Communicating government support for the VW EV battery plant: The ultimate example of subterfuge
For years I have advised my economic development clients to be open and clear about any government investment made to support company expansions. Exactly how much support was given over what period of time under what conditions and what will be the payback to the taxpayer in the form of incremental tax revenue.
There is too much temptation to obfuscate and use terms with different interpretations leading to confusion and creating even more cynicism.
When it comes to government subsidies of industry, the PM’s announcement of the EV battery plant yesterday was probably the most exaggerated example I have ever seen.
He wasn’t lying, of course. He was just making a lot of claims that could be true or not depending on how you define terms like “economic impact” and “indirect jobs”.
First, he said the plant would create 3,000 direct jobs and up to 30,000 other jobs across the economy.
Now, I have done economic impact analysis for more than 20 years and the only way there will be a 10 to 1 jobs multiplier is if he is throwing in everything including the kitchen sink. The critical minerals mining jobs must be in that 30,000. There must be other supply chain manufacturing jobs in there that are only loosely related to the EV battery plant. I worry – I hope I am wrong – that he even included the manufacturing of EVs themselves somehow in the definition of the 30,000.
The implication, therefore, is that this EV battery plant would induce all these other industries and jobs and that doesn’t make much sense.
Companies will mine for critical minerals whether or not there is an EV battery plant here. The only difference is the minerals will be exported for inclusion in battery production elsewhere (or in a less costly plant in Canada). Sure, it is beneficial to have an EV battery plant here but it is not required to secure mining investment.
The honest approach would have been to clearly define what he meant by 30,000 jobs and let the public decide if that makes sense or not.
The other big issue is that he said the economic impact would be equal to the value of government investment in less than five years (to great applause in the clip I saw).
Again, this could be true depending on what he is using for the denominator. If he is adding up the cost of building the facility, the cost of running the facility and all the other costs associated with those 30,000 jobs, it is distinctly possible that if he is using total spending as the denominator, it is possible that amount could be $13 billion.
But you can’t equate industry spending to tax revenue. The only serious denominator in a government incentives model has to be incremental tax revenue. So, let’s say for a moment the PM is right and all the spending equates to $13 billion within five years (and this itself strains credulity). The incremental tax revenue associated with that $13 billion might be a few billion. Depending on the sector, government tax revenue runs between 15%-25% of total spending – so the very best case is that the project will generate enough tax revenue to payback the government incentive in something like 20 years.
Just a reminder the government incentives work out to $4.3 million per direct job.
But, of course, this doesn’t even start to cover it. If he is including the ‘kitchen sink’ in that 30,000 jobs, almost all those upstream or downstream industry investments will get their own hundreds of millions and billions in government incentives. So you would need to add to the $13 billion all the other federal, provincial and local government incentives up and down the value chain.
Finally, the feds have set the government subsidy bar so high - where will it go from here? The next auto manufacturer that wants to set up an EV manufacturing plant in southwestern Ontario. How much will it get?
If I had been advising him, I would have recommended telling it straight. The Americans wanted this plant and we had to pony this level of money to get it (to be competitive). We believe it is in the best interest of the country to have the full EV supply chain here (from the mining of critical minerals to the manufacturing of EVs and everything else that comes with it) and this was a foundational investment.
The subterfuge that I heard yesterday will just lead to even more criticism and will make even more people cynical of the role of government incentives to stimulate industry investment.
When communicating government support to industry, to reiterate what I said above, tell people exactly how much support was given over what period of time under what conditions and what will be the payback to the taxpayer in the form of incremental tax revenue.
If you are claiming a 10 to 1 job creation multiplier than be really clear where all those jobs are going to be created and how much government money is being invested to get all those jobs too.
If you are claiming an economic ‘payback’ within 5 years, be very clear about what you are using for the denominator. Just adding up all the spending is not good enough. Even GDP is not the right denominator. For me the right denominator is clearly definable, incremental tax revenue.
You are advocating absolute honesty from our Prime Minister, and that is a non-starter for any politician. I am not an economist, but I trust your assessment of the payback or lack thereof, and for a politician to admit those facts would be political suicide. The average voter has problems keeping up with the household budget and when they hear $13B, their eyes glaze over—they need an explanation they can understand. In the age of Marvel comic figures and fantasy news entertainment, It takes hyperbole to explain a position. Honesty is not cool.
The question, in the final analysis, is a political one. Do we, as a nation, want to spend what it takes to retain our economic standing in the competitive world of buying manufacturing jobs where the cost has been driven upward past the directly attributable value? Subsidies are always a gamble and seldom, in hindsight, have directly defiinable financial benefits—but aren't they a political necessity?
Agreed, David. Measurement and transparency are critical, and there are significant gaps, IMO.