15 May 2023

Badenoch’s regulatory reforms are just the beginning of the story, not the end

By Shanker Singham & Alden Abbott

For too long the UK’s approach to regulation has been warped by a strange kind of numbers game: how many laws can be removed? What percentage of EU laws on the UK rule book can be dispensed with? how many quangos can go on the bonfire?

It’s the kind of misguided approach that has led to headline-grabbing projects like the revival of imperial measures – a purely symbolic gesture that did nothing to improve competition, liberalise the economy or raise people’s living standards.

Rather than this rather performative approach, our new book Trade, Competition and Domestic Regulatory Policy suggests a very different approach to regulatory reform.

First, does the proposed reform establish a framework that can be used to ensure that future regulation is as pro-competitive as possible. Are actual mechanisms established or are the principles merely hortatory?

Second, how does the reform impact the stock of existing regulation? How precisely will those regulations be made more proportionate, subject to the test of necessity, and generate pro-competitive and open trade outcomes?

Third, is there a moral philosophical choice embedded in the approach? This will be vital to ensuring that reform is not some random hotch-potch of ideas, designed more for a tabloid front page than as a real, sustainable and concrete reform.

Encouragingly, if we look through these lenses in turn, we find that the beginnings of a framework are emerging here in the UK.

The Government’s recent package of regulatory reform has much to commend it. It establishes an overall set of governing principles for future regulation, and also requires the review of our existing stock of regulation, including the body of EU rules that are still part of UK law. The focus on necessity, proportionality and competition is particularly welcome, as is the consideration of how regulation affects economic growth.

It’s not perfect – we do think, for instance, that the framework could go farther and actually embed the Competition and Markets Authority into the regulatory promulgation process more concretely. This should not be controversial. The OECD itself made these recommendations in its Regulatory Toolkit and Competition Assessment some 20 years ago, which was coincidentally the time when the spread of regulatory distortions seemed to accelerate. The International Competition Network (ICN), comprised of most national competition agencies, has also recommended that those agencies advocate for competition in the regulatory promulgation process.

The UK has indicated that they would apply this approach to the stock of regulation, much of which is retained EU law. This represents an opportunity for the UK, as most countries do not have a readily identifiable corpus of regulation to start with. Certainly it is helpful to ensure that common law approaches are applied to the entire UK rule book (including any retained EU law), and that UK interpretation (by judges, and the executive branch) trumps any interpretation of the Court of Justice of the European Union. Of course, it would have been better to have undertaken this task six years ago, when we knew it would be necessary.

Where there is less clarity, it is around the philosophic underpinnings of this regulatory approach, which is regrettable. Back in the early 2000s, the OECD recognised the long-held view that pro-competitive regulation does indeed stimulate an increase in GDP per capita. Separately, this has also been recognised for open trading systems and property rights protection.

None of this should be remotely controversial in the UK, or indeed anywhere else. It is unfortunate that it has become so, largely because of an approach based on a Manichaean view that all EU regulations are bad, