Cutting Red Tape in Canada: A Regulatory Reform Model for the United States?
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
percent 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.
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 poorly designed laws, regulations, and policies; outdated rules
that may have been justified at one time but are no longer; and 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).
In
both Canada and the United States, far more businesses believe the
burden of regulation is growing or staying the same than those that
believe it is decreasing (see figure 4). Figure 5 shows how business
owners say they would use savings if the cost of regulation was reduced.
Investing in equipment and expanding the business is the most commonly
cited use for the savings, another indication that reduced regulatory
costs could enhance productivity.
A
very different way to quantify the broad regulatory burden is to track
it by volume—by counting the number of regulations, the number of
requirements associated with regulations, or the number of pages of
regulations. An example of the approach of counting the number of
regulatory restrictions is the Mercatus Center’s database called
RegData, which counts the number of regulatory restrictions in the Code of Federal Regulations
(using a count of restrictive terms such as “shall not” and “must”).
According to its data, as of 2012, there were 1,040,940 restrictions in
the Code of Federal Regulations, an increase of 28 percent since
1997. RegData also quantifies how many additional restrictions are in
place as a result of new laws such as the Dodd-Frank Wall Street Reform
and Consumer Protection Act, which has added over 27,000 new federal
restrictions since 2010, compared to all other laws passed by the Obama
administration (roughly 25,500). RegData considers only federal
regulations (as mentioned previously, government rules also can exist in
legislation and other government policies), and it does not attempt to
differentiate red tape from justified regulation. The Mercatus database
has the advantage of being more objective than survey-based approaches,
as it does not rely on perceptions and estimates of time and money spent
on regulation.
Using yet another approach with a more
complex methodology, Nicole Crain and Mark Crain wrote a report for the
Small Business Administration’s Office of Advocacy, in which they
estimate that the cost of federal regulations in the United States in
2008 was $1.75 trillion (14 percent of US GDP), up from $1.1 trillion in
2005 and $843 billion in 2001. The cost of US regulation in this study
is significantly larger than the estimate from the survey-based approach
of the CFIB, underscoring how challenging it is to estimate regulatory
costs.
The US Congress requires the Office of
Management and Budget to submit a report each year estimating the annual
benefits and costs of federal regulation to the extent feasible. The
report for 2014 estimates the benefits of federal regulation to be
between $217 billion and $863 billion from October 1, 2003, to September
30, 2013, while the costs over the same period are estimated at
somewhere between $57 billion and $84 billion (in 2001 dollars).
However, the estimates only cover a small fraction of the total rules.
Richard Williams and James Broughel find that for fiscal years
2003–2012, OMB reported both cost and benefit numbers for only 0.3
percent of the regulations. Both the wide range of the estimates and the
limited scope of what they cover once again underscore the challenge of
quantifying the costs and benefits of regulation.
The
standard cost model, initially used in the Netherlands, is a way of
measuring part of the overall regulatory burden. Popular with European
governments, this model estimates the amount businesses spend
administering regulations, but it makes no attempt to divide the
regulations into those that are legitimate and those that would be
considered red tape. Denmark, the Netherlands, and Norway have used the
model to track progress toward their respective reduction targets of 25
percent. Although some European countries have embraced the model as a
credible way to measure, it does have drawbacks. The methodology is
complex (the user’s guide is 63 pages long) and it is much more
difficult to implement than the BC measure discussed in the next
section.
This brief discussion of some of the
available measures of the regulatory burden leads to two important
conclusions. First, measuring the broad regulatory burden, and
determining what portion of that burden may constitute red tape, is a
challenging and imperfect undertaking. However, measurement is also an
essential part of effective red tape reduction. One of the difficulties
that governments interested in effective red tape reduction face is
finding a clear, credible measure they can be comfortable using in spite
of its inevitable imperfections. Second, available evidence suggests
that the broad regulatory burden, including red tape, is large and
growing, and that reducing red tape is a worthy policy objective. Both
of these observations make the BC model of red tape reduction discussed
below very relevant.
British Columbia’s Experience with Red Tape Reduction
British
Columbia is Canada’s westernmost province, with a population of 4.6
million people (roughly the same population as Louisiana) and a GDP of
approximately C$220 billion. BC’s small open economy is reasonably well
diversified, with important sectors including forestry, mining, oil and
gas, agriculture, tourism, financial services, real estate, technology,
and film products.
