August 2001

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A modest proposal to reform regulation

Adding regulation's compliance cost to government spending gives a more complete estimate of the size that government has already attained in Canada's economy (Crews, 2000: 7). The Fraser Institute has calculated that in fiscal year 1997/1998, government spending--$386 billion--equaled 44% of GDP.⁶ Regulation's estimated compliance cost in that year--$100 billion--amounts to another 12% of GDP. Altogether, then, governments' reach extended to an astonishing 56% of Canada's economy in fiscal year 1997/1998 (figure 17, table 17).

Most regulatory decisions in Canada today are implemented in a knowledge vacuum: governments and the private sector alike are often oblivious to the costs that regulation imposes on society (Mihlar, 1997; Mihlar, 1999). To remedy this situation, policy analysts frequently recommend that governments enhance regulatory accountability through comprehensive regulatory reform.

One such comprehensive proposal is regulatory budgeting, which formally limits the compliance costs that governments' regulatory activities can compel the private sector to incur (Hughes, 1996: 3-4). Regulatory budgeting would enhance accountability by asking governments to prioritize their regulatory activities (Crews, 1996), presumably on the basis of cost-effectiveness (Morrall, 1992: 19).

Another comprehensive proposal to reform regulation is to entrench cost-benefit analysis. Ostensibly, this would prevent governments from adding new regulation unless net benefits would result (Hahn and Litan, 1997: 22). Regulation's benefits, however, are difficult to measure and, what is more, governments have strong incentives to overstate benefits and understate costs in order to defend and expand their regulatory activities. As a result, efforts to improve regulatory accountability by conducting cost-benefit analyses for new regulatory initiatives might well be rendered futile by widespread scepticism about the analyses' quality (Lutter, 1999: 41).

Comprehensive proposals to reform regulation are contentious and difficult to implement. A more modest proposal--and a more realistic first step towards reforming regulation--would be to require governments to publish a catalogue of regulatory compliance costs in a detailed and all-inclusive but easily used document (Crews, 2000c: 35). The value of such a catalogue is readily appreciated by considering that, even if governments only collected negligible amounts in taxes, it would still be worthwhile to keep track of them (Crews, 1996). In addition, cataloguing data on compliance costs is the first step toward regulatory budgeting.

Independent estimates of the cost of regulation like this study can provide only the driving force behind enhancing regulatory accountability. Improving disclosure of compliance costs calls upon governments themselves to estimate how much it takes to comply with their initiatives (Hughes, 1996: 3), monitored all the same by aggressive commentary from policy analysts to prevent systemic under-estimation (Crews, 1996).

At the outset, it would be necessary to rely on a variety of sources like industry and academia in addition to government departments and regulatory agencies to accumulate data on the cost of complying with regulation. Over time, constant review would develop a standard methodology for collecting and comparing cost information (Hughes, 1996: 41). To be credible in a policy environment, it would have to be clearly defined and consistently applied (Hughes, 1996: 28). In the meantime, the process would reveal just how much is not known about the cost of regulation in Canada.

What about regulation's indirect costs? As discussed in the introduction to this study, regulation's indirect costs include loss of choice for consumers and of productivity for businesses. A case can be made that governments should avoid cataloguing regulation's indirect costs, on grounds that they are virtually impossible to measure (Weidenbaum, 1979: 38; Crews, 1996). Nevertheless, regulation's indirect costs should at least be acknowledged as failing to do so would massively understate the economic impact of regulation (Crews, 1999: 20). Indeed, indirect costs might exceed the direct costs of administration and compliance (Crews, 1996).

It is time to stop governments from hiding the full costs of regulation. Requiring governments to put on record the off-budget costs that are incurred in complying with government regulation would benefit Canadians enormously. Public disclosure of the cost of regulation in Canada would then be on a par with public disclosure of taxes.

Table 17: The size of government in Canada's economy

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