Deputy Prime Minister and Finance Minister Chrystia Freeland delivers the federal budget in the House of Commons, in Ottawa, on March 28.Sean Kilpatrick/The Canadian Press
Whatever you want to call the $21-billion that the federal budget projects Ottawa will dole out over five years in “clean” energy and manufacturing subsidies – ballooning to $80-billion by 2034 – please do not call it an industrial policy. That would be giving too much credit to a government that has again shown that it does not grasp the concept.
Finance Minister Chrystia Freeland created heightened expectations when, in her November fall economic statement, she said “what Canadian workers need is a government with a real, robust industrial policy” to “make Canada a leader in the industries of tomorrow.” What Ms. Freeland delivered in the budget is a copycat approach that makes Canada a follower and places the country’s economic future more in the hands of U.S. policy-makers and corporate lobbyists than its own innovators.
The title of Budget 2023 is A Made-in-Canada Plan, which is ironic, since its signature economic initiatives were inspired by K-Street lobbyists in Washington. Ottawa has assumed a defensive crouch, mainly out of a fear of missing out. But FOMO is not a compelling reason to justify subsidizing electric-vehicle (EV) and battery manufacturing on this scale, no matter how much Ms. Freeland likes to say it would be “reckless” not to.
The U.S. Inflation Reduction Act “poses a major challenge to our ability to compete in the industries that will drive Canada’s clean economy,” the budget says. “If Canada does not keep pace, we will be left behind.”
Really? Ottawa’s entire response to the IRA has been posited on outbidding the Americans to persuade foreign auto giants to invest a portion of the billions of dollars they have allocated for the EV transition here. So far, all this strategy has yielded are photo ops and self-congratulatory tweets. The promised investments are still only just promises and there is no guarantee that any of these new EV assembly and battery factories, if and when they are built, will be competitive in the long-term.
Volkswagen, Stellantis, Ford, General Motors and their ilk have now become dependent on massive state subsidies to survive. They have not been able to out-innovate Chinese EV and battery makers, and ongoing subsidies risk making them permanent wards of the state. The Detroit Three are still hooked on selling internal-combustion-engine (ICE) pickup trucks and SUVs. Though they vow to go all-electric by 2035 or so, their track record on executing a change of this magnitude is not very reassuring. So, expect them to hold out for even more government aid before weaning themselves off their ICE cash-cows.
Luckily for them, Ms. Freeland and Innovation Minister François-Philippe Champagne are all too willing to play along.
Following the U.S., Canada has now decided that EVs and batteries are a strategic industry that must be located in this country to counter Chinese supply-chain domination and combat climate change. (As if electric F-150 pickups are any better for the planet than ICE ones.) Still, the national security and decarbonization objectives apparently justify the mind-boggling levels of subsidization and repudiation of the global trade rules that the U.S. and Canada spent decades defending.
How much will all this cost Canadian taxpayers? The budget’s introduction of a 30 per cent tax credit for clean manufacturing covers investments all along the EV supply chain, from mining and refining critical minerals to cathodes and batteries. That single measure is projected to cost $4.5-billion over the next five years. But automakers can also draw on a slew of other federal programs on top of provincial subsidies that include everything from cash and land grants to cheap electricity rates.
Contrary to a December CBC report that said Ottawa was preparing to match the IRA’s production tax credits for EV batteries, the budget stopped short of introducing such a measure – perhaps out of fear that the projected cost could break the bank. But it would be premature to conclude that Ottawa has rejected the idea altogether. After all, Ottawa still has not disclosed the incentives it has promised Volkswagen to locate a gigafactory in Ontario rather than in Oklahoma or Mexico. Suffice it to say that EV and battery makers are not finished with lobbying Ms. Freeland and Mr. Champagne.
The budget’s emphasis on subsidies for clean manufacturing and electricity contrasts with near total silence on measures that might actually form the basis for the robust industrial policy that Ms. Freeland promised last fall. Ottawa has once again kicked the can down the road on revamping Canada’s hodgepodge of research and development incentives and totally ignored pleas for a major investment in university research funding.
The Canada Innovation Corporation, Ottawa’s answer to repeated calls for a new approach to intellectual property development and commercialization, continues to exist only on paper. The country’s anemic R&D record – business investment in research here is one-third the U.S. level – will not be improved by this budget. Talk about reckless.