The context for BC’s experience
with regulatory reform was set in the 1990s, a time widely known as BC’s
“dismal decade,” when economic growth and employment lagged behind the
rest of the country. The New Democratic Party government came to power
in 1991 and raised taxes and increased regulation. The attitude of the
government toward the economy in the 1990s is captured well by the
comments of former premier Glen Clark, who was in power for most of that
period. Shortly after leaving office, he told a reporter, “We were an
old-fashioned activist government, with no more money. So you’re
naturally driven to look at ways you can be an activist without costing
anything. And that leads to regulation.”
It is no
surprise that, during this period, too much regulation or red tape was
often cited as a significant contributor to BC’s economic
underperformance, and the province had a reputation within Canada for
regulatory excess. Forest companies were told what size nails to use
when building bridges over streams. Restaurants were told what size
televisions they could have. Golf clubs had to have a certain number of
par-four holes, and the maximum patron capacity for ski hill lounges was
based on the number of vertical feet it took to get to the top of the
mountain.
The forest industry, one of the province’s
main economic drivers, was burdened with a prescriptive Forest Practices
Code that was widely cited as a deterrent to investment. According to
one estimate, forestry regulations had added over $1 billion to the
industry’s costs with no public benefit. The mining industry, another
economic driver, was also suffering. In a 1998 survey of mining
companies, British Columbia’s overall investment policies scored last
out of 31 jurisdictions on an investment attractiveness index, receiving
a score of 5 points out of a possible 100. BC was the worst
jurisdiction on several red tape indicators contributing to the index,
such as “uncertainty concerning the administration, interpretation and
enforcement of existing regulations” (76 percent indicated this was a
strong deterrent to investment), and “regulatory duplication and
inconsistencies” (62 percent indicated this was a strong deterrent to
investment).
Elections in British Columbia tend to be
quite close, but in 2001 concern over the economy—including
uncompetitive tax and regulatory policies, deficits, and costs of
infrastructure projects—contributed to a landslide victory of the
Liberal Party (a center-right coalition) over the incumbent New
Democratic Party (a left-of-center party) that had been in power since
1991; 77 of 79 seats in the election were won by Liberal candidates.
The Early Years of Red Tape Reduction in British Columbia: 2001–2005
During
the 2001 election campaign, the soon-to-be-elected Liberal government
made the commitment to reduce the regulatory burden by one-third in
three years. Once elected, Premier Gordon Campbell wasted no time in
taking steps to accomplish his government’s goal. In his first cabinet,
the premier appointed Kevin Falcon to the newly created position of
minister of state for deregulation. Falcon’s only responsibility was
regulatory reform, and he reported regularly at cabinet meetings.
The
choice of the strong word “deregulation” reflected the context in which
the reforms were undertaken—a province emerging from a “dismal decade”
needed big policy changes. The minister of deregulation’s first
challenge was to develop a new regulatory policy and to figure out what
measure the government would use to determine the success of its
commitment to reduce the regulatory burden by one-third. Over time, the
language changed from “deregulation” to “regulatory reform” and “red
tape reduction.”
Falcon rejected several crude
regulation measures used by think tanks and academics in the past. For
example, he decided not to count pages of regulations or to simply count
regulations, as each individual regulation can have literally thousands
of requirements associated with it. To understand the difference
between counting “regulations” and counting “regulatory requirements,”
consider that the Workers Compensation Act (legislation governing
workplace safety) has nine regulations associated with it, but these
nine regulations contain 35,308 regulatory requirements.
The
minister chose to use regulatory requirements as his counting tool. The
regulatory requirement measure was unique to BC at the time. It is
similar to the measure that the Mercatus Center is now using for its
RegData project. One important difference between the RegData measure
and the BC measure is that BC’s measure included requirements found in
policies and legislation as well as in regulations, so it is quite
comprehensive. A “regulatory requirement” is defined in BC’s Regulatory
Reform Policy (see attachment) as “an action or step that must be taken,
or piece of information that must be provided in accordance with
government legislation, regulation, policy or forms, in order to access
services, carry out business or pursue legislated privileges.” For
example, writing your name on a form or being required to have a safety
committee meeting would each count as one regulatory requirement. To
develop a baseline count of regulatory requirements, each ministry
conducted its own count of all the regulatory requirements contained in
the statutes, regulations, and policies that ministry oversaw. A central
regulatory requirement database, administered by the newly created
Deregulation Office, was established to track progress against the
baseline and issue regular reports. The first government-wide count
revealed 382,139 regulatory requirements (the regulation count, which
was not used, would have been a much less compelling 2,200).
