Regulatory policy

The hidden tax

Governments impose regulations on firms and individual members of society with the chief aim of protecting the public interest. The most commonly cited of these public interests include the environment, health and safety practices in the workplace, and protection from unfair labour practices. Supporters of more regulation in these areas contend that they are an important means towards securing the economic and social well-being of society. The aims are admirable but a substantial number of the regulations are nothing other than a form of taxation and, as such, impose an undue burden on the ability of businesses to operate efficiently in Canada.

From laws that restrict the ability of private firms to hire replacement workers to rules that govern the length of a wooden ladder, regulations impede economic growth by forcing firms to spend more of their time doing what the government tells them, rather than actually running their business. In 1993/94 alone, regulations cost Canadians $85 billion in compliance costs (Mihlar 1996b).

Since the 1970s, Canada has seen a sharp decline in productivity growth (OECD 1994c) which, in turn, has led to slower growth in real income and resulted in huge losses to the Canadian economy. Empirical studies suggest that between 12 percent to 30 percent of the productivity slowdown can be attributed to government regulations (Wienert 1997).

Moreover, the vast majority of regulations are exempt from a cost-benefit analysis. As such, there are many regulations where the costs exceed the benefits, impede economic growth, and fail to meet their objectives. Empirical evidence shows that in many cases the cost of regulations far exceeds the benefits experienced (Hahn and Hird 1991). Between 1973/74 and 1993/94, the direct cost of administering regulations in British Columbia increased by 800 percent (Mihlar 1996b). These increases in expenditures are inevitably paid by personal and corporate taxes. In addition, Professor Wiedenbaum at the Centre for the Study of American Business concluded that for every dollar spent on regulations by the government, it costs private firms $20 dollars in compliance costs (Mihlar 1996b). These compliance costs are indicative of the increasing transformation costs faced by businesses operating in Canada.

The cost of regulation
in British Columbia

Between 1975 and 1997, British Columbia passed over 11,000 regulations amounting to almost 20,000 pages. The present government is responsible for passing almost 30 percent of these regulations since coming to power in the fall of 1991 (Mihlar 1996b). As figure 11 shows, the government has set a steady pace, passing, on average, over 400 regulations per year. Even more troubling, the number of pages it takes to log these regulations continues to grow as the increasing number of pages reflects the increasing complexity of the regulations. This is of particular concern to small businesses, which have to devote more time than they can spare to reading and complying with provincial regulations than running their operations.

What is the impact of this expansion? It has been estimated that the Forest Practices Code enacted by the government of British Columbia in 1994 has cost the forest industry about $1 billion per year in extra costs from increased red tape (Vancouver Sun 1998a). Moreover, evidence shows that, while the act has cost the industry hundreds of millions of dollars a year to administer, there has been little or no social benefits realized as a result of this act (Van Kooten and Wang 1998). In short, regulations do not act to increase economic efficiency and welfare as supporters of government regulations contend.

The response of the Clark government

In response to the adverse impact of their regulatory policies, the Clark government announced in its recent budget (1998/99) that it is initiating a review of provincial regulations. The Business Task Force has been entrusted with the responsibility of making recommendations on how the provincial government can cut the cost of doing business in British Columbia by streamlining regulations or eliminating red tape. The task force will also be responsible for devising ways to prevent the creation of unnecessary new regulations (Business Task Force 1998). This is indeed good news for British Columbia business, which has witnessed the cost of complying with provincial regulations rise steadily.

Recommendations

While the British Columbia government's review of all provincial regulations is a step in the right direction, there are many other initiatives that the Clark government could adopt to lower the cost of doing business in British Columbia. Specifically, we suggest that the government of British Columbia adopt the following policy recommendations.

1. Implement a moratorium on all new regulations
   The Clark government should place a moratorium on all new provincial regulations for a period of three years. This step will allow the Business Task Force to complete its work without delay and stop the tide of regulations that have hurt productivity and economic growth in British Columbia. This moratorium should, of course, make exemptions for extraordinary circumstances such as earthquakes, epidemics, and other major natural disasters.
2. Prioritize all regulations
   Regulatory bodies in British Columbia should use risk assessment to prioritize regulations in such areas as health, safety, and the environment. Since not all risks are of equal magnitude, the Clark government should focus on the risks that are most serious for British Columbians (Hahn 1996).
3. Implement a cost/benefit test
   The Clark government should implement an assessment mechanism to analyze the costs and benefits of any future regulations. This step would prevent the passage of unnecessary regulations that impede productivity and economic growth. For instance, British Columbia should investigate Ontario's system for assessing the impact of new regulations, the Less Paper/More Jobs Test (Law, Markowitz, and Mihlar 1997).
4. Enact a "sunset review clause" in all new regulations
   Regulatory bodies should include a "sunset clause" in all new regulations, which would repeal regulations on a three year cycle. This step would allow the province's regulatory regime to adapt to changing circumstances and provide for a mandatory review of all regulations for their continued relevancy and economic impact.

Conclusion

Government regulations are an implicit form of taxation. Empirical evidence has shown that regulations tend to lower productivity growth and the overall standard of living. Since the present government took power, regulations have increased at a steady pace, as have the compliance costs to business. Recently, the government announced a review of all existing regulations in an attempt to stem the escalating costs of doing business in British Columbia. While this is an important first step to cutting red tape, there is still much that needs to be done to ensure that the investment climate in British Columbia is conducive to economic activity. For finally recognizing, after six years in office, the onerous cost of regulations and initiating a task force to examine regulatory reform, the British Columbia government deserves a D.1

1. We cautiously grant the government of British Columbia a D for its regulatory policy, since it was not known at the time this assessment was written whether or not the government would enact the recommendations suggested by the Barrett Commission. This "conditional passing" grade for regulatory policy is based on the assumption that the government will not enact the recommendations in the study that would add further to the already high regulatory burden faced by businesses in British Columbia.

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Last Modified: Wednesday, October 20, 1999.