Opinion: Ottawa’s industrial policy interferes with the economy to Canada’s detriment

Craig Alexander is a columnist for The Globe and Mail. He has served as chief economist at Deloitte Canada, the Conference Board of Canada and Toronto-Dominion Bank.

Canada needs to embrace competition and open markets to increase productivity and prosperity. Unfortunately, in recent years, the country has gone in the opposite direction.

Government intervention has increased dramatically through industrial policy, which is a government effort to shape economic outcomes by targeting specific industries, firms, or activities. This includes the use of subsidies, tax incentives, and regulations. The argument for such policies is that free markets will not generate the desired economic, social, or national security outcomes. However, the expansion of industrial policy over the past decade has been both dramatic and excessive.

For example, economist John Lester published a report in March showing that Canadian federal subsidies to businesses have increased by 140 per cent over the past nine years, compared with just 17 per cent over the previous nine years. That reflects the Trudeau government’s belief in the power of government to influence outcomes. In some cases, expanding industrial policy has been justified to address market problems, such as measures to reduce inequality and address climate change. But virtually every problem has been addressed with additional business subsidies, tax incentives and regulations that have deeply distorted price signals across the economy.

It is important to remember that market prices provide powerful information about where to expend effort or allocate scarce resources, which increases efficiency by increasing revenues and reducing costs. Competition in open markets can also be a powerful catalyst for driving innovation and investment, as well as limiting the ability of firms to raise consumer prices.

In March, Bank of Canada Deputy Governor Carolyn Rogers gave a speech calling for more market competition to encourage companies to scale and encourage investment to address Canada’s productivity crisis. Last month Matthew Boswell, Commissioner of the Bureau of Competition, reinforced that message in these pages, emphasizing that his group’s research showed that the intensity of competition in the Canadian economy declined between 2000 and 2020. He wrote: “Too often in Canada, laws, policies and regulations create barriers — that are outdated and no longer serve the public interest — to competition.”

Previous analysis by Deloitte and the Business Council of Canada found that excessive government regulation is the single biggest obstacle to Canada’s international competitiveness. The key message is that Canada needs the right balance of industrial policy that curbs market failures or suboptimal social outcomes while allowing market forces and prices to drive efficiency and innovation.

The current policy tilt is toward over-intervention. Professor Lester’s research shows that more than a third of federal business subsidies fail to address market problems, and many federal subsidies do not generate benefits that exceed their costs. He found that 80 percent of subsidies currently have negative economic impacts. Getting rid of these ineffective business subsidies would save the federal government $32 billion. And removing the market distortions created by these subsidies could increase competitive outcomes and productivity.

The preference for more industrial policy in recent years also ignores its inherent limitations. Governments have no information or ability to predict which industry or company will be the next world leader or will generate the most wealth for its citizens. The multitude of price distortions created by the vastly increased number of industrial policy measures makes it difficult to assess whether individual incentives, subsidies, and regulations are having the desired effect. Policy delivery can also be inconsistent. For example, the federal government recently increased subsidies for artificial intelligence research and development while imposing higher capital gains taxes on the technology sector.

Politics can undermine industrial policy and its effectiveness. For example, when Canada launched its Innovation Superclusters initiative, each Canadian region simply had a related supercluster. Did this really identify Canada’s comparative advantage or was it an exercise in government-led regional development? Politics can also be seen in an overemphasis on small businesses, which is popular with voters. Two-thirds of federal business subsidies go to small and medium-sized businesses. While start-ups deserve extra support, some small business subsidies are counterproductive because they encourage companies to stay small.

Choosing priority sectors or focusing on select groups of companies ignores the fact that there are fast-growing companies of all sizes and in every industry. Rather than trying to pick winners, policies that encourage growth and investment should seek to maintain a level playing field across industries and companies.

Canada needs a smart industrial policy that achieves the public interest with the least disruption to market prices and outcomes. Unfortunately, the recent drastic expansion of industrial policy has fallen far short of this goal, which is detrimental to Canadian prosperity.