The
regulatory requirement measure has several advantages, including its
simplicity and granularity relative to the much cruder regulation
measure. However, like other measures, it has its flaws. For example, a
regulatory requirement could be something that only a few people have to
do once a year or it could be something that many people have to do
multiple times a year. The impact of these requirements is vastly
different, yet each would count as one regulatory requirement. The
measure could evolve to include frequency of reporting.
Setting
a clear target for regulatory reduction and establishing a clear and
compelling measure for evaluating success are two things that
differentiate BC’s regulatory reform initiative from other initiatives.
In contrast, many regulatory reform initiatives focus on identifying
specific irritants. These initiatives have a track record of failing to
make much difference because, as the specific irritants are dealt with,
others proliferate—the equivalent of pulling a few weeds in an overgrown
garden.
One example of this is the prior BC
government’s announcement in the 1998 budget that cutting red tape would
be a priority. The government set up the Small Business Task Force,
which focused on specific initiatives such as streamlining filing and
registration requirements and simplifying approval processes. These are
worthy objectives, but it is hard to see how they contribute to an
overall reduction without the discipline of an aggregate measure in
place.
Another common approach to regulatory reform is
to institute some form of regulatory impact analysis (RIA) that is
essentially an internal checklist for regulators who must go through the
exercise of evaluating the costs and benefits of new regulations. The
United States and Canada, as well as many other developed countries, use
a form of RIA process at the federal and state or provincial level (not
all US states have a RIA process). While RIAs may improve the
regulatory process, they have not proved an effective approach for
reducing red tape for at least three reasons: they are not subject to
much public scrutiny, they do not cover a broad enough scope, and they
set no overall limit on the total volume of regulatory activity.
Of
course having a measure is not enough, it also must be monitored. In
BC’s case, the measure was monitored closely. During the initial years
of the reform, the BC government publicly issued quarterly reports
showing how many regulatory requirements each ministry had reduced.
Table 1 is a quarterly report from May 2004. The reports were discussed
regularly at cabinet meetings and created a strong culture of
accountability across government.
Measurement
was critical to assessing whether the political commitment of reducing
the regulatory burden by one-third had been met, and it was the
cornerstone of the government’s overall Regulatory Reform Policy
(attached), which was approved by Executive Council in August 2001, just
three months after the election. The Reform Policy applies to all
proposed legislation, regulations, and related policies. This broad
application is another important feature of BC’s reforms because much of
what the private sector experiences as regulatory burden is in the form
of policies and forms rather than in legislation or regulations.
Another virtue of the Regulatory Reform Policy is that it is very
simple. The entire policy, including definitions, a checklist, an
exemption form, and an example is only seven pages long and written in
very straightforward language (BC’s Regulatory Reform Policy and
Regulatory Criteria Checklist are attached).
Complying
with the Reform Policy involves two important steps. First, the
Regulatory Criteria Checklist must be completed. The checklist has
evolved a bit over time, but it essentially requires ministers to
confirm that any new rules are needed and that they are outcome based,
transparently developed, cost effective, evidence based, and support
BC’s economy and small business. Where these criteria are not considered
or met an explanation must be provided. At the end of the form, there
is a box that asks how many regulatory requirements will be added and
how many will be eliminated, as well as what the net change will be. The
responsible minister or head of the regulatory authority must sign the
form and submit it to the Regulatory Reform Office. In addition, he or
she must make the Regulatory Criteria Checklist available to the public,
at no charge, on request.
When the BC government
first introduced the Reform Policy in 2001, two regulatory requirements
had to be eliminated for every one introduced. At one point, the ratio
was five to one, but today the policy calls for eliminating one
requirement for every new one introduced. That policy expires in 2019.
In
2001, requiring regulators to consider the checklist and eliminate two
regulatory requirements for every new one introduced represented a
dramatic change in thinking about regulation in BC: It put the onus on
the government to make the case that additional regulation was
necessary, to ensure adequate consultation, to keep compliance flexible,
and to reduce the total amount of regulation. One public official
commented that it changed her role from regulation “maker” to regulation
“manager.”
While the new Reform Policy did change the
attitude of those in government over time, there was a lot of initial
internal resistance. However, the decentralized approach to achieving
progress likely helped create buy-in. Not only were ministries tasked
with conducting their own regulatory counts, but each minister was asked
to identify how his or her three-year business plan would meet the
one-third reduction target. When ministry staff realized that they were
in charge of determining changes within their own ministries, the
reforms became easier to embrace. The Deregulation Office was not going
to tell them specifically what to do, but it was there to offer
guidance, support, and feedback from industry about what regulations and
policies were considered especially problematic. In addition, the House
Leader—the person in the legislature responsible for ensuring
government bills become law—had guaranteed that any legislation needed
to reduce regulatory requirements would get on the agenda. This
guarantee proved a powerful incentive for ministry staff who could
sometimes toil away for years on projects that would never see the light
of day.
