August 2001

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The cost of regulation

In fiscal year 1997/1998, the federal government and provincial, territorial, and local governments in Canada spent $5.2 billion administering their regulatory activities, down only slightly in real terms from $5.3 billion in fiscal year 1995/1996 (table 14). Federal administrative costs alone increased by 50% in real terms between fiscal years 1973/1974 and 1997/1998. Provincial and territorial administrative costs of regulation increased by 80% in real terms over the same period.

Administrative costs in the public sector, however, are only the tip of the regulatory iceberg. The bulk of the cost of regulation is incurred by individuals and businesses in the private sector to implement, monitor, and demonstrate compliance. In fiscal year 1997/1998, the private sector spent an estimated $103 billion to comply with federal and provincial government regulation (table 14, figure 14). To put this amount in perspective, consider that it is only slightly less than what governments collected in personal income taxes in the same year ($114 billion). The estimated cost to the private sector of compliance to regulation in fiscal year 1997/1998 exceeds corporate income taxes collected ($27 billion) and even pre-tax corporate profits ($86 billion) in that year (figure 15).

The cost of regulatory compliance--though often imposed on businesses--is borne largely by consumers (Weidenbaum, 2000: 14) since businesses pass on much of the cost of regulatory compliance as higher prices for goods and services (Crews, 2000: 8). In 1997, regulatory compliance cost individual Canadians an estimated $3,425, or $13,700 per family of four (table 15). According to Statistics Canada's 1997 survey of household expenditure, the average household size in Canada (10 provinces) is 2.59 (Statistics Canada, 1997: 36). The cost of regulatory compliance absorbed an estimated $9,300 per household or 24% of an average household's after-tax expenditure of $39,313. The embedded costs of regulatory compliance thus exceeded spending on every item except shelter in Canadian households' after-tax budgets in 1997 (Statistics Canada, 1997: 62; figure 16).

Table 14: Costs of administering and complying with regulation (in millions of constant dollars)

Methodology

Data on the costs to the public sector of administering regulation were provided by the Office of the Senior Social Scientist, Statistics Canada. The costs to the private sector of compliance were then estimated using a multiplier derived by Weidenbaum and DeFina (1976), who estimated that for every dollar that the public sector spent to administer regulatory activity, the private sector spent $20 to comply with government regulation. To derive this estimate, they gathered and aggregated available estimates of the compliance costs of American federal regulatory programs.⁵ Weidenbaum and DeFina assumed that the compliance costs of American federal regulatory programs for which estimates were unavailable were zero. Consequently, their multiplier, 20 to 1, is conservative.

Weidenbaum and DeFina set out to estimate regulation's total cost. As a result, their standard of comparison was no regulation, not even regulation that facilitates markets.

Since 1976, other policy analysts have updated Weidenbaum and DeFina's multiplier. The private sector is estimated to have spent $17.5 for every dollar that the public sector spent to administer regulatory activity in the late 1980s and early 1990s (Regulatory Affairs, 1996; Moore, 1995). However, the Center for the Study of American Business has recently returned the multiplier to 20 to 1 (Douglass, Orlando, and Warren, 1997). These ratios of compliance cost to administrative cost are readily applicable to Canada's economy, as Canada and the United States have similar regulatory regimes (Stanbury and Thompson, 1980). Therefore, this study uses a 20-to-1 ratio to estimate compliance costs from administrative costs in fiscal years 1973/1974, 1980/1981, 1995/1996, and 1997/1998, and a 17.5-to-1 ratio in fiscal years 1987/1988 and 1993/1994.

Table 15 Cost per household and per capita of complying with regulation

Costs of legislating and lobbying

Governments and the private sector each incur costs when regulation is made. Governments incur costs when they decide to regulate. Simultaneously, individuals and groups who are likely to be affected by regulation that the government is contemplating incur additional costs to retain experts to lobby politicians and bureaucrats (Strick, 1994: 115). Although the cost of this political activity is difficult to measure, Wiedenbaum estimates that it adds approximately 10% to compliance costs (Weidenbaum, 1979: 38). This means that governments and the private sector spent an estimated $10 billion on political activity related to regulation in fiscal year 1997/1998 (table 14). These costs are over and above what governments spend to administer regulatory activities, and what the private sector spends to comply with government regulation (Dr. John C. Strick, personal communication, August 15, 2000).

In Canada, the Lobbyists Registration Act requires individuals who are paid to lobby federal politicians to register and disclose information such as the name of the client or corporate or organizational employer, the names of the parent or subsidiary companies that would benefit from the lobbying activity, the subject matters lobbied, and the names of the federal departments or agencies contacted (Industry Canada, 2000). Under revisions to the Act brought in 1996, there are three categories of lobbyists. Consultant lobbyists lobby on behalf of a client and may include government-relations consultants, lawyers, accountants, or other professional advisors who provide lobbying services for their clients. Between 1998 and 2000, the number of consultant lobbyists increased 20% from 584 to 702 (table 16). In-house lobbyists are corporate employees managing public affairs or government relations who spend a significant amount of time lobbying. The number of in-house lobbyists has fallen from 367 to 335 (around 9%) between 1998 and 2000. The decrease is attributed to corporate mergers and re-evaluations by company officials of the need to register when lobbying is less than 20% of an employee's duties. Finally, non-profit organizations must register when one or more employees lobby federal politicians and when the lobbying activity of these employees is a significant part of their duties. The number of organizations registered increased roughly 15% from 322 in 1998 to 370 in 2000. The total number of registered lobbyists increased by 10% over that same three-year period (table 16). While it is impossible to know the exact cost of all of this lobbying, it is clear that time and energy devoted to trying to influence legislation and regulations comes at the expense of more productive activities.

Table 16 Lobbyists active as of March 31

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