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Tuesday, March 30, 2010

Setting the record straight on regulation

In case anyone has yet to see it, Open Europe has today published a new report detailing the cost and benefits of regulation introduced in the UK since 1998. Since last year's study on the same topic we have analysed an additional 320 of the Government's impact assessments, bringing the number of IAs analysed in total above 2,300.

It's not the easiest subject to traverse for those unfamiliar with the inner workings on regulation and deregulation initiatives, which is perhaps why it seems to have led to confusion in some quarters over what the report actually is.

The European Commission, for one, gave their response to our study in the Telegraph saying:

"The Open Europe study lacks rigour and is intentionally misleading. The headline figures suffer from a methodological bias. It confuses stocks and flows, it suffers from double-counting, it does not consider what repealing EU regulations would imply either in terms of foregone benefits or alternative regulatory costs."

An intriguing response. The Commission appears to have read only the first sentence of our press release and nothing of the actual report. That's a shame because:
  • We presented three sets of figures, the cumulative cost of regulation, the annual cost of regulation and benefit/cost ratio of regulation. The Commission only responds to the first figure.

  • The cumulative cost, or a cost of the 'stock' of regulation, measures the entire cost to the economy since 1998, which is £176 billion. The EU is responsible for 71%, or £124 billion of that cost. We explained that £176 billion is equivalent to 12.6% of the UK's annual GDP, and roughly equivalent to the country's budget deficit. This does not mean that the £176 billion cost of regulation occurs in one year, as we make clear, and the comparison to the budget deficit and GDP is illustrative and designed to relate a large figure to something most people are familiar with. In particular it's a useful reminder that regulatory policy deserves as much scrutiny as budgetary policy, as both have a significant impact on the economy. We can see why the Commission doesn't like that thought. We're note sure what the Commission's remark about 'double-counting' refers to.

  • In the report, we do address the counterfactual , i.e. the costs that would have occured in absence of EU regulation. This is indeed an interesting discussion - one that the Commission would do well in seriously engaging with. We accept that many regulations - but certainly not all - would exist in national law also in the absence of the EU. However, and this is crucial, while the framework of laws may still exist at the national level, a whole range of prescriptive requirements that go with it would not. We give examples in our report.
  • Additionally, knowing the source of regulation is vitalling important, both in terms of practically amending the law if so desired, and in terms of political accountability. Not knowing the source of the laws massively undercuts citizens' ability to hold policymakers to account. I.e. if I'm not happy with my energy bills rising as a result of regulation, who should I blame? The answer is far from straightforward.

  • The annual cost of regulation measures the cost to business and the pulic sector arising from red tape in any given year (from existing and new regulation). We consider this to be a more useful measure than the cumulative cost as it allows us to look at trends. The Commission doesn't seem to address this figure, which is surprising. Particularly as it shows that the EU proportion of the total cost has gone down over the last three years (at 59% in 2009, compared to a 72% average), which could be a sign of the EU's 'better regulation agenda' beginning to pay off...
  • But the most interesting figure is the benefit/cost ratio, showing the benefits of EU and UK regulations relative to each other. This figure is not being addressed by the Commission either. The ratio makes clear that for both EU regulations and UK regulations the benefits outweigh the costs, but UK regulations areo n average 2.5 times more cost-efficient than EU laws. This is also true in the areas where the EU and UK regulate the same parts of the economy (for example, social policy and environment legislation). This is what the Commission really should be trying to respond to if they’re concerned with relative benefits.
Additionally, a spokesman from the Department for Business said:

"The figures presented in this report are out of context as they take little or no account of the wider economic benefits that regulation can deliver. European regulation has helped open up new markets for UK business across Europe and provided important new rights and protections."
Again, we acknowledge that regulations come with benefits, and that EU laws, for example on public procurament or energy 'unbundling', can have a positive impact on the economy. The problem is that EU regulations too often are mistargeted, overly burdensome and decided at the wrong level of policy-making in the first place. That's what we're addressing.

The Department for Business added that its "Forward Programme", which details the regulations planned for next year, shows that EU regulation will only make up 31% of the total cost. The discrepency is explained by the fact that the forward programme doesn't take into account any of the existing regulations generating costs to businesses and the public sector - our estimate does.

And closer inspection of the Government's "Forward Programme" reveals that the economic impact of many of the EU regulations due to come into force next year have yet to be quantified (24 to be exact). Some are also very important, such as the proposed establishment of the EU's three new financial regulators - which could have a massive impact on the City of London. True, there are also many domestic regulations yet to be quantified but, as we have seen in previous years, a high EU proportional cost can just as easily be attributed to just a few extremely costly regulations as several put together. So, essentially, it is too early to tell until all the costs are quantified.

Interestingly, former Dutch EU Commissioner Frits Bolkstein today reaches some similar conclusions to those we spell out in our report. Writing in Belgian daily De Standaard he calls for the size of the Commission to be reduced to 12. He explains his reasoning:

"A proposal to grant independent women the right to pregnancy leave. Both in the Netherlands and Bulgaria, shouldn't we decide on that ourselves? The European Commission has apparently learned nothing from the Nos in France and the Netherlands...Under Barroso the Commission has become a presidential system. Now there are 27 Commissioners. Power is with the President and his Chief de Cabinet. The Chief of Cabinet has more power than many Commissioners. Discussions within the Commission don't mean anything any more."

"What do Commissioners want? They want to get into the picture with initiatives, smart or not...The only way to stop the stream of useless initiatives is to reduce the number of Commissioners to what is necessary to steer the EU. I think a Commission of twelve capable people is enough."

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