Cost of Regulatory Compliance to the Canadian Economy
Methodological Issues
In order to estimate the cost of regulation to the economy as a whole, it was necessary to obtain detailed cost data from federal, provincial, and local governments mandated to design and implement regulations. The data gathered were the estimated costs incurred by government agencies, from the public accounts. This study uses a method devised by Professor Wiedenbaum at the Centre for the Study of American Business, Washington University in St. Louis, Missouri, US, to estimate the cost of compliance for the economy as a whole.
The precise cost of regulation to the economy is rather difficult to estimate.22 Using the method developed by Wiedenbaum, however, one can make a reasonable estimate of the cost of regulation at a macro level. Wiedenbaum’s basic method was to gather the most reliable estimates of the specific cost of regulatory measures and aggregate the results for a base year (in his case, 1976). Within a given range of regulatory compliance costs, the Wiedenbaum’s study adopted a conservative approach by using the lower end of the range. Although Wiedenbaum makes a clear distinction between stocks and flows,23 he recognizes the incremental expenditure on capital outlays as the one-time use of resources in a certain year.24 Based on several studies, for every dollar spent on regulatory activity by the government, the Wiedenbaum study estimated the compliance cost for firms to be $20 per year in the early 1970s.25 In the late 1980s and early 1990s, however, firms are estimated to have spent $17.50 in regulatory compliance costs for every dollar spent by regulatory agencies.26 Therefore, in calculating the compliance cost, this study will employ the multiplier of 17.5 for 1987-88 and 1993-94 respectively. In a new study by the Centre for the Study of American Business, however, the ratio has been revised back to 20. Thus, this study will use the ratio of 20 in calculating the cost of regulatory compliance for 1995-96.27
Public Sector
Administration and
Private Sector Compliance Costs
Direct administrative costs are the costs of administration incurred by regulatory agencies. They are easily identifiable and measurable, but form the smallest portion of the total costs of regulation. Compliance costs are those costs incurred by industry in complying with government regulations. They may range from the nuisance of completing government forms to huge capital investments necessary to meet regulatory requirements. To the extent that these costs increase the operating costs of firms, they are reflected in increased consumer prices.28
In 1987-88, expressed in constant dollars, Canadian federal, provincial, and municipal governments spent $4.5 billion (see table 11) administering regulatory and regulatory-related programs. Using the multiplier (17.5)29 we can estimate the costs of regulation on a macro-scale to the Canadian economy. In fact, Canada and the US have roughly comparable regulatory regimes.30 Therefore, a similar ratio is applicable to Canada. Consequently, the cost of regulatory compliance for the economy in 1987-88 was 17.5 times larger, at $78.7 billion in 1993-94 dollars.
All three levels of government spent $4.9 billion on administering regulations in 1993-94 (table 12). Once again, using the multiplier of 17.5, this expenditure translates into $85.7 billion in regulatory compliance cost to the Canadian economy in 1993-94.
All three levels of government spent $4.1 billion on administering regulations in 1995-96 (table 13). Using the multiplier of 20, this expenditure translates into $83.4 billion in regulatory compliance cost to the Canadian economy in 1995-96. The federal government alone spent $2.4 billion in administering regulations in 1995-95, translating into a compliance cost of $48 billion for Canadian businesses.31
Click Here to View Table 11: Total Government Regulatory Expenditure and Cost to the Canadian Economy (1987-88)
During the period under consideration, nominal provincial expenditures increased by 545 percent. Nominal federal expenditures rose by 342 percent. The rapid increase in regulatory expenditures by provincial and federal levels also reflects the increase in the number of regulations and the attendant costs of private sector compliance.
Click Here to View Table 12: Total Government Regulatory Expenditure and Cost to the Canadian Economy (1993-94)
Click Here to View Table 13: Total Government Regulatory Expenditure and Cost to the Canadian Economy (1995-96)
Click Here to View Table 14: Federal and Provincial Government Expenditures (in thousands of nominal dollars) on Regulation (1973-74 to 1995-96)
Click Here to View Table 15: Government Expenditures (in thousands of 1993-94 dollars) on Regulation (1973-74 to 1995-96)
As table 15 indicates, real expenditure by all provincial governments increased by 106 percent between 1973-74 and 1995-96. Federal government expenditures during the same period increased by 26 percent. In fact, the last two decades has seen an increase of 49 percent in federal and provincial government expenditures on regulation.
