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Cutting Red Tape in Canada: A Regulatory Reform Model

Eliminate at least one regulation for every new one

Canada recently became the first country in the world to legislate a cap on regulation.

The Red Tape Reduction Act, which became law on April 23, 2015, requires the federal government to eliminate at least one regulation for every new one introduced.

Remarkably, the legislation received near-unanimous support across the political spectrum: 245 votes in favor of the bill and 1 opposed. This policy development has not gone unnoticed outside Canada’s borders

Canada’s federal government has captured headlines, but its approach was borrowed from the province of British Columbia (BC) where controlling red tape has been a priority for more than a decade.

BC’s regulatory reform dates back to 2001 when a newly elected government put in place policies to make good on its ambitious election promise to reduce the regulatory burden by one-third in three years. The results have been impressive.

The government has reduced regulatory requirements by 43% relative to when the initiative started.

During this time period, the province went from being one of the poorest-performing economies in the country to being among the best.

While there were other factors at play in the BC’s economic turnaround, members of the business community widely credit red tape reduction with playing a critical role.

The British Columbia model, while certainly not perfect, is among the most promising examples of regulatory reform in North America.

It offers valuable lessons for US governments interested in tackling the important challenge of keeping regulations reasonable. The basics of the BC model are not complicated: political leadership, measurement, and a hard cap on regulatory activity.

John Peter  shared this link Mercatus Center at George Mason University

“Canada recently became the first country in the world to legislate a cap on regulation.”

The Red Tape Reduction Act, which became law on April 23, 2015, …
mercatus.org

This paper describes British Columbia’s reforms, evaluates their effectiveness, and offers practical “lessons learned” to governments interested in the elusive goal of regulatory reform capable of making a lasting difference.

It also offers some important lessons for business groups and think tanks outside government that are pushing to reduce red tape. These groups can make all the difference in framing the issue in such a way that it can gain wide support from policymakers.

A brief discussion of the challenges of accurately defining and quantifying regulation and red tape add context to understanding the BC model, and more broadly, some of the challenges associated with effective exercises in cutting red tape.

Defining Red Tape

Red tape refers to rules, policies, and poor government services that do little or nothing to serve the public interest while creating financial cost or frustration to producers and consumers alike.

Red tape may include:

1.  poorly designed laws, regulations, and policies;

2. outdated rules that may have been justified at one time but are no longer; and

3. rules intentionally designed to burden some businesses while favoring others.

Red tape, as the term is used in this paper, stands in contrast to government laws, regulations, rules, and policies that support an efficient and effective marketplace and provide citizens and businesses with the protections they need.

For the sake of keeping a clear distinction between the two, the latter will be referred to as “justified regulation” in this paper. The “broad regulatory burden” is composed of both justified regulation and red tape.

Some rules fall into the justified regulation category because they deliver a lot of benefits relative to their costs.

Others, such as an eliminated BC regulation prescribing what size televisions BC restaurateurs could have in their establishments, have little or no value and entail significant compliance costs, so they fall into the category of red tape.

However, the difference between justified regulation and red tape is not always straightforward in the messy real world where costs and benefits are not always easily quantified and one person’s red tape is another person’s justified regulation.

Despite measurement challenges, available evidence suggests that the broad regulatory burden is growing in both Canada and the United States.

Given that red tape delivers very little benefit relative to its costs, it is reasonable to want to keep this piece of the broad regulatory burden to a minimum. This is easy to say but hard to do for a number of reasons.

Part of the challenge can be attributed to the loose language that is often used about regulatory reform, especially the imprecise use of the terms regulation and red tape. People sometimes confuse cutting red tape, which most support at least in theory, with eliminating justified regulation, which most do not support in theory or practice.

In Canada, the language about government reform has evolved to put a heavy emphasis on the distinction between red tape and necessary or justified regulation, as exemplified in the title of the recently passed Red Tape Reduction Act.

The Canadian Federation of Independent Business (CFIB), a not-for-profit small business advocacy group with 109,000 small business members, strongly promotes this distinction in its work with governments.

For example, in 2010 it created an annual Red Tape Awareness Week to highlight the costs of red tape and to tell the stories of business owners affected by it.

Politicians at both the provincial and federal levels of government make announcements about cutting red tape (as opposed to announcements about regulatory reform) during the week. For example, during the 2011 Red Tape Awareness Week, former prime minister Stephen Harper announced the creation of a Red Tape Reduction Commission (which ultimately led to a number of reforms, including the one-in, one-out legislation explained above).

The BC government used the 2015 Red Tape Awareness Week to announce that it was extending its policy of eliminating one regulatory requirement for every new one introduced to 2019 (it had been set to expire in 2015).

Quantifying Regulation and Red Tape

Governments have three main ways of influencing behavior: taxing, spending, and regulating.

