Rated “R”: Prosperity Restricted by Red Tape
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Rated “R”: Prosperity Restricted by Red Tape
Full Report
December 2005
Authors: Laura Jones, Tom Charette, Leanne Hachey, Shannon Martin, Pierre Emmanuel Paradis, Robert Taylor
Executive Summary
Regulation is the predominant tool – other than taxation – that governments use to effect change and mold behavior. While a certain amount of regulation in society is important for efficiency and safety, excessive regulation has serious negative consequences for Canadian prosperity. Red tape limits consumer choices, raises prices, frustrates entrepreneurship, reduces productivity and lowers living standards. Despite these significant impacts, little is known about the impacts of regulation on Canadian businesses. The Canadian Federation of Independent Business (CFIB) has set out to change this.
Fortunately, in recent years, the Canadian economy has performed considerably well, outpacing other G-7 nations in job creation while recording numerous consecutive federal surpluses. This prosperity is due in large part to Canada’s small- and medium-sized enterprises (SMEs) whose resiliency and diversity has enhanced Canada’s ability to weather challenges such as SARS, terrorist pressures, prolonged trade disputes over softwood lumber and BSE, and tremendous spikes in energy and insurance costs.
While these crises have affected the Canadian economy, they pale in comparison to the annual economic consequences of red tape, paperwork burden and regulatory compliance imposed on business by all levels of Canadian government – federal, provincial, and local. In its survey of more than 7,300 Canadian businesses, CFIB conservatively estimates that the “rock-bottom” cost to Canadian businesses of complying with regulation is $33 billion annually. The total cost to the Canadian economy involves numerous other factors and would result in a much larger estimate.
Given this tremendous cost, it comes as little surprise that 65 per cent of CFIB members identify government regulation and paper burden as their greatest concern, second only to the overall tax burden. Further, while larger businesses have staff devoted to regulatory compliance, the vast majority of businesses in Canada (those that have fewer than five employees) indicate this responsibility falls squarely on the shoulders of the business owner. Since smaller businesses must, in most cases, follow the same rules as their larger competitors, these businesses bear a greater regulatory cost. Figure 2 illustrates the disproportionate distribution of the regulatory burden, whereby businesses with fewer than five employees pay $5,317 per employee each year in compliance costs, while businesses with more than one hundred employees pay $1,104 per employee annually.
To compound this cost burden, the way in which regulation is designed and enforced restricts the prosperity and productivity of businesses and undermines competitive advantages. In the case of smaller firms, the regulatory burden not only adds direct and indirect cost pressures, it also affects the business owner on a personal level, creating
added stress and taking time away from family and friends.
The gap between essential regulation and excessive red tape is attributable to a lack of awareness of the impacts of regulation by regulators and a “clash of cultures” between government and business. Figure 13 illustrates that six out of 10 business owners do not believe government is aware of how regulations impact their firms. This sentiment is consistent across all business sectors.
