Regulatory reform in Canada should focus on streamlining deregulation

The federal budget update delivered last week by Finance Minister Bill Morneau disappointingly provided no general relief on personal or business taxes. However, a number of business leaders and journalists praised the promise of substantial regulatory reform in Canada.

While many details remain to be worked out, the finance minister said legislation would be introduced requiring annual reviews that will consider the economic impact of federal regulations. Specifically, regulators will be required to consider efficiency and economic growth when implementing regulatory mandates.

It’s welcome news that the Trudeau government wants to reduce the cost burden of regulation, but it’s unclear how the initiative will substantially improve upon current practice. Targeted regulatory reviews under the supervision of the treasury board secretariat are already required under existing federal legislation, and the reviews are meant to promote, among other things, innovation and economic growth.

Furthermore, The Red Tape Reduction Act mandates the cost burden of any new or amended regulation be offset by other regulatory changes (the “one-for-one" rule). A serious limitation of the existing regulatory regime is that the one-for-one rule must not compromise public health or public safety. To the extent that the economic benefits of deregulation to both Canadian businesses and consumers significantly outweigh the costs to public health or safety, a strict interpretation of this constraint makes Canadians worse off, even given modest increases in health and safety risks. In this regard, Minister Morneau’s promise that the government will continue to ensure Canada’s regulatory system protects first and foremost the health and safety of Canadians is concerning.

Moreover, Bill C-69, currently under Senate review, would radically change the process of environmental assessment for major infrastructure projects. By adding a new “consultation and cooperation” phase prior to the review of projects, the bill makes it necessary for investors to gain pre-approval from potentially hostile constituencies before any formal environmental review takes place.

The standard technique for evaluating whether specific regulations are in the social interest—the benefit-cost analysis—is expensive and time consuming. The government’s reliance on formal benefit-cost analysis will be a major barrier to the timely elimination of red tape. Fortunately, such detailed analysis is frequently unnecessary, since criteria that are more streamlined can often identify regulations that impose net costs on Canadians and should therefore be eliminated.

Streamlined criteria include the following considerations.

First, regulations that do not address legitimate economic or social problems should be eliminated, as should those that do not effectively mitigate legitimate problems. Second, regulations should be dropped if other laws or rules already address them, as Morneau acknowledged in his budget update.

Less obviously, regulations that contradict other rules or laws should be eliminated since legal compliance is impossible in such cases. And finally, when stronger market institutions, especially property rights, can effectively address specific economic or social problems, encouraging market-based solutions is preferable to regulation. This criterion is particularly relevant when addressing environmental externalities.

At this early stage, it’s unclear how assiduously and effectively Ottawa will pursue regulatory reform. The experiences of other political jurisdictions including British Columbia suggest that an explicit commitment to eliminating regulatory red tape is necessary to realize substantial economic benefits from regulatory reform. The explicit adoption of streamlined criteria by treasury board would facilitate socially beneficial deregulation, as would ensuring that experts assisting in evaluating regulations for possible elimination are independent of the regulatory agencies meant to carry out evaluations.

The experience of developed countries that have undertaken substantial deregulation across a range of industries including transportation, communications and finance shows that deregulation leads to dramatic improvements in productivity, increased capital investment and expansion of output. In this regard, Canadian consumers—not just Canadian businesses—will be major beneficiaries from streamlined deregulation.