Table 16 shows the changes in spending by provincial and federal governments on regulatory programs. As is clear from the table, provincial government spending has increased by 4.7 percent per year, while federal government spending has escalated by 1.1 percent per year in real terms over the last two decades.
Table 17 shows that the whole array of government regulations cost Canadian households $11,277 in 1995-96. Looking at the costs another way, regulations cost each Canadian $2,819 in 1995-96. The statistics in table 18 indicate that federal regulations alone cost the Canadian economy $48 billion in 1995-96.
Regulatory reform: some ideas
It is apparent from this study that the regulatory burden in Canada remains high in spite of the rhetoric of regulatory reform at the federal and provincial levels of government. The following are
Click Here to View Table 16: Real Average Annual Growth Rate of Federal and Provincial Government Spending on the Administration of Regulation: 1973-74 to 1995-96
Click Here to View Table 17: Cost of Regulatory Compliance to Canadians: 1987-88 to 1995-96 (expressed in 93-94 dollars)
Click Here to View Table 18: Federal Government Component of the Cost of Regulatory Compliance to Canadians (expressed in 1993-94 $)
some modest suggestions for re-forming the federal and provincial regulatory processes.32
1) Federal and provincial governments should encourage market-driven responses. There should be a reliance on instruments other than regulation, where possible. The legislatures should encourage market-driven responses through their statements of intent, and to the greatest extent possible, through specific legislative language. Regulatory alternatives might include voluntary standards, economic incentives, performance standards, and negotiated compliance.33
2) Regulators should prioritize their regulations. The regulatory agencies should use risk assessment to help set priorities for achieving greater protection of health, safety, and the environment in the most cost-effective manner. All risks are not of an equal magnitude. Government should focus on the most serious hazards. Operationally, this would entail centralizing regulatory decision-making. Sound science and comparative risk analysis should be drawn upon during the legislative drafting process. Regulating trivial risks harms society by diverting resources away from their most productive uses.34 All regulatory agencies planning to propose regulations should prioritize them and submit them for the approval of the respective committees.
3) Avoid an “at any cost” approach to regulation. There should be a cost-benefit analysis for any regulation proposed. Specifically, regulatory agencies proposing rules should demonstrate to the independent committee the tangible benefits to the affected individuals, and what practical evidence supports these claims. It should also explain how these benefits justify the cost of implementation, administration, compliance, and monitoring to government, firms, and individuals.
4) Committees should be set up under the Treasury Board Secretariat federally and under each provincial Department of Finance to review, eliminate, and amend existing regulations. The committees should outline general strategy and process, set goals, and establish reduction targets. The committee should be given a three-year mandate to review every existing regulation so as to eliminate, amend, and streamline. The evaluation should be zero-based, to allow for total objectivity in designing an effective document from scratch. This process will ensure that the existing regulatory framework document is not used for reasons of simplicity. The committee should be retained to provide final approval of the proposed rule before it goes to cabinet for approval. The onus should be placed on the respective ministries to support the need for retention of any regulation. The final decision, however, should lie with the cabinet.
5) Study the economic impact of proposed regulations. The economic impact statement should include an assessment of the proposed regulation’s impact on firms’ competitiveness in the sectors where the majority of the compliance costs are expected to occur. The assessment should also consider the effect of the regulation on the number of jobs by sector, region, household disposable incomes, and the competitive position of the province’s or Canada’s major economic sectors vis-à-vis their major trading partners. The proposed rules should also be analyzed to determine their effects on the fiscal condition of the federal, provincial, and local governments, including the anticipated effects on the regulating agency itself. This analysis should estimate the potential increase in provincial or local government employment and spending necessary to comply with the regulations.35
6) Regulations should be written in simple language. If the regulations are not understood by the groups and individuals who will be affected, they should be sent back to the regulatory agency by the committee for further clarification.
7) There should be a provision for sunset review for all regulations. Regulatory agencies should include in all regulations a sunset clause repealing the regulation on a three year cycle, unless the committee, after conducting a review, specifically approves its extension.
8) Minimize inter-jurisdictional conflicts. Regulatory agencies proposing new rules should be required to identify and take action to minimize the inter-jurisdictional conflicts and confusion of the proposed rules by: