Financial headlines tend to focus more on quarterly profits and share buybacks than on capital spending and technology investments by Canadian firms. The benefits of such investments are rarely discussed, let alone celebrated, and yet collectively they are essential to our long-term growth and competitiveness as a country.
For example, without the $100-billion spent on technology by Canadian banks since the financial crisis, Canada would have an average, rather than global top-tier, digital banking system – something that is good for bank shareholders and customers, as well as for the health of our financial system as a whole. Similarly, telecoms in Canada are making huge technology investments in response to the future of work and digitization. And Canadian railways are investing billions in trade-enabling infrastructure, which bolsters our competitiveness.
But general trends in total business investment in Canada are not heading in a direction that would support a rebuilding of our long-term growth capacity. The reasons are many, but there is one frequently overlooked culprit: regulation.
Poorly designed regulation is a stealth impediment to growth. In surveys, businesses point more frequently to regulation than taxation as a serious competitiveness pressure, and with empirical evidence: Canada ranked 38th for “the burden of government regulation” in the World Economic Forum’s 2019 Global Competitiveness Report. And the cost of that regulatory burden is real. According to the Canadian Federation of Independent Business, regulation from all levels of government cost Canadian businesses $38.8-billion in 2020, with red tape accounting for a staggering $10.8-billion of that total.
As the pandemic fades but its scarring remains, Canada is going to need business investment – lots of it – to rebuild our productive capacity and growth potential for the decade ahead. And with monetary and fiscal stimulus clearly at their limits, isn’t it time to ask ourselves: What should regulation look like for the postpandemic economy?
We do not believe the answer is deregulation or lowering regulatory standards. The answer is smart regulation, a frugal stimulus for unleashing private-sector investment.
First, smart regulation should be clear and transparent about its objectives, making things more predictable, and designed with faster decision-making, eliminating overlapping and duplicative processes and endless layers of review. The intent is to reduce uncertainty for all stakeholders and to allow companies to seize opportunities in the changing landscape and respond quickly, effectively and boldly, in accordance with regulatory objectives.
Second, smart regulatory objectives should be balanced – promoting efficiency and encouraging head-to-head competition while allowing consumers and business customers to reap benefits through lower prices, better access and greater choice. It should foster investment in innovation, as this provides more future choices for customers and encourages dynamic competition.
Third, a principles-based approach to smart regulation allows greater flexibility than a prescriptive-based approach, which is focused on what you cannot do rather than what you should do. This can be particularly important in prospective areas of regulation, such as data, digital commerce and social media, in which public objectives are evolving and technology is changing. It can also be more effective when regulatory harmonization across jurisdictions is the goal but the national regulatory systems themselves differ.
Fourth, smart regulation, in a world of “Buy American” and rising global protectionism, should encourage strong, efficient, Canadian-headquartered companies. The ownership of capital should matter less than the behaviour of capital when making investment decisions, but being domestically domiciled does matter. Vibrant Canadian head offices support good-paying jobs directly, attract high-value suppliers and create a virtuous cycle of talent attraction. For example, the Toronto-Waterloo corridor added the second-most technology jobs in North America between 2015 and 2019. Moreover, Canadian-headquartered firms are among the most generous donors to the not-for-profit sector, which strengthens communities.
Regulation is one of the most powerful tools in a government’s policy arsenal, yet it is not always used effectively. Regulatory uncertainty, opacity and interminable review processes only harm Canada’s reputation as a place to invest and grow.
It’s time to ensure that regulation better supports our long-term economic growth. Smart regulation is all about creating the conditions for an innovative and competitive economy, while supporting social benefits and minimizing unwanted externalities. It’s about ensuring our regulatory framework keeps up with technological and market trends – both at home and abroad – and protects consumers and customers. It’s about greater harmonization with other regulatory frameworks that share the same policy objectives – both at home at abroad. And it’s about reviewing regulations on a regular basis to ensure they are efficient and effective, using rigorous cost-benefit analysis that is transparent to the public.
We can no longer afford to take an analog approach to regulation in a digital world. Smart regulation is a way to stimulate the economy in the postpandemic world, without the need for additional deficit-financed stimulus or prolonged monetary easing.
The Honourable Kevin Lynch is a former clerk of the Privy Council and a former vice-Chair of BMO Financial Group.
Paul Deegan is the CEO of Deegan Public Strategies and was the deputy executive director of the National Economic Council in the Clinton White House
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