We all agree, the last thing the government needs to do today is stimulate job creation, given the severe labor shortage.
We all agree that the strategy is rather to promote innovation so that employers produce as many goods and services with fewer staff. Such a strategy would make labor available to other employers, who are competing for it.
We all agree, except that in Quebec, the government continues to apply the same industrial policy initiated 25 years ago, when unemployment was rife, by granting very generous tax rebates to groups of businesses based on jobs, rather than innovation.
A report published on Thursday highlights this implausibility, with supporting figures. The report, published by the Center for Productivity and Prosperity of HEC Montreal, considers that this phenomenon is one of the factors that harm Quebec’s competitiveness and our ability to catch up with our competitors, including Ontario.
In 2021, 83% of the $2.4 billion in business tax credits from the Quebec government were used to subsidize wages, and therefore jobs. The government even has 20 tax credits subsidizing wages.
Worse: these wage subsidies are mainly paid to large information technology (IT) companies, one of the sectors where, precisely, the shortage is great.
In 2021, according to the study, Quebec IT companies received $510 million through the e-business tax credit, which can represent up to 30% of eligible salaries. For video game companies, the sum amounts to 311 million and can reach 37.5% of eligible salaries.
In other words, the government contributes to accentuate the shortage of computer scientists by artificially supporting employment in certain companies, which creates very real problems for other organizations. And to remedy this, paradoxically, the government is once again offering subsidies (scholarships) to computer science students to encourage them to complete their studies.
The other large credit ($475 million), among the 20, is intended to stimulate research and development, but a good part is linked to salaries, once again (14% of the salaries of researchers), rather than to targets for ‘innovation.
This economic policy has perverse effects. First, the beneficiaries of the credits are not encouraged to find innovative solutions with fewer staff – and therefore to increase their productivity – since the tax bonanza linked to jobs discourages them from doing so.
Secondly, in addition to accentuating the shortage, companies which do not receive credits of the same type, for example to pay an IT specialist, are disadvantaged. Finally, the policy has the effect of increasing the tax burden of all businesses to finance these measures.
Quebec is much more generous than elsewhere, in particular Ontario. In Quebec, tax credits paid to businesses represent the equivalent of 15.2% of all taxes and duties paid by all our businesses, i.e. double that of Ontario (7.4%)1. Another comparison: in Quebec, credits represent 0.75% of corporate GDP, compared to 0.24% in Ontario.
Originally, one of the objectives of the e-business credit was supposedly to help companies “who want to improve their productivity by integrating IT into their business process”. The decision to subsidize the salaries of service providers (credits of 510 million in 2021), rather than directly supporting the investments of client companies, does not seem to have produced the expected results.
“Since 2008, more than 4.5 billion have been granted in tax credits to computer companies in the province, without however producing the expected effect. Employment in the IT sector has not deviated from the trend that prevailed before the credit was offered and the credit has clearly failed to stimulate investment in IT”, it is written in the study. .
One of the authors of the study, Robert Gagné, does not propose to “pull the plug overnight”. And he is aware that Quebec risks losing certain companies.
But he argues that originally, these credits were to help emerging sectors, not become permanent to the point of financing mature companies today. “If video game studios are here only for our credits, it’s not normal. And if they find no other value in being here, fine! let them go,” he said.
In short, these employment credits do not help increase our innovation, our ingenuity and our productivity, according to the study. The stakes are high knowing that productivity is the only way to really increase our standard of living.
In 2021, the standard of living gap between Quebec and Ontario stood at $5,960 per capita, according to the study. Some 48% of this gap is explained by Quebec’s lag in productivity and the rest by lower work intensity and lower employment rate.
Are we really all in agreement?
1. The study compared the value of all the tax credits paid to companies, which it divided by their taxes and payroll taxes.