In February, Ottawa will almost certainly reveal long-awaited cuts across government departments. It will also likely introduce changes to research and development tax credits, in an effort to promote innovation and increase productivity.
The federal government should be leading by example: The innovation agenda must encompass the public policy function itself. The exercise of this has stagnated over the past 25 years, at least relative to the remarkably innovative decades after the Second World War. New thinking is badly needed.
A good place to start would be with the federal government’s regulatory function, that is the legal obligations imposed by the government on the private sector. Despite significant deregulation in the late 1980s and early ’90s, Canada still has a significant regulatory burden. A 2006 OECD study estimated that if Canada were to have adopted, in each sector, the least restrictive regulations among the countries surveyed, our average annual productivity growth over the period 1985-2003 would have been 0.75% higher.
Supply management in the agricultural area provides a good example of regulation that curtails productivity growth and innovation. Another example comes from the communications industry, where foreign-ownership restrictions deter innovation by preventing Canadian firms from reaching international scale.
Now would be an ideal time to get serious about regulatory innovation. There has not been a fundamental review of the government’s administrative law and regulatory policy for decades. The upcoming budget and the associated departmental budget review bring into sharp relief the need for change. In particular, we should move from ad hoc reviews to a system where the ongoing regulatory oversight function ensures that government operations remain efficient and appropriate over time. This would provide a meaningful legacy for the future operation of the federal regulatory function.
The current system of periodic departmental reviews is both disruptive and expensive. It is a direct result of our more or less unconstrained discretionary model of intervention in business and society: Regulations are imposed under statutes that delegate to the executive branch a broad authority to determine what is in the public interest. This leads to “regulatory creep:” Regulators regulate; they are not inclined to deregulate or minimize regulation. And regulations tend to beget more regulations as the web of regulations becomes more entangled.
An effective alternative would be a “standards-based” approach to all federal regulatory functions (whether economic or social). Under such a system, those who are devising regulations would have an objective benchmark by which to assess their actions (as opposed to a notional reference to the public interest). Innovative, standards-based regulation should therefore result in far clearer limitations, as well as better accountability and responsibility on the part of regulators.
One means of implementing a standards-based approach would be to apply the legal test developed by the Supreme Court of Canada in R. vs. Oakes (the “Oakes test”). This case sets out five conditions that must be met before governments are justified in encroaching on fundamental rights and freedoms under the Charter of Rights. The conditions can easily be adapted to the regulatory context. They would require any regulation to have a clear and pressing objective; be proportionate and clearly connected to the objective; interfere to the minimum extent necessary to achieve the objective and meet a cost-benefit test.
Appropriate provisions for accountability and challenge — an effective legal review mechanism — would have to be put in place. In principle, this might be handled by the courts. However, the courts in Canada have adopted an extreme curial deference when reviewing the activities of specialized regulatory agencies. Affected parties have had no meaningful recourse to independent adjudicators to challenge the regulatory functions of government. This must be addressed.
One option would be to create a separate, universal review process, combining legal fairness with input from non-legal or sectoral experts. The existing Competition Tribunal may fit this description. This body would have the added advantage of understanding the importance of enhancing competition and minimizing regulations that unnecessarily restrict competition.
It is time for the federal government to step forward to reset the regulatory agenda. An aggressive, forward-looking approach would have a meaningful impact on business-sector productivity. It would limit market distortions to the minimum extent necessary to achieve regulatory objectives and, by vigorously promoting competition, would spur business in Canada to be more innovative and thus more productive. The forthcoming federal budget challenges us to take a more long-term perspective.
Lawson Hunter is head of the competition/antitrust group at law firm Stikeman Elliott and a contributor to Canada 2020’s paper, The Canada We Want in 2020: Towards a strategic policy roadmap for the federal government.
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