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.