Introduction

Risk and Regulation

It is inherently risky to breathe, eat, drink, walk, drive, work, invest, and play. Tragic events occur every moment. The world is full of different risks and everyone is prone to different dangers. We confront varying levels of risk every day. While people frequently face potentially dangerous situations, not many live at home in complete isolation to avoid getting in harm’s way. Most people try to avoid what they perceive as unacceptable risk, while some willingly take on high-risk activities.

It is important to recognize and understand that risks are relative, and inevitably people have to make trade-offs. Taking some risks lead to rewards. For instance, people take risks when they step out of their homes to get some fresh air, eat desserts, drive to work, take medicine, and invest in the stock market. Since not all risks can be completely eliminated, even with government regulations and private precaution, people do accept risk on a daily basis. In fact, life is a whole series of risk trade-offs.³

The modern welfare state is now expected to provide income support to the poor, assistance and job training to those who are unemployed, pension benefits for the old, and “universal” and “accessible” health care for everyone. The modern Canadian welfare state is also expected to ensure that the air we breathe is clean, the food we eat is free from any health hazards, the sidewalks are clear of any debris, the cars we drive meet certain safety standards, the conditions under which we work are safe and secure, and the deposits we make at our banks and credit unions are insured. Of course, the relentless pursuit of “zero risk” has its costs. Unfortunately, federal and provincial regulators do not appear to understand that not all risks can be eliminated. At best, regulators have good intentions, but tend to ignore both the other risks which imposing regulations create, and the economic burden that regulations impose on society.³

Professors John Graham and Jonathan Baert Wiener provide many examples of the unintended consequences of regulation. They include:

• Disposable diapers. Disposable diapers do create solid waste in landfills. However, encouraging the use of cloth diapers to reduce solid waste creates air pollution since they require washing by energy-intensive machines. More often than not, a washing service will pick up cloth diapers from households in a gas-guzzling truck ...
• Fungicide bans. In order to reduce the risk of cancer, a ban on the fungicide EDB was introduced. While this might appear to be a sensible regulation, it may, in fact, cause a fungus to remain on nuts and grains which is potentially more carcinogenic than the fungicide itself ...
• Child-resistant caps. Child-resistant caps on certain medicine bottles became mandatory in the 1970s. The intent of the regulation was to protect children. The outcome, however, was different. There has been an increase in the number of poisonings of children. How did this risk reduction strategy fail? Apparently, parents were lulled into a false sense of security and were not as vigilant about storing drugs safely, which contributed to a higher number of poisonings ...
• Old-growth logging ban. A ban on logging old-growth forests in North America may sound like a good idea. However, it may increase world timber prices and thus encourage logging of certain sensitive forests in other parts of the world ...
• Artificial sweetener ban. Artificial sweeteners were banned since they were considered carcinogenic. Again, the intent of regulators was good. However, prohibiting artificial sweeteners could potentially increase the consumption of sugar, which itself creates another risk, namely, weight gain in some cases and the consequent problems associated with obesity...⁴

These examples are indicative of the trade-offs which must necessarily take place if we are to avoid creating other risks.

The Regulatory Burden

One of the most important but overlooked challenges to Canada’s economic competitiveness has come from the unfair and unreasonable regulatory burdens imposed by federal, provincial, and local governments on business, both large and small. High taxes are an acknowledged major impediment to creating new investment and jobs.⁵ Regulatory burdens, however, are also a significant barrier to creating jobs. Regulatory burdens can also be costly and chaotic for business people because they are unpredictable. Despite this unpleasant reality and several proposals for reforming regulation, there has not been any comprehensive effort to truly reform the regulatory process provincially or federally. The rhetoric of regulatory reform has not been matched by action.⁶ A 1994 report by the Small Business Working Committee set up by Ottawa is reflective of the rhetoric at the federal and provincial levels of government.

Too many regulations are developed and administered with little consideration given to their impact on the competitiveness of small businesses. Government must regulate less, simplify paperwork, limit information requirements and get out of the way so that small businesses can focus on creating wealth and jobs.⁷

The number of regulations affecting people and businesses in Canada has escalated over the last two decades to an extent that defies the imagination. There were over 100,000 federal and provincial regulations passed by these two levels of government between 1975 and 1997. On average, federal and provincial governments across the country (excluding Quebec) have passed 4,075 regulations per year.⁸ According to the Privy Council Office, the federal government alone has passed 1,031 regulations on average per year during the same period.

