Demonized ‘industrial policy’ puts corporate tax cuts to shame

Posted on January 22, 2015 in Policy Context – ROB/Commentary/ROB Insight
Jan. 22 2015.   Andrew Jackson

The words “industrial policy” have been virtually banned from polite company, and should certainly never be uttered in the presence of small and impressionable children. Many mainstream economists and conservative think tanks believe that governments should seek only to create a favourable business climate through low taxes and light regulation, and should not intervene in the investment decisions of private corporations.

And yet, industrial policy (which should be called strategic economic policy) persists, and arguably has a greater impact on investment and jobs than broad framework policies such as deep corporate tax cuts.

The Harper government has proudly put corporate tax cuts at the very heart of its so-called growth and jobs agenda. Since taking power in 2006, they have cut the general federal corporate tax rate to 15 per cent from 22.1 per cent. According to the Parliamentary Budget Office, each one-percentage-point reduction costs $1.85-billion in lost annual revenues, so the total annual cost is some $12-billion.

Corporate tax cuts certainly boost after-tax corporate profits, but have had a negligible impact to date on actual business investment in machinery and equipment and in intellectual property, which are the key building blocks of our future prosperity. The latest national accounts data show that real business spending in these vital areas has been flat for the past three years and remains below the pre-recession level, both in dollar terms and as a share of the economy.

Corporations are reporting decent profits but have been buying up their own shares and building up over $600-billion in cash reserves. They lack the confidence to invest for the future at a time of sluggish growth.

It is in this context that the federal and Ontario governments jointly contributed $100-million in support of a major new investment of $500-million by Linamar in Guelph that will create an advanced manufacturing facility and 1,200 new jobs.

We can expect more such announcements given that the federal government injected an extra $500-million into the Automotive Innovation Fund in the 2014 budget. Industry Canada also supports new investments in the aerospace industry, notably in Bombardier, through the Strategic Aerospace and Defence Initiative program to the tune of more than $200-million a year.

When it comes to investment in research and development, the federal government has cut some programs but remains a player through the National Research Council and the various granting councils that help counteract Canada’s dismal record in business-funded research and development. These programs have been mandated to help build Canadian business capacity.

Two federal government-owned quasi banks, Business Development Bank of Canada (BDC) and Export Development Canada, provide significant loans and other services to small businesses and exporters, taking on more risky loans than the big banks. And, in a significant departure from orthodoxy, the federal government is now directly investing $400-million in venture capital funds plus an extra $100-million in BDC Capital as part of the new Venture Capital Action Plan announced in the 2012 budget.

While avowedly “private-sector led” and operated at arm’s length from the government, these government funds are being invested as equity in specific areas of the economy such as high tech, IT and health care where startup capital is much more scarce than in the United States.

Progressive economists see these interventions as broadly justified and cost effective given market failures that limit the willingness of the private sector to undertake or finance risky but potentially highly productive investments. The federal government’s own advisory panel on the funding of innovation, led by Tom Jenkins, recommended more targeted and strategic interventions.

This raises the question of how much money should be funnelled to the private sector through costly across-the-board tax cuts as opposed to more targeted programs. The fact that even the Harper government has retained and even expanded some strategic interventions strongly suggests that they are needed.

Rather than demonize “industrial policy” we should reflect on just what are the most effective ways to support wealth creation.

Andrew Jackson is an adjunct research professor in the Institute of Political Economy at Carleton University and senior policy adviser to the Broadbent Institute.

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