Avoiding red herrings in economic development

Let me say right up front that Michael Tutton’s Canadian Press article on BNB’s bad loans was an important contribution.  I have said that governments should be ultra-transparent about economic development spending. Instead of waiting for intrepid journalists to find ways to unlock this information, it should be easily accessible on the government’s website.  It is taxpayer dollars and transparency is critical.

But the real focus has to be the the transparency’s close cousin – accountability.  It is very important to know how the taxpayers’ money is being spent.  It’s even more important to know if it is being spent effectively.

Maybe red herring is too strong a term here but if you think about it, maybe not.   Focusing the discourse on loan repayment distracts from the more important question of whether the “$653 million in repayable loans, loan guarantees, equity investments and various forms of grants to companies” was a valuable investment for the taxpayer.

I have been hammering this drum for years.  This applies to the most abstract federal government economic development efforts down to the smallest municipal efforts.   We have got to focus on the effectiveness of the spending – the ROI for the taxpayer.

Most people would agree that $653 million would be a great investment if it led to two billion in new tax revenue.    Sure, many people are ideologically opposed to governments giving out money to companies.  Fine.  That is a legitimate world view.  Some of the most intelligent people that study this stuff disagree on this point.  But everyone can agree with basic math.  If $653M led to no appreciable increase in the provincial tax base – bad investment.  If $653 million led to a significant increase in the tax base – economically sound investment (even if ideologically not).

The problem is we don’t have these metrics.

Another big problem – in defence of BNB – is that it is called into intervene in many cases where no one else would dare go – Atcon, Fraser, etc. so you should expect a higher loss ratio.  I never liked the ‘lender of last resort’ view of the government and I never liked the hostage taking view of economic development.

We need to figure out where we have growth potential and build a broad plan to achieve that growth.  This is not the same as a Stalin Five Year Plan.  I am not talking about engineering an economic through central planning.  I am talking about taking steps as communities, as governments, as business groups – to make the province attractive for investment.

I have always said if there are gaps here that are restricting access to capital for companies with strong business plans, then the government should have some mechanism to fill in – maybe a ‘Bank of NB’ or an expanded role for the BDC or whatever.

At the same time, I continue  to be amazed at just how much of the economic development effort in New Brunswick is tied up in the effort to match companies to capital.  There are numerous government departments and agencies giving out money and they collectively have dozens of different funding programs.  There are literally thousands and thousands of man hours chewed up each year in New Brunswick (paid by the taxpayer) in the government banking efforts.

Donald Savoie in that article referenced above talks about promoting our 10% corporate tax rate.  That’s fine but not really a game changer.  As I have pointed out here many times, most large firms that set up here pay very little tax here anyway because their markets and the bulk of their operations are elsewhere.     The only firms that pay all their provincial income tax in New Brunswick are firms that are only operating in the New Brunswick market and that isn’t the kind of firm that is going to grow the economy.

But Savoie is on the right track.  I think tax-based incentives should replace almost all the cash funding provided by government now. If a firm needs capital and can’t get it from a bank, it should go the Bank of NB.

But I am not fanatical about that.  In certain cases – to remain competitive – we may need another type of incentive program.

Bottom line?  I think economic development efforts should be showing a positive return on taxpayer investment.  If for every dollar in, we are getting 20 cents out in new tax revenue, that should be the trigger to shut ‘er down.

 

 

 

 

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One Response to Avoiding red herrings in economic development

  1. 4themargins says:

    Piggy backing on some of your previous postings I have derived that it cost the province of NB $653 Million to maintain the status quo…imagine the cost of growth…ouch! Our economy has not significantly improved since the advent of BNB has it? Is it another wealth redistribution system? A job creation scheme? I think that you may have mentioned this before but where do all these incentives end? Looks like a slow downward spiral to me. I also dislike the lender of last resort position the Government seems to take and how companies seem to hold them hostage. If no bank will touch a company why does the government seem to think its a good idea? We think very short term when it comes to this stuff too. Last time I drove through Miramichi I found it still to be there despite the shut down to Atcon, UPM, Weyerhauser…its not as vibrant maybe but its still there and people have found other things to do. Sure, some have gone out west but some have started businesses and done other things. Need drives innovation and if we continue to enable inept companies we wont get better as a province. If I find solace in NB’s current state it is that it will force us to get better because the enabling days are coming to a head because they are proving to be unsustainable.

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