From rules restricting or eliminating a business’ ability to hire workers to new definitions of wetland that deem whole parcels of land undevelopable, these rules have a deleterious effect on the ability to do business in Canada. The need for a framework of laws⁹ is not in dispute. However, inadequate attention to how these rules are made and enforced in Canada has resulted in a proliferation of ineffective and inappropriate regulations, and a stifling of Canadian entrepreneurship, thus creating impediments to Canada’s competitive position in the global marketplace, as well as allowing an unacceptable level of government intrusion into our lives.

Objectives of this study

There have been repeated calls to ease the regulatory burden on Canadian firms, but efforts to make substantial changes have been impeded by the lack of sufficient and systematic information on the magnitude of the regulatory burden. In 1988, a Ministerial Task Force on Program Review put the cost of regulatory compliance to the economy due to federal regulations at $30 billion.¹⁰ In 1996, The Fraser Institute published one of the first comprehensive estimates of the cost regulatory compliance in Canada using 1993-94 data. It estimated the cost of complying with federal regulations at $48 billion, and the total cost, including provincial regulations, at $85 billion. This study will update the cost estimates based on 1995-96 data.

This study focuses on the cost of regulation and does not attempt in any way to examine any benefits that may arise from regulation. It will only measure administrative and internal compliance costs. These may not be the most important costs, but they are directly measurable. Since the study’s focus is the analysis of regulatory costs at the level of the firm, two areas of study are explicitly excluded: an analysis of the final incidence of the regulatory burden, and an analysis of the social benefits, if any, of regulation. These two areas need further research, but are beyond the scope of this paper.

The primary goal of this study is to estimate the direct financial cost to taxpayers of federal, provincial, and local administration of government regulations in Canada. The secondary goal is to estimate the compliance costs incurred by the private sector in complying with regulatory mandates. Finally, the paper will conclude by examining the impact of regulation on productivity growth and provide some modest proposals to reform the regulatory process in Canada.

Defining Regulation

Webster’s dictionary defines “regulation” as a “rule, ordinance or law by which conduct is regulated.”¹¹ Regulations are imposed on individuals by their governments. Of all the regulations that affect everyday life, most come from the federal and provincial governments. Perhaps the most pervasive kind of government regulation is the federal and provincial income tax imposed on both individuals and corporations. Canadians are very familiar with the inconvenience associated with filling out income tax forms, but there is another type of regulation that to most Canadians is less obvious than income tax, but is as pervasive in its effects as taxation. This category of regulation includes everything from packaging and labelling requirements to employment equity laws. Although it consumes a relatively small portion ($4.1 billion in 1995-96)¹² of federal, provincial, and local government expenditures, it has a disproportionately far-reaching impact on the nation’s economy, affecting producers and consumers alike.

This category of regulation can be divided into two groups: social and economic. Social regulations are designed to achieve such goals as cleaner air, equal employment opportunity, safer work environments, and product safety. Agencies that administer social regulations include Environment Canada, Human Resources Development Canada, Health Canada, and Agriculture Canada.

Economic regulation is traditionally more industry specific. Agencies regulate a broad range of activities using economic controls such as price ceilings and service parameters. Agencies that administer economic regulations include Canada Radio-television and Telecommunications Commission, Canadian International Trade Tribunal, and the Canada Deposit Insurance Corporation.

While difficult to define, for the purposes of this study regulation is considered as:

the imposition of rules intended to modify economic behaviour significantly and which are backed by the authority of the state. Such rules typically attempt to modify one or more of the following: price entry (e.g. permits and licences), rate of return, disclosure of information, attributes of a product or service (e.g. quality, purity and safety), and methods of introduction (e.g. pollution standards, worker health and safety standards)."¹³

Measuring the Growth of
Regulation

Numerous attempts have been made to document the growth of government regulation. The Economic Council of Canada reported that between 1870 and 1978, the number of federal statutes increased from 25 to 140 while the number of provincial statutes increased from 125 to 1,608. During the period 1970-1978, the federal government passed 25 new statutes while provincial governments passed 262 new statutes. The Council attributed the explosion in government regulations to “new style” or “social regulation” in areas primarily concerned with consumer protection, health and safety, and the protection of the environment.¹⁴

Even though there has been a recognition that regulations cost the economy in the form of higher transaction costs for firms, which impede productivity, job growth, and economic growth,¹⁵ federal and provincial regulations have been a growth industry in Canada since the 1970s (see tables 1 to 10).