Government Subsidies and Economic Development: Is the End Near for the Northern Ontario Heritage Fund? – by Livio Di Matteo – (November 19, 2011)

Livio Di Matteo is Professor of Economics at Lakehead University in Thunder Bay, Ontario. Visit his new Economics Blog “Northern Economist” at http://ldimatte.shawwebspace.ca/

In the art of politics, timing is everything.  My curiosity was certainly piqued earlier in the week when a story in the Ottawa Citizen reported that Ontario’s premier Dalton McGuinty was hinting that he was ready for a major policy reversal regarding the practice of provincial government grants and subsidies for business.  According to the story, he was listening “to all the arguments” on these grants which have been referred to as corporate welfare.

In many respects, this would be a remarkable turn around given the Ontario Liberals campaigned on the strength of their economic strategy – a strategy of government investment in green energy in particular as a job creation program.  There have been enormous subsidies to producers of wind and solar energy in the form of generous prices for the electricity generated.  As well, there is the money in the regional development funds such as the Eastern Ontario Development Fund and the Northern Ontario Heritage Fund.

Why the sudden shift?  It turns out the Ottawa Citizen has apparently been investigating stories that the Eastern Ontario Development Fund has been favouring businesses in Liberal ridings since the fund was established.  Add to this Friday’s news that wood products company Global Sticks in Thunder Bay – a recipient of about seven million dollars in provincial funding – may be in some financial difficulty given that the most recent pay to employees has not been deposited and the plant seems to be quiet. 

Global Sticks was supposed to create up to 130 permanent jobs when announced in May 2011, which amounts to about 54,000 dollars in government subsidy per job created – assuming that 130 jobs were actually created.  The cost per job to the government could indeed be much higher if fewer jobs were created.

All of this news places the future of the Northern Ontario Heritage Fund in some danger.  The Northern Ontario Heritage Fund was created in the 1980s as one of the planks of a northern Ontario policy by the Peterson government.  It was in part intended to address the decades of resource rent outflows from the north that had they been retained might have been useful in northern development. 

At one point in the first half of the twentieth century, revenues from timber and mining taxes were providing the government of Ontario with about 20 percent of its revenues – the equivalent of oil for Alberta today.

These all flowed into general revenues.  Ideally, the Heritage Fund should have been an endowment with the income generated providing funds for public infrastructure, culture and education projects in the north.  Instead, it is an annual expenditure of the government and can be terminated at any time. 

 The provincial government, given its deficit and the political damage caused by the Eastern Ontario Development Fund now has an incentive to reconsider the Northern Heritage Fund also.  After all, once one such fund gets created, everyone wants one and then they become expensive to run.  The price may suddenly have become too high.

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