Live by the gravy……

I am in Portland, Maine today. Toronto the last couple of days. Not much time to look around.

I, like most economic developers, am following the continuing saga of the auto industry in Ontario. It is, behind oil & gas, probably the single most important industry to Canada’s economy. If you look at our export numbers you will see that that O&G accounted for $66 billion in exports in 2006 while auto exports accounted for $50 billion (if you throw in auto parts and trucks you are up to $65 billion). The next closest export category is petroleum at a mere $15 million. Aerospace is at a paltry $11 billion.

But it is an industry that relies on the government gravy train. From today’s Globe & Mail:

General Motors Corp. has scrapped plans to build some rear-wheel-drive cars at its giant operations in Oshawa, Ont., a move that could threaten the long-term future of the largest vehicle assembly plant in Canada and thousands of jobs.

The move comes as GM prepares for crucial contract talks with the Canadian Auto Workers union this summer and seeks government financial help for an investment in St. Catharines, Ont., on top of $435-million Ottawa and Ontario have already agreed to give the company as part of a $2.5-billion plan to upgrade its Canadian operations.

This is a Gordian Knot-type problem for Conservatives who don’t mind using ‘tax breaks’ for industry but tend to chafe at the notion of direct subsidies.

But to the advocates of targeted subsidies, the ratios work here. $435 million is only 17.4% of $2.5 billion. I don’t remember the incremental jobs associated with the expansion but I think you could make a case that governments would receive an adequate ROI in terms of taxes back on this investment (that’s an ideological-neutral statement just a fact).

Consider New Brunswick’s parallel. We give between $5,000 and $7,500/per job for the rural call centre jobs. This is about 40% to 60% of the total costs of setting up the call centres.

17.4% or 40%. The percentages are low but the absolute dollars are high.

However, just for argument’s sake, let’s say that GM plant generates $150 million/year in taxes – all levels. After three years, the $435 million is paid back to the government’s coffers. Then from that point on (presumably until the next ‘subsidy’), the government gets $150 million in net new taxes per year.

Or about 10% of the self-sufficiency gap. In one plant.

Consider the alternative. You can go here to calculate the income taxes paid to government from a $20k or a $25k/year call centre job. To get to $150 million in taxes? Who knows. But on $25k jobs, the NB government gets only about $1,800/year in income taxes and the call centre sector has almost no economic multiplier. 20,000 call centre jobs @ $25,000 generates about $36 million/year in provincial income tax (that table above shows the combine fed/prov income taxes paid).

I suspect that the NB government has little or no interest in attracting an auto plant. In fact, I doubt we will ever see a $100 million deal in New Brunswick let alone a $435 million deal.

But we will continue to see a $600 million deal. That’s a conservative estimate of the EI paid out in New Brunswick each year. And I see in the TJ yesterday, that Atlantic Canadian’s don’t see seasonal EI as the panacea that many rural politicians believe it to be.

On a side note, I see that BNB deputy Minister Brian Dick has responded to my recent commentary on self-sufficiency and the need to embed a culture of self-sufficiency across the civil service. I am encouraged by his comments. In most of my intersection with provincial bureaucrats, I haven’t seen much sense of urgency. There is a lot of back slapping and self-denial on the economic front – driven I think mostly from the political need to been seen as successful – but if their jobs were directly on the line, one would think the bureacrats would be a little more hungry.

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0 Responses to Live by the gravy……

  1. mikel says:

    I was surprised at that statement of yours, I’m assuming it was a sidenote. A committee? You want to see a committee? That’s some hard hitting criticism!

    How about writing for a need for some ACTION. For them to actually DO something. These four pillars they talk about have seen ZERO policies for the last year and a half.

    What have we seen about ‘transforming the economy’? An increasing reliance on resources, albeit different resources-this time the province doesn’t own most of them, but just refines, unloads them.

    Transforming governmment? Hmmm. Give me a minute. Well they did cancel the province wide referendum, so I guess that tells you REALLY how interested they are in transforming government. They exchanged it for some referenda in rural areas, places where people overwhelmingly voted for the status quo. Of course they do seem to have one key difference-these ‘two man committees’ that they set up instead of public consultations that at least Lord had. Now public input is restricted to finding the relevant website and sending them an email.

    The other two had so little meaning that I can’t even remember what they were. Suffice it to say, when have you heard of any policies that came close to talking about transforming ANYTHING. I suppose a new oil refinery WILL transform the air and water around Saint John. But transforming the workforce seems to be ‘as mills close those workers will go out west or take low paying service jobs’. Bingo, the forestry industry has been ‘transformed’. That’s an odd thing to take credit for though.

    But I suspect that your wrong. If ANY automaker expressed ANY kind of interest then I think they’d be all over it. And they’d probably pay far more, like you said, the habit is to pay MORE of the costs than even Ontario.

    But again, I don’t see ANYBODY ever saying that EI is an economic ‘panacea’. They may say that its an economic necessity. But when you talk about policy, use some common sense. You don’t quit your job before you start a new one-or before your new business makes any money. When the industrial players are set up with good full time jobs then you talk about EI reform. Otherwise all you do is increase the speed at which people head out west.

    Finally, in fact if you read that little note from the government then its nothing to be optimistic about-note the phrase “corporate priorities” in there. What do you think THAT means. It means privatizing hospitals and government services, virtually the only place they’ve mentioned any possibility of ‘transformation’.