Ottawa's Volkswagen deal will cost $3-billion more than initial estimate: PBO - The Globe and Mail

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Prime Minister Justin Trudeau arrives to make an announcement on a Volkswagen electric vehicle battery plant at the Elgin County Railway Museum in St. Thomas, Ont., on Friday, April 21, 2023.Tara Walton/The Canadian Press

The federal government’s deal with Volkswagen to build an electric vehicle battery manufacturing plant in southern Ontario will cost $16.3-billion, about $3-billion more than the initial estimate due to additional money needed to offset taxes, according to a new Parliamentary Budget Office report.

Ottawa and Ontario announced a deal with Volkswagen in April to provide the company $13.2-billion in federal subsidies for production support to build a battery plant in St. Thomas, Ont. The deal also includes $700-million from the federal government to build the plant and $500-million from Ontario.

However, the Parliamentary Budget Office released an analysis on Wednesday that said the initial estimate did not include $2.8-billion needed to offset taxes that Volkswagen would pay on the federal production support. The report also says the production support will only total $12.8-billion, according to figures based on the production schedule and exchange rates.

While the federal government has not published details of the deal, the PBO estimates the government would have to offer a tax adjustment to the “after-tax equivalency” offered under U.S. President Joe Biden’s IRA, in order to stay competitive. The $16.3-billion estimate will also depend on the exchange rate, as well as output and sales from the Volkswagen plant.

“This is a significant subsidy,” Parliamentary Budget Officer Yves Giroux told reporters, noting it is six times the annual budget of the federal environment and climate change department.

He said the report only looks at economic and fiscal benefits of the construction stage of the plant, not its operation, because much of the government’s information is confidential, including the annual output and subsidies. “That limits us in our capacity to estimate the economic impacts,” he said.

He said the report took into consideration the government’s repeated, and public, aim of matching U.S. subsidies. In the U.S., production subsidies are provided through refundable tax credits, but in Canada they are direct subsidies, and in current taxation rules, they are taxable under the Income Tax Act.

According to the report, the economic impact of the construction phase of the project is “marginal,” and would increase real GDP by 0.01 per cent and create 1,400 jobs by the end of 2027. Ottawa has said the plant will eventually create up to 3,000 direct jobs and 30,000 indirect jobs, and produce up to one million electric vehicles per year.

Mr. Giroux said the construction phase should generate sufficient taxes to compensate Canada’s $700-million investment under the Strategic Innovation Fund and offset the government contribution.

Finance Minister Chrystia Freeland said she hadn’t yet read the report but said the federal money was accounted for.

“I do want to assure Canadians that the Volkswagen investment came before the budget. It is fully accounted for in the fiscal framework on which the budget is based, fully accounted for,” she told reporters in Ottawa.

The report does not delve into Ontario’s $500-million contribution to the project.

Ottawa and automaking giant Stellantis NV are currently in negotiations about the future of a $5-billion electric-vehicle battery plant in Windsor, Ont., with the company asking for Canada to match billions in subsidies being offered in the U.S. after halting construction last month.

Mr. Giroux said negotiations with Stellantis continue but when there is more clarity, his office will send an information request to the federal government and update their analysis of the Volkswagen deal.

LouAnn Gosselin, a spokeswoman for Stellantis, said Wednesday there is nothing new to report about the status of negotiations.

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Ottawa's Volkswagen deal will cost $3-billion more than initial estimate: PBO - The Globe and Mail
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