All have benefits and costs. With taxation and government spending, however, the costs and benefits are more obvious. It is clear how much money the government collects in revenues and there is a high degree of transparency with respect to how the money is spent, although it can be tougher to evaluate outcomes of spending and the externality costs and benefits to third parties.

The costs of the broad regulatory burden and its two components, justified regulation and red tape, are considerably less clear. Much of the costs fall on those who must comply with the rules, and these costs are never quantified by governments, making them essentially a hidden tax. Regulatory benefits too can be challenging to quantify.

The challenges of measuring regulatory costs and benefits are not trivial because they make it difficult to assess how much the broad regulatory burden is costing, whether the costs are increasing, and how much of the broad regulatory burden is red tape.

In spite of ongoing concern from business communities in both the United States and Canada that regulatory costs are too high and growing, governments tend to be reluctant to take the first necessary step to assess the burden: that is, to measure it.

Reducing regulatory excess without measurement is like trying to lose weight without ever stepping on a scale—possible but not probable.

A distinguishing feature of the BC model, discussed in the next section, is the government’s willingness to create and track its own measure of the broad regulatory burden.

While governments have been generally reluctant to quantify the regulatory burden, others have stepped up to the challenge, including researchers working for the Canadian CFIB, as well as the Mercatus Center at George Mason University, the Competitive Enterprise Institute, and the Small Business Administration’s Office of Advocacy in the United States. Existing measures, albeit limited and imperfect, bring some valuable transparency to our understanding of the broad regulatory burden.

Clyde Wayne Crews, author of numerous studies on the broad burden of regulation, explains,

Precise regulatory costs can never be fully known because, unlike taxes, they are unbudgeted and often indirect. But scattered government and private data exist about scores of regulations and about the agencies that issue them, as well as data about estimates of regulatory costs and benefits. Compiling some of that information can make the regulatory state somewhat more comprehensible.

Using survey results from both Canada and the United States, CFIB estimates that broad regulatory costs for US businesses are around C$205 billion while Canadian businesses, far fewer in number, pay C$37 billion a year.

What fraction of these broad costs might constitute red tape? When US small businesses were asked how much of the burden of regulation could be reduced without sacrificing the public interest for these regulations, the average response was a 31 percent reduction (or C$64 billion a year) with Canadian respondents sharing a similar view on the fraction of the broad regulatory burden that is red tape (see figure 1).

The survey results are consistent with the findings of other studies, showing that the smallest businesses in both countries pay considerably higher per-employee regulatory costs than larger businesses do (see figure 2).

The same CFIB survey found that more than half of US small businesses (57 percent) agree that excessive regulations (or red tape) significantly reduce business productivity while 65 percent of Canadian businesses agree with the same statement.

A significant portion of respondents in both countries indicate excessive regulations discourage businesses growth.

Beyond the economic costs, small business owners find regulatory compliance very stressful, with 78 percent of Canadian respondents agreeing that excessive regulations add significant stress to their lives and 65 percent of US respondents agreeing (see figure 3).

(Click and read this lengthy article on the BC model)

Lessons from the BC Model for US Governments Interested in Red Tape Reduction

The United States and Canada share more similarities than differences in overall economic conditions and general cultural attitudes, which makes Canada’s experience with red tape reduction and control relevant to the United States.

US governments at the state and federal level will find much to borrow from and some things to improve upon in the lessons from British Columbia.

Lesson #1: Language Matters

BC’s reforms were born in the context of “hitting the wall” with uncompetitive taxes and excessive regulation. This situation created a climate where the general public supported making cutting regulation a clear priority.

A poorly performing economy initially allowed for the more aggressive “deregulation.” Once the economy improved, the context changed and “regulatory reform” was more acceptable to the public.

More recently, a senior minister commented how helpful it was to make a distinction between red tape and necessary regulation.

Indeed, it is much harder to argue against cutting red tape, a problem most can relate to in some way, than it is to argue against regulatory reform, which can be confused with cutting justified regulations.

The language used in BC today is better at maintaining public support for cutting red tape, and it would likely have been as effective, if not more effective, than the “deregulation” language used at the beginning of the reforms. Indeed much of the “regulation” that was cut (such as restaurants being told what size televisions they could have in their establishments) was clearly red tape.

Lesson #2: Political Leadership Matters

Regulatory reform in BC has been successful because it has had strong political champions. Leadership from the top was critical to the success of the reforms.

However, it was also important in the early years to have other strong political leaders who could lead the execution of the reforms. In BC’s case this initially came from the minister of deregulation, whose sole responsibility was to focus on effectively implementing the reforms.

For regulatory reform to be successful, it must have broad buy-in from politicians and from civil servants.

