Regulatory Accumulation, Business Dynamism and Economic Growth in Canada

Despite their good intent, regulations and their accumulation over time impose real costs to businesses and may have a negative impact on economic growth and competitiveness. Accurately measuring these costs and benefits is important for understanding if regulations are achieving their desired results. This paper uses a new, modelled, measure of regulatory burden developed by KPMG and Transport Canada to inform about the possible overall impact of the changing number of regulations faced by firms on Canadian economic activity. Measuring regulatory burden is complex, and there is not a consensus on the best approach. The novel Transport Canada – KPMG measure is based on counting the number of regulatory provisions in Federal legislation and is one of several aggregate measures of regulatory burden available. It shows that regulatory requirements in Canada rose 2.1% per year from 2006 to 2021. A measure from the US based Mercatus Center that is not as broadly defined showed an increase in the number of provisions rising 1.1% per year over the same period while the OECD measure of product market regulation (PMR) that tracks the stringency, rather than the number, of regulations declined. Using the newly developed Transport Canada – KPMG measure, regression estimates show that regulatory accumulation from 2006 to 2021 is associated with a decline in gross domestic product (GDP) growth by 1.7 percentage points and reduced employment growth by 1.3 percentage points in the business sector. A smaller decline on labour productivity of 0.4 percentage points was also estimated. The business sector investment growth was lowered by an estimated 9.0% (with the effect being bigger for small firms than for large firms) for the period 2006 to 2021 and that regulatory accumulation is associated with lower business entry and exit rates. Understanding economy wide costs and benefits from regulations is challenging. The results of the study provide a first indication for Canada of the estimated impacts of the changing number of regulations over time on businesses. While the results of the study point to potentially important costs for the economy, it is not meant to reflect a full economic assessment of the benefits of regulations nor economic impacts associated with not introducing regulations.