The three-year timeline proved to be a smart
choice. It created enough urgency around eliminating regulatory
requirements while being enough time to inculcate new habits and
acceptance to the new way of doing things.
Another
feature of the first phase of the reform was an extensive set of
consultations with the private sector. The Red Tape Task Force, largely
made up of industry representatives, was established and tasked with
reviewing and prioritizing 150 different submissions with 600 proposals
for reform from the business community. Each minister was asked to
prepare a three-year deregulation plan outlining how targets would be
met. The minister of deregulation gave the priorities and
recommendations of the Red Tape Reduction Task Force to other ministers
to consider as they prepared these plans.
Some of the
major changes during this period included making significant amendments
to the Workers’ Compensation and Employment Standards Acts in order to
increase flexibility; reviewing more than 3,000 fees and licenses across
government and eliminating, consolidating, or devolving 43 percent of
them; streamlining the Forest Practices Code; and amending mining, oil,
and gas regulations in order to increase flexibility and reduce
administration.
By 2004, BC’s premier and minister of
deregulation had been successful at achieving their stated regulatory
reduction objective. The number of regulatory requirements eliminated at
the end of three years was 37 percent, exceeding the one-third target.
There is no question that political leadership and disciplined
measurement and reporting were critical to achieving this success.
Maintaining Red Tape Reduction: The Middle Years 2004–2013
Between
2004 and 2013, regulatory reform was a lower priority for the
government. Around the time when the one-third reduction target was met,
the minister of deregulation position was eliminated. The Regulatory
Reform Office became part of the Ministry of Small Business and Economic
Development. The minister responsible was enthusiastic about regulatory
reform, but in contrast to the minister of deregulation, he had a long
list of other priorities.
As the deadline for meeting
the one-third reduction target approached, it became clear that the
government had no plans to continue tracking regulatory requirements
beyond 2004. Small businesses were concerned that regulatory creep would
set in unless the regulatory counting continued. Armed with survey
results showing that small businesses wanted government to keep
measuring, the Canadian Federation of Independent Business lobbied the
minister and his colleagues to establish a new target to maintain the
regulatory reduction.
The lobbying effort was
successful and the minister agreed to a target for no net increase in
regulatory requirements through 2008 (a one-in, one-out rule). The
policy of no net increase has subsequently been extended three times—to
2012, to 2015, and, earlier this year, to 2019. Pressure from small
business to keep a target in place has been critical to preserving the
reforms. The target provided a hard-cap constraint on regulators and
meant that measurement had to continue. However, there was not much
political appetite to build on the reforms and go beyond what had
already been achieved.
This period was also
characterized by high turnover of staff in the Regulatory Reform Office,
with none of the original staff remaining. This situation did not prove
difficult in terms of understanding or overseeing regulatory reform, as
the policy is concise and clearly written. However, there were many
small indications that momentum was fading at the bureaucratic level.
For example, the Regulatory Reform Office stopped holding annual
conferences to share best practices, and it did not stay up to date in
publishing its quarterly reports online.
In November
of 2010, a new premier, Christy Clark, was sworn in. Controlling red
tape did not seem to be high on her list of priorities. Regulatory
reform went into maintenance mode with one important exception:
Responsibility for the Regulatory Reform Office went back to the
original architect of the reforms, Kevin Falcon. He helped make the
reforms more permanent by promoting legislation (which passed in 2011)
requiring the government to produce an annual report on regulation that
included measurement. CFIB had been lobbying for this change for a
number of years based on the concern that a future government might undo
the reforms. Legislation requiring annual reporting would make this
harder.
Surviving a Change in Leadership, 2013–present
Premier
Clark’s Liberal Party won the 2013 election with a solid majority. Her
campaign had focused on the importance of balancing the budget, paying
off debt, and developing a liquefied natural gas industry in the
province.
In her first mandate letters to her
ministers, Premier Clark emphasized the importance of minimizing red
tape. She also announced a core review of government services and made
regulatory improvement an important part of the review. This energized
the Regulatory Reform Office, and it has been seriously looking at ideas
for building on, rather than just maintaining, the existing red tape
reforms. As reported above, during the 2015 Red Tape Awareness Week, the
small business minister announced the one-in, one-out policy would be
extended through 2019. More recently, the government passed a law
creating a Red Tape Reduction Day to be held every year on the first
Wednesday in March. The language in the release suggests the government
itself has embraced the importance of an ongoing commitment to reform:
“The new legislation institutionalizes the accountability and
transparency in British Columbia.” The minister responsible also
launched a consultation with British Columbians to solicit new ideas for
cutting red tape, including encouraging people to use the Twitter
hashtag #helpcutredtape to communicate their suggestions.
