Volkswagen battery plant to cost Ottawa over $16B: budget watchdog

A new Volkswagen electric battery plant in St. Thomas, Ont., will cost the federal government over $16 billion because of an additional $2.8 billion in tax adjustment expenses, says an analysis by the parliamentary budget officer (PBO).

Deputy Prime Minister Chrystia Freeland is disputing the report, arguing the PBO made an incorrect assumption.

“Based on our analysis, the federal government’s financial commitment to Volkswagen will total around $16.3 billion over the period of the agreement,” Parliament Budget Officer Yves Giroux said in a news release.

The federal government announced the deal with Volkswagen earlier this year. Ottawa agreed to provide up to $13.2 billion in production subsidies to the company over the next decade.

Conservative Leader Pierre Poilievre has criticized the cost of the deal, but Prime Minister Justin Trudeau and Innovation, Science and Industry Minister François-Philippe Champagne have defended it as an economic boon that will bring approximately 3,000 jobs and be worth over $200 billion to the economy.

Champagne has called the agreement a “game changer” for the Canadian economy. 

Giroux said in a news conference that the PBO did not look at the broader economic effects of the plant in comparison to the production subsides. To do that, he said, would require confidential business information from Volkswagen that the PBO is not allowed to make public. Giroux said the federal government did provide the PBO with details of the deal that aren’t yet public.

Giroux said his office can’t compile a report on the overall benefits and costs of the deal until it can disclose information that’s currently confidential.

“As soon as the government and Volkswagen say that we can use the annual production profile that is in the contract, then we’d be in a position to at least try to provide an estimate of the economic and fiscal benefits to governments,” Giroux told the news conference.

“Providing an economic impact and fiscal impact of the production subsidy would indirectly disclose the production schedule of Volkswagen, which is commercially sensitive.”

But the PBO report also says the deal will cost significantly more than the sum announced by the federal government. Ottawa will have to provide approximately $12.8 billion in production subsidies and spend the $700 million it has pledged through its Strategic Innovation Fund (SIF), the PBO estimates.

While those numbers are in line with the costs the federal government has acknowledged, the PBO report says there’s another cost — $2.8 billion in tax adjustment dollars the government will have to give to Volkswagen.

Those tax adjustments are a result of the government having to compete with the American Inflation Reduction Act (IRA). The PBO report said production subsidies in the United States would be tax-exempt, but the production subsidies from the Canadian government will incur corporate income taxes.

“[The tax adjustments] are needed to achieve an after-tax equivalency to support offered under the U.S. Inflation Reduction Act (IRA), as per the government’s stated intention,” the PBO news release said.

Deputy PM disagrees with report

Giroux said at the news conference that he came up with the $2.8 billion number by examining the contract and statements the government has made about its intentions, as well as his own analysis.

“In the U.S., this assistance wouldn’t be taxable, and the stated aim of the government was to ensure [the deal] is at least equal to what the U.S. offers,” Giroux said.

Speaking with reporters Wednesday, Freeland said the figure does not reflect the government’s plans.

“I think the principle point of difference comes when considering the future tax treatment of the VW investment,” she said.

“The PBO has drawn one conclusion about what that tax treatment will be, and that’s a hypothetical conclusion.”

Asked if Giroux had come to the wrong conclusion about the government’s tax treatment of Volkswagen, Freeland said that he had.

The Volkswagen deal came in for scrutiny last month when Stellantis halted construction of its planned electric vehicle battery plant in Windsor. The company said the federal government is not living up to its promises to the company.

The stoppage prompted Ontario Premier Doug Ford and Windsor West NDP MP Brian Masse to call on the federal government to offer Stellantis a deal similar to the one it gave Volkswagen.

The government is negotiating with Stellantis to restart construction. 

Freeland said the IRA has created difficulties for Canada and defended the value of the Volkswagen and Stellantis deals.

“We simply could not, and will not, accept a universe in which investment is sucked out of Canada to south of the border,” she said.

Poilievre continued to criticize the government over the cost of the deals on Wednesday.

“It’s clear that Justin Trudeau has been totally incompetent. He claimed that he had a deal with Stellantis, and then, all of a sudden, he was backtracking and having to pay out even more money,” he told reporters.

“The question we have to ask is, when is a deal a deal with this prime minister? How many billions of dollars will he have to go over budget in order to achieve his photo op?”

NDP science and innovation critic Brian Masse said the government needs to show how the deal will benefit workers.

“This deal must come with guarantees and measurables for good-paying jobs and a commitment from Volkswagen that the plant will be allowed to unionize,” the MP said in a media statement.

Report says economic benefit of construction is small

Giroux said the plant’s construction is unlikely to bring a significant economic boost.

“We estimate the plant will increase real GDP in Canada by 0.01 per cent above its baseline projection by 2027 and will add around 1,400 jobs by the same time,” Giroux said in the release.

The Ontario government has pledged $500 million in direct support for Volkswagen, but the PBO did not include that funding in its analysis.