The last word on incentives

Or maybe not….

We all love to debate the merits, morality, legality, efficacy, etc. of the government using taxpayer funds directly to attract industry. From their perspective, they are looking at an ROI (return on investment). For example, if we give a company $5,000/employee they hire to train new workers and we get $25000 back in taxes paid over 8 years, that is a good ‘ROI’. There are also rationale arguments against giving incentives.

My position is well known – if you read this rag very often. I think that governments should use incentives when it makes sense – to lose a good project because Quebec or Alabama coughs up more upfront goodies – on some quasi-moral grounds – doesn’t make sense to me.

But after a little chat this week with someone closely involved with this stuff, I have to issue a major qualification to my position. Major.

I don’t think you can ‘lead’ with incentives. In other words, if the main reason why companies are coming to your community is the ‘incentive’, then I think the naysayers are right. The company will use the incentive and then, likely, leave. If the underlying economics don’t make sense and you are levelling the playing field with government cash, that’s a losing proposition. However, I do agree that this has been done on some occasions.

I think incentives are something put on the table after you are shortlisted. Most of the big investment projects I have studied got to a ‘short list’ of jurisdictions (in other words, a list of areas where the economics and other factors made sense) before even having a serious discussion about tax breaks or free land or training grants or infrastructure funding.

The underlying business case (energy costs, labour costs, availability of labour, R&D capacity, business/industrial park infrastructure, transportation infrastructure, workers’ compensation rates, legal/regulatory environment, access to supply chain, access to markets, etc.) must be favourable before even considering ‘incentives’. And, I might add, governments should work on the former rather than the latter.

You can’t bait good companies with incentives. You can attract bad ones. Anyone who has been in economic development for any length of time has seen ‘shoppers’. Companies shopping around a project looking for large government incentives upfront (most likely because the private sector won’t touch it). But those are doomed to fail (9 times out of 10) and governments should avoid them.

Economic development departments, supported by good government policy, should be competing directly in sectors where there is a strong business case to locate in New Brunswick. If there are no sectors where there is a strong business case to locate in New Brunswick, then Houston (or should I say Fredericton), we have a problem.

Incentives come later.

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0 Responses to The last word on incentives

  1. nbt says:

    My position is well known – if you read this rag very often. I think that governments should use incentives when it makes sense – to lose a good project because Quebec or Alabama coughs up more upfront goodies – on some quasi-moral grounds – doesn’t make sense to me.

    Yes, but those that have pulled back their position on this stuff, British Columbia and Alberta, seem to be doing just fine. I mean, look at BC under the NDP (Higher taxes and incentives for every interest group) to what it looks like now. A complete transformation.

    You can argue in favour of this practice all you want (on the grounds that everyone else is doing it), but if the truth be known, those that have decided to veer away from the German/French social economic model have faired quite well. Just look at Ireland who had the courage to finally free itself of excessive statism and get its fiscal house in order.

  2. Anonymous says:

    NBT – interesting you reference Ireland.

    McKenna gave an excellent speech this morning in Fredericton and spoke about economic development, education, immigration etc. He recited an encyclopedia of data, but one of the interetsing points was corporate tax rates noting that Ireland is down to something like 12% while Canada is in the 30% range. He pushed hard on the point corporate taxes need to be lower. However, maybe that should come after a period of industry build up through incentives since we have so much ground to make up; we need something to accelerate the closure of the gap and incentives may be it.

    PS McKenna also hammered on the point that Atlantic Canada needs to work together and reduce redundancy. An excellent example was the suggestion that we combine the provincial pension funds making the 5th largest in the country and use this to leverage economic development. The guy has smart ideas….the trouble is we need politcians with both intelligence and guts to execute.

  3. Gawain says:

    Only in the Maritimes could McKenna have delivered such a pedestrian talk, full of nostrums and shop-worn truisms, and have it characterized as “an excellent speech”.

    Virtually everything said in the room has appeared in the G&M or the Post over the last 5 years — and who could possibly be against Atlantic Canada working together to eliminate overlap, duplication and unnecessary bureaucracy, not to mention create a market of 2 million against the current NB market of 750,000. Or go back further to the now-defunct Economic Council of Canada or the Science Council of Canada, which both made these recommendations more than 15 years ago.

    Or the TEP reports, NABST, or …

    Wake up and get a library card.

  4. Anonymous says:

    Interesting comments. Perhaps it emphasizes how desperate we are for solid economic development strategy.

    I thought the speech was very good because it inspired confidence, identified success stories and proposed action. Even if the ideas were old news, recyled from CD Howe or torn from the pages of the G&M, at least it did not fall into the category of catchy slogans backed up with a heaping helping of “hope”.