s electric vehicle companies, B.C. and Alberta’s film industries or Atlantic Canada’s pulp and paper plants, thousands of companies over the years have received federal and provincial “corporate welfare,” a colourful term highlighted by federal NDP leader David Lewis in his “corporate welfare bums” election campaign of 1972.
Such welfare has taken the form of grants, tax credits, wage subsidies and loan guarantees. With their helping hand, governments are also on the hook to bail out low-productivity companies when markets go sour.
When a government gets involved in the nation’s boardrooms, expect a significant cost to taxpayers, whether current ones or, because of higher deficits and debts, future generations. Typically, the middle class foots the bill with higher income and consumption taxes, which slow down the economy, offsetting any job creation in the subsidized sector. There is no free lunch.
Rio Tinto is expecting to quadruple its production of scandium, which is used in aluminum alloys — even though aluminum production is already heavily subsidized in Quebec via favourable electricity pricing, as the OECD reported in 2019. It will also increase its output of titanium, which is used in aerospace and autos, and boost its capacity in lithium for battery production.
It’s not that Rio Tinto is going bankrupt. According to its latest financial report, in the first six months of 2022 its after-tax profits were US$8.9 billion with an underlying return to employed capital equal to 34 per cent. Despite the recent global slowdown, prices for these critical materials are far higher than just five years ago. Lithium, for example, is trading at US$70 per kilogram, seven times its price before 2020. Titanium is at US$11,000 per kg, three times higher than previously.
If a company like Rio Tinto has great prospects, why is the federal government subsidizing it? Visiting Rio’s plant for the announcement, the prime minister declared “the investment would help create middle class jobs.” But that is not a “science-based” statement. Quite the opposite. Though industries and their patrons in government justify subsidies by arguing they create thousands of direct and indirect jobs, in reality resources are not just sitting around idly. What subsidies do is shift resources from more to less successful uses, which leads to a net loss in well-paying jobs.
For example, the biofuels industry claims that its industry has created $5 billion in new GDP since 2007. But the studies it bases this on ignore the replacement of fossil-based fuel, which is cheaper to produce. Even more critically, if carbon is being priced anyway, why are we mandating and subsidizing low carbon fuel? (Full disclosure: I’m a director of Imperial Oil, which produces biofuel.)
One popular argument for subsidies is to spur “moonshot” infant industries that would not exist without public money. But it presupposes that all-wise governments know, not only which industries are the future stars, but which firm is going to be the supernova. Though governments can’t tell winners from losers, losers do know how to pick governments. True, government support of infant industries has had some limited success — and some people do win in Vegas — but whole herds of white elephants have got funding as well. Ever heard of “compressed air” autos co-built by India’s Tata company? Or the Northwest refinery boondoggle in Alberta?
Another popular justification for subsidies is that they correct for market distortions such as chronic underinvestment in innovation. But this assumes capital markets are so imperfect that worthy innovators can’t access funding from banks, private equity and other lenders who fail to see good profitability. Government bureaucrats may think they can outsmart international capital markets, but they can’t. As for politicians, they often subsidize industries to gain local political support, not because the investments are sound.
Subsidies are also a response to other countries’ subsidies — though that requires subsidizing just about every industry since somewhere in the world since just about every industry is getting a subsidy somewhere in the world.
In mining, Canada already has one of the world’s most tax-competitive fiscal environments. In an Australian paper released last week, my co-author Philip Bazel and I find that the effective tax rate on new mining investment in Canada is far less than in other major mining jurisdictions. This is partly because Canada relies on profit-based royalties but also because of numerous tax incentives for exploration, development and processing. Our competitiveness may erode over time, however, since we are moving to much higher carbon prices than other countries are, especially the United States, which has no carbon tax.
The big obstacle to mining investment in Canada is our incredibly slow permitting system, especially compared to Australia. One senior executive told me recently that obtaining a permit in British Columbia is now almost impossible under federal and provincial law, so they are investing elsewhere.
If new projects can’t be approved, no business subsidy will work. The best solution is obvious. Fix the regulatory system. That, not subsidies, should be our policy focus.