Snow and ice build up on the roof of the Confederation building on Parliament Hill on Feb. 18.Sean Kilpatrick/The Canadian Press
Red tape, or rather the cutting of said tape, is one of the perennial promises of Canadian politics, and for good reason. It strikes the right note of exasperation with bureaucracy, cozies up to the frustrations of small business and is vague enough to threaten no one in particular. Best of all, there is no measure of success (and hence no penalties for failure).
In the meantime, the red tape keeps unrolling, and tying up the economy. A recent Statistics Canada study measured the scope and pace of regulatory creep at the federal level. That pace is relentless. The number of regulations rose almost every year between 2006 and 2021. The business of making regulations is a steady one.
It’s also a booming business. There were 234,200 federal regulations in 2006. By 2021, that tally had swollen to 320,900 – 86,700 new regulations. That growth is a bipartisan sin: the rollout rate of additional regulations was roughly the same during the Harper and Trudeau governments.
All of those rules come at a steep economic cost, on top of the direct compliance expenses. The Statistics Canada study estimates that the growth in regulations over those 15 years – not including the 234,200 regulations already in place in 2006 – reduced gross domestic product by 1.7 per cent. (Based on November’s GDP figures, that’s just over $38-billion.)
Employment growth was 1.3 per cent lower due to the additional regulations over that time span, the study estimates. And the increase in regulations meant that business investment was 9 per cent lower in 2021 than it would have otherwise been.
Imagine the political storm if Ottawa enacted a tax hike that blew a recession-sized hole in GDP, killed jobs and depressed business investment. But that considerable cost comes from tens of thousands of decisions, making the damage harder to discern. And the full bill is certainly higher, since the Statscan analysis doesn’t include the effect of provincial and municipal regulations.
The most pernicious effect of the growth in federal regulations that Statscan identifies is the decline in business dynamism. Both entry and exit rates for businesses are pushed down by the weight of red tape. Faced with a growing regulatory burden, fewer entrepreneurs are willing to launch new businesses.
And without the pressure from such innovative new entrants, uncompetitive firms are able to stick around.
That is a formula for stagnating productivity, exactly the predicament in which Canada currently finds itself.
Beyond the economic costs measured by the Statscan study, there are also strategic distractions for corporations. The greater the growth in regulations, the more incentive there is for large firms to build up an infrastructure to minimize those costs – the legal and accounting departments – and to push government for favourable treatment through lobbying. Playing the system rather than winning in the marketplace becomes a key to success.
Some part of those regulatory costs must simply be borne. In some cases, the ultimate economic costs will be greater than those of regulations. In other instances, the social cost of eliminating regulations will be unacceptable.
But amid the morass of federal regulations there are surely vast numbers of rules whose benefits are overshadowed by their costs. So how to prune?
The federal Conservatives gave it a shot in 2011, passing a one-for-one rule that required ministers to scrap an existing regulation when introducing a new one that imposed a regulatory burden. There are a number of problems with that approach, but the two most obvious are these: First, it presupposes that the ideal number of regulations is the status quo. Worse, the rule was ineffective. The number of federal regulations continued to rise.
The better approach would be to start from the premise that regulations come with a cost, one that should be tallied and published. An annual report card, using Statscan’s methodology, would be a helpful tool in understanding the full costs of regulations, and in holding governments accountable. Having measured the cost of regulatory creep, Ottawa needs to start pruning, by setting targets for rolling back the associated economic costs.
And to those bureaucrats who might protest that it would take a huge investment in time and money to deal with such a welter of regulations, we would retort: Exactly.