The buy-in in BC was the result of strong political leadership from the top, a decentralized approach to reform where ministries could chose the regulatory requirements to cut, and a three-year timeline, which created urgency while still allowing time to adapt to the change.

Lesson #3: A Clear, Credible, Simple Measure Matters

One thing that distinguishes BC’s regulation reforms is the clear metric that was used to establish whether the reforms were successful. BC’s measure has several virtues: it is clear, fairly comprehensive, and easy to update. There is no perfect way to measure the broad burden of regulation, and there are certainly alternative approaches to the regulatory requirement metric used in BC that would be just as good, if not better.

However, too often, regulatory measures become so complex that they are too expensive for governments to consider adapting, and it is not at all clear that the additional complexity delivers more accuracy or better results. A simple measure has the added advantage of being easy to communicate to the public.

Lesson #4: A Hard-Cap Constraint on Regulators Matters

At the federal and state levels in both Canada and the United States, regulatory impact analysis has been used as a “check” on regulators. RIAs may slow down the growth of regulatory activity, but available evidence suggests that they do not stop it. BC’s target of reducing regulation requirements by one-third in three years and then maintaining the reduction has set a hard cap on the total amount of regulatory requirements. This has forced a discipline that did not previously exist, a discipline that has helped change the culture within government to one where regulators see their job as focusing on the most important rules.

One of the challenges for governments interested in reducing, rather than just controlling, red tape is picking a reduction target. BC’s choice of a one-third reduction target was not scientific. However, the political “gut feeling” was that a one-third target would be achievable without compromising justified regulation. The choice seems to have been reasonable, as there is little evidence that the regulatory reduction in the province compromised health, safety, or environmental outcomes. Interestingly, on the CFIB survey, small business owners in both Canada and the United States also suggest that about a one-third reduction in rules is possible without compromising the legitimate objectives of regulation (see figure 1).

As was mentioned at the beginning of this paper, the Canadian government recently adapted BC’s one-in, one-out policy, becoming the first country in the world to legislate a hard cap on regulations. The legislation is new, but it has been the policy of the government for the past several years. As of December 2013, the rule had achieved a net reduction of 19 regulations, saving business 98,000 hours and $20 million. While this reduction is small in the grand scheme of the costs of the overall regulatory burden, it is nonetheless a quantifiable reduction and another indication that hard caps matter.

Lesson #5: Institutionalizing Red Tape Control Matters

Perhaps one of the most remarkable things about the BC model is its longevity. An important transition happened once the initial one-third reduction target was met: a new target for zero net increase in regulatory requirements was set. The government has extended this commitment several times and ensured that measuring red tape requirements has continued. While it is impossible to say with certainty that there would have been more red tape without the controls, it is clear that there would have been less transparency and less ability to evaluate the broad regulatory burden without the ongoing measure, which provides a benchmark.

In contrast, Nova Scotia’s government implemented its own red tape initiative, which had some initial success, but it was not followed by institutional commitment. Several years after BC launched its reforms, the Nova Scotia government was convinced of the merits of setting and measuring targets. In 2005, Nova Scotia set a target for a 20 percent reduction by 2010 in the time business owners spend on regulation.

The starting benchmark was 613,000 hours, and the government successfully achieved its goal. It then stopped measuring and there is currently no way to know whether the time spent by businesses complying with rules has increased, decreased, or stayed the same. A recent report commissioned by the Nova Scotia government strongly recommends that the government find effective ways to eliminate red tape, including reestablishing measurement and “creating mechanisms, including legislation, to sustain the regulatory modernization agenda over the long term.”

Final Lesson: Outside Advocacy Can Make All the Difference

Regulation is largely a hidden tax that most directly affects business owners, in particular small business owners. Having the support of organizations that represent small businesses has been very important in keeping the BC government committed to its reforms and in encouraging other governments in Canada, including the federal government, to follow the example set by BC.

In fact, without the advocacy coming from small business, it is doubtful that BC’s reforms would still be in place today. Several effective steps that the CFIB took in pushing to continue reforms include the following:

  • Regularly meeting with politicians from the governing party and opposition parties to present survey results from small businesses that showed why it was important to continue the reforms. These meetings helped make red tape reduction a nonpartisan issue that all parties could support. This strategy worked at the federal level too.
  • Issuing an annual report card on governments across Canada. BC was the only jurisdiction to get an A and wanted to keep it.
  • Holding an annual “Red Tape Awareness Week,” which keeps a spotlight on the issue and gives politicians credit and publicity for making announcements about cutting red tape.
  • Publishing research reports estimating the costs of the broad regulatory burden and red tape.
  • Connecting business owners with media during Red Tape Awareness Week so that the public could get a better understanding of the costs and frustration of red tape.
  • Issuing an annual “Golden Scissors” award for cutting red tape. Kevin Falcon, the BC minister responsible for the initial reforms, was the first to receive the award.

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