U.S. Regulatory Budgeting: Take a Page from Canada

Alden Abbott —  18 March 2016

Like taxation, government regulation imposes indirect deadweight efficiency losses on the economy as well as direct costs on affected businesses and consumers.  Unlike taxation, however, whose direct costs (payments made to government) are on public display, the heavy direct burden of regulation is far less visible to the public.  This creates a strong incentive for legislators to substitute regulatory mechanisms for taxation when possible (for example, regulation has been used instead of taxation as an indirect means of redistributing income, as documented by Richard Posner, among others).  It also encourages the growth of regulation, rather than taxation, to satisfy the demands of interest groups.  Making the direct costs of regulation more visible might at least partially rein in these malign governmental tendencies.  Is such a goal unattainable as a practical matter?  Perhaps not.

In a recent paper, Sean Speer of the R Street Institute suggests that Congress take a page from the Canadian Government and consider imposing “regulatory budgets” on federal agencies. As Speer explains, “[r]egulatory budgeting requires government departments and agencies to price their ‘regulatory expenditures,’ just as they do fiscal expenditures.” More specifically:

Regulatory budgeting is based on the premise that regulatory costs – the administrative costs incurred by the state to enforce a regulation and the compliance costs incurred by individuals and businesses to conform to a regulation – are conceptually similar to government expenditures through the budget process. . . .

The regulatory budget . . . operates analogously to the fiscal budget. Each year, the government establishes an upper limit on the economic costs of its regulatory activities. It then apportions that expenditure cap across the government to various departments and agencies, who are expected to live within their respective regulatory budgets. . . .

[T]he [regulatory budgeting] regime requires that departments and agencies can only exceed their budgetary limit by offsetting the costs of new regulations with “savings” realized by eliminating existing regulatory requirements. The expectation is that this comprehensive process provides incentives to review the existing stock of regulatory requirements regularly. It also rewards simplifying or removing outdated and ineffective regulations. . . .

Spicer points out that while regulatory cost calculations are complicated and fallible, so are the estimates and projections that are part and parcel of fiscal budgeting.  Thus, as in fiscal budgeting, the estimates produced by regulatory budgeting “do not need to be infallible for the system to work. They just need to be seen as defensible, unbiased and a reasonable basis for making trade-offs”.  Spicer goes on to discuss the cost savings achieved by the Canadian province of British Columbia (a 43 percent reduction in regulatory requirements imposed on individuals and businesses achieved over the past 15 years), and by the Canadian federal government under former Prime Minister Stephen Harper (annual reductions of C$32 million —  roughly $24.7 million in U.S. dollars  —  in administrative burdens on business and 750,000 hours in compliance costs), in implementing regulatory budgeting.

Spicer then presents a brief summary of recent U.S. congressional proposals for the establishment of federal regulatory budgeting, and concludes his analysis in a positive vein:

The costing methodology proposed in the bills would capture “all costs” imposed on regulated entities (defined as companies, nonprofit organizations, and local and state governments), as well as the administrative costs incurred by the federal government. . .

Regardless which [regulatory budgeting] model the U.S. Congress ultimately chooses, it is right to focus on regulatory reform as part of a low-cost, pro-growth agenda. That the federal government enacted 84 new regulatory requirements in 2014 that each exceeded $100 million in estimated burdens on the economy, is strong evidence that the time for reform has come. 

In sum, regulatory budgeting is a creative institutional reform that has shown real promise in reducing the economic burdens imposed by government on businesses and individuals.  It merits careful attention by the next administration and the next Congress, as they seek practical ways to constrain the bureaucratic leviathan.

Alden Abbott

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I am a Senior Legal Fellow at the Heritage Foundation. I write on antitrust, domestic and international regulatory policy, and law and economics. I am an Adjunct Faculty Member at George Mason Law School.

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