On Monday, the Canadian Federation of Independent Business (CFIB) unveiled the third edition of Canada’s Red Tape Report. It reveals the pecuniary impact of the various government regulations imposed on Canadian businesses. For the first time ever, it also compares the costs of Canada’s regulatory burden with those of the United States.
The direct costs to Canadian businesses are startling. At the same time, it is instructive to emphasize the indirect consequences of government regulations.
According to the study, which surveyed small businesses, the estimated cost of government regulations to Canadian businesses is approximately $31 billion per year. On a per-employee basis, this is considerably higher than in the United States. In order to put this in perspective, consider that $31 billion exceeds total annual GST revenues. It also constitutes all of the provincial deficits and half of the federal deficit for 2011-12.
Making matters worse, it is an underestimate. First of all, the study did not include publicly-traded firms, which face additional regulatory requirements, in its analysis. It also does not include the costs associated with government administration and lobbying. Regulations don’t write and enforce themselves, after all. Considering that the United States Federal Register published 77,250 pages of triple-column regulations in 2012, it appears that bureaucrats and lobbyists have no shortage of writing or enforcing to do.
In addition, the $31 billion figure does not include the opportunity cost of lost economic activity and productivity. This applies to bureaucrats who could otherwise be employed in the voluntary private sector. It also includes the time devoted to complying with regulatory requirements. For example, an average small business in Canada with four employees devotes more than 682 hours per year to regulatory compliance. This amounts to 91 work days per year for a single employee. Stated differently, it means that one out of only four employees will work exclusively on regulatory compliance from January until mid-May, every single year, on the business-owner’s dime. Were it not for this burden, what else could this employee accomplish during this time?
Alternatively, this is money that businesses could have re-invested in capital equipment or expansion, further increasing productivity.
There is also a predatory aspect to government regulations. This is because smaller businesses are impacted disproportionately. In fact, the annual regulation cost per employee for Canadian firms with fewer than five employees is $5,942. This is more than five times the cost faced by businesses with at least 100 employees, which benefit from economies of scale. This represents a barrier to entry for would-be competitors who lack sufficient capital to overcome a disproportionate regulatory burden. As a result, crony firms of the too-big-to-fail variety often utilize their connectedness with government to increase and complicate regulations in order to insulate themselves from competition.
Meanwhile, a revolving-door effect develops between government and crony business, as complicit government officials often receive lucrative job offers for their efforts while in office.
When contemplating government intervention in the economy, always consider that which is unseen. From the CFIB study:
Perhaps the most shocking indication that the impact of regulation should be a priority for both countries
comes from the following survey result: 31 per cent of business owners in Canada and 23 per cent of
business owners in the U.S. say that if they had known the burden of regulation, they may not have gone
into business. It is startling to think about the impact on our communities and living
standards if one-quarter to one-third of existing businesses disappeared. This begs another question: How
many businesses never start because of excessive regulations?