General business support programs don't work. Instead, focus on competitive tax policies, manufacturing institutes, and opportunity zones: Policy paper
December 4, 2019
The Ontario government spends approximately $5 billion a year on business support programs, many of which don’t stand up to cost-benefit analysis.
So say Jamison Steeve and Sean Speer in a new paper published by Ontario 360, a public policy research group housed at the University of Toronto’s Munk School of Global Affairs and Public Policy. The authors argue that Ontario’s business support programs aren’t doing what they’re supposed to, and may even be counterproductive.
The report takes its launching point from the province’s efforts to reevaluate the performance of its business support programs. In April, Ontario introduced its Open for Jobs Blueprint, which seeks to modernize those programs based on principles of accessibility, fiscal responsibility, coordination and scalability, and effectiveness.
Steeve and Speer point to multiple reports that have deemed Ontario’s business support programs to be ineffective: Don Drummond’s report on Ontario’s public finances in 2012; an Auditor General of Ontario report in 2015 that couldn’t verify its economic development and employment-support programs were effective; a 2018 report by the Financial Accountability Office of Ontario that likewise found no evidence for the effectiveness of these programs; and another report in 2018 by Ernest and Young, commissioned by the Ford government, that identified business support programs as a “major area for government to focus on to achieve efficiencies and improvements.”
Speer and Steeve emphasize three problems with business support programs:
1) Access to cheap capital doesn’t necessarily outweigh other influential factors like energy and labour costs in driving business investment decisions. Consequently, business support programs could be making needless subsidies, or distracting policymakers from real challenges.
2) Since modern tech firms have lower sunk costs and smaller workforces, the transition from an industrial economy to a knowledge-based economy fundamentally alters the usefulness of traditional business incentives.
3) Business support programs habitually overemphasize measurements like the number of jobs, while ignoring “unseen costs” such as market distortions.
Given the poor evidentiary basis for business support programs — ”The evidence from around the world and here in Ontario seems overwhelming in this regard." — Steeve and Speer argue that Ontario is smart to focus instead on reforming regulations and lowering taxes, and should continue even more ambitiously down this path to enhance its economic competitiveness and improve its productivity. ”The government has made some early steps on regulatory reform and lowering taxes on capital investment but there is more to be done to offset the province’s high-cost reputation,” they write.
In order to draw public support to a “pro-competitiveness framework,” the authors advocate for what they call the “22-percent challenge”: that is, closing the 22-percent productivity gap between Canada and the United States, which offers a clear and compelling objective on both a policy and political level. ”If Ontarians were 22-percent richer, many of the province’s challenges would be diminished or even disappear,” they write.
Some business support programs are necessary, however, in order to boost specific sectors and economically-distressed rural regions. Steeve and Speer argue for a “reindustrialization strategy” that echoes the Obama Administration’s Manufacturing USA network, which saw the “creation of 14 sub-sectoral institutes spread out across the country that enable public-private partnerships on new manufacturing-related technologies.” Inspired by Manufacturing USA and following suit on the Next Generation Manufacturing Canada supercluster, the authors say that Ontario should help found similar manufacturing-based institutes in parts of the province with underlying comparative advantages.
Likewise, to improve prosperity in rural regions, Ontario should adopt another American model: Democratic Senator Cory Booker's and Republican Senator Tim Scott’s “Opportunity Zones,” which use tax inducements to draw investment into “undercapitalized communities.” Speer and Steeve state that these “pre-market redistribution initiatives” can be “designed to minimize the distortions typically associated with business support programs.”
David Wolfe, co-director of the Innovation Policy Lab at the Munk School, doesn't agree with the paper's premises, however. He suggests that Steeve and Speer take a too-narrow view of how and why these kinds of incentives are used, and fail to take into account the range of policy instruments that governments use to support business innovation. “[The authors] don’t give full justice to the fact that these subsidies get framed in a competitive international environment, where other jurisdictions are offering subsidies,” he said in an interview with RE$EARCH MONEY, adding that they “seem to be drawing very broad generalizations from a narrow subset of the different kinds of programs that are out there.”