It
is worth noting that, while BC’s Regulatory Reform Policy is very
broad, it does not cover a few arm’s-length-from-government groups in BC
that have the ability to impose rules on businesses. In some cases,
these groups are clearly creating red tape, and their exemption from
BC’s policy is problematic.
Did Regulatory Reform Make a Difference to British Columbia’s Economic Performance?
There
is no question that BC’s economic performance improved markedly after
2001 in contrast to the “dismal decade” of the 1990s. The province went
from being one of the worst performing in the country to being among the
best. How big a contribution did regulatory reform make to BC’s
economic turnaround? It is hard to answer that question definitively
because regulatory reform was part of a broader package of economic
reforms happening at the same time. For example, when the Liberals came
into office, one of the first things they did was reduce personal income
tax rates across the board by 25 percent, eliminate the provincial
sales tax on production machinery and equipment, and eliminate the
corporate capital tax on nonfinancial institutions.
Despite
the challenge of not being able to quantify the extent to which
regulatory reform contributed to BC’s economic turnaround, it is worth a
brief overview of some of the economic changes. The BC government set
up the British Columbia Progress Board in 2001 to produce benchmark
reports describing the province’s standard of living, job performance,
environmental quality, health outcomes, and social condition relative to
other provinces. Economic indicators from Progress Board reports show
how BC’s position relative to other provinces improved. For example,
economic growth in BC was 1.9 percentage points below the Canadian
average between 1994 and 2001 but 1.1 percentage points above the
Canadian average between 2002 and 2006. BC’s real GDP growth was lower
than Canada’s as a whole in six of the nine years between 1992 and 2000,
but BC’s GDP grew faster than Canada’s every year between 2002 and
2008. Per capita disposable income in BC was C$498 below the national
average in 2000, but by 2006, it was C$60 above the national average,
third behind Alberta and Ontario.
Business creation
also improved. The number of incorporations in BC jumped from 20,759 in
1998 to a high of 34,036 in 2007. The number of incorporations between
2008 and 2013 were a bit lower, ranging from 26,431 to 32,225, but even
the lowest year was higher than any time in the 1990s. The number of
business bankruptcies in BC also decreased considerably over the same
time period, from 1,031 in 1998 to 454 in 2008. The number of business
bankruptcies per year has been falling since 2003 and was only 189 a
year by 2013.
Anecdotal evidence suggests that red
tape reduction was an important contributor to British Columbia’s
recovery. For example, mining is a historically important industry in BC
that was in decline in the 1990s, but it rebounded after 2000.
According to a task force on mining established by the government in
2008, “The provincial government has taken many important
steps—improving its tax competitiveness, streamlining regulatory
requirements and investing in the province’s geosciences mineral data
collection and analysis—to enhance BC’s reputation as an important
mining jurisdiction and industry has responded with record exploration
levels and the opening of new mines in the recent period of economic
growth.” This statement is typical of the kinds of statements coming
from industry at a time when tax and regulatory competitiveness are
highlighted as key to the provincial economic turnaround.
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.
Conclusion
As
average incomes in countries like Canada and the United States have
increased, the demands for better health, safety, and environmental
provisions have also increased. Available evidence, while limited,
suggests that at least some of these demands have been expressed in an
increase in the number of mandatory rules our governments issue. It
seems reasonable to assume that some of the increase in the broad
regulatory burden is justified regulation and some is red tape.
The
challenge for modern governments is to control the growth of red tape
in the messy real world, where measures are imperfect and the line
between justified regulation and red tape can be difficult to establish.
The BC model of red tape reduction stands out for its simplicity,
effectiveness, and longevity. Not only did the BC government accomplish
its goal of reducing the number of regulatory requirements by more than
one-third in three years, it has maintained the reduction for over a
decade. Its approach, which is very different from what other
governments have tried, uses essential ingredients that are really just
common sense: measurement, a cap on the total burden of regulation, and
political leadership. A blueprint for common sense regulatory reform is
long overdue, and I hope it proves useful to US governments interested
in improving the welfare of their citizens. Reducing red tape has the
power to unleash entrepreneurship and make us all better off.
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