Ottawa is spending $1.7M for 10 new jobs at a pasta plant. Are these corporate subsidies worth it?

When the federal government said earlier this week its investment of $1.7 million in a Brampton, Ont., pasta plant would create 10 jobs, some questioned whether that taxpayer money was being put to good use.

One economics professor tweeted he was “legit astonished” by the investment in Italpasta.

“Do they not understand just how insane this is? That spending north of $170k for *one job* is an embarrassment, not an achievement?” wrote Stephen Gordon of Laval University.

And that was just a fraction of the billions in subsidies that were announced recently for the creation of electric vehicle-related plants in Ontario.

While some economists say they understand the political motives for such corporate government subsidies, they say they make little economic sense.

“There is really no underlying economic rationale,” said Robert Gillezeau, assistant professor of economics at the University of Toronto’s Rotman School of Management. “Ithink those spends are more about politics than they are about economic development.”

“You’re introducing an economic inefficiency to the market.”

The $1.7 million subsidy for Italpasta Ltd., billed as the largest pasta manufacturer in Canada will help it “increase production to keep up with growing demand,” according to Filomena Tassi, the minister responsible for the Federal Economic Development Agency for Southern Ontario.

“Investments like these are making a difference in our economy & helping businesses grow,” Tassi tweeted.

Today we announced that we’re investing over $1.7M in Italpasta – a local Brampton business. This will help the Italpasta team increase production to keep up with growing demand!  Investments like these are making a difference in our economy helping businesses grow. @FilomenaTassi

Her press secretary says the money is a 100 per cent repayable loan that Italpasta will use to buy new equipment.

“[That] allows them to triple the production of their pasta products, all while reducing their energy consumption and carbon footprint,” Edward Hutchinson said in an email to CBC News.

Meanwhile, the benefits of such government corporate subsidies on a much larger scale were trumpeted by both Prime Minister Justin Trudeau and Ontario Premier Doug Ford last month.

The two leaders stood together at a Honda plant in Alliston, Ont., to announce the creation of four new manufacturing plants in the province, including the construction of Honda’s first EV assembly plant and a new stand-alone EV battery plant.

The federal and provincial governments will contribute $5 billion in total in direct subsidies and tax credits, an investment, they say, that will mean 1,000 new jobs.

That comes on top of both governments’ previously announced billions of dollars for the Stellantis-LGES EV battery plant in Windsor and the Volkswagen plant in St. Thomas.

But some observers have questioned whether jobs created from these subsidies are worth the money.

While the pasta plant investment works out to $170,000 per job, the $5 billion EV subsidies for 1,000 jobs means taxpayers are paying $5 million per job.

‘Fairly irresponsible’

“It is fairly irresponsible … to be using this money and defending this on a job creation argument,” said Kent Fellows,assistant professor of economics at the School of Public Policy at the University of Calgary.

“These aren’t new jobs. We don’t have any evidence that the people who would be in these positions wouldn’t be working in another sector otherwise.”

‘Historic’ Honda EV investment will boost economy for generations, says Trudeau

Prime Minister Justin Trudeau praised Honda’s $15-billion EV investment as an example of ‘Canada building the kinds of solutions the world needs’ before taking aim at his rivals, and suggested the announcement would not have happened under a Conservative government.

Fellows says another argument can be made against the subsidies for the pasta and EV plants.

“These are not new technologies. We’re not funding R&D that’s going to spur new economic production,” he said.

Even with the current unemployment rate (6.1 per cent), there isn’t a really big unemployment problem in the country, Fellows says. In fact, some sectors have labour shortages.

In that kind of economic environment, then, what the government is really doing with its corporate funding is just reallocating jobs, reshuffling the deck and trying to move jobs around the economy, which is not necessarily a good thing, Fellows said.

“You could take a worker that is very productive in an industry that pays a reasonable tax rate and is making good returns on its capital and now you’re allocating them to an industry that either requires a subsidy or requires a tax break to locate here,” he said.

“That’s not efficient. That means that we’re getting less out of the sort of the macroeconomic factors of production we have than we could otherwise be doing.”

Officials have also said that thousands of spin-off jobs will be created because of the new EV plants, which include positions created through new supply chains for the plants.

‘Do the plants need to be located here?’

But Fellows says, under the free trade agreement, a lot of auto parts will pass back and forth across the border multiple times before they end up in a finished product.

“So the question really is, do the plants need to be located here for us to get the spin-offs?” he said.

“It’s costing a lot in subsidies to do that. Where do we stop? Because we can’t afford to go toe to toe with the U.S. … We just do not have the fiscal capacity as an economy.”

Aaron Wurdick, director of the Macdonald-Laurier Institute’s domestic policy program, says he believes any spin-offs would also have to be subsidized.

“So for EVs, you’re subsidizing the main plant, you’re subsidizing the parts. You’re subsidizing the purchase of the vehicles. So, like, the entire ecosystem is subsidized,” he said.

“We’re subsidizing [a] big thing and all the little things feeding into the big thing as well.”

Gillezeau says it’s likely the government could probably find a better use of those dollars that would have a bigger impact on economic growth or redistribution.

That would include any type of baseline infrastructure that is broadly available to all firms, he said.

“If we think about things like the power grids or the rail network or roads… those things are going to yield much larger returns quickly.”

“You could go out and ask a bunch of economists and you’d probably find hundreds of programs that would do a lot more for economic growth than giving a couple of tens of billions of dollars to the auto companies.”

As for the pasta plant, Wurdick questions the government’s insistence that the money being spent is a “repayable loan.”

‘They’re called banks’

“If you ask most people if they needed to get a loan, we have institutions for that. They’re called banks. What is the reason that you need to use the government?”

He says one could argue that there are times when the government is the lender of last resort.

“Does anyone want to say to me that this [pasta] company, which apparently is booming and doing so well, it just needs to triple production, they can’t get a loan from the bank?” he asked.

“This is a private business making pasta. What does the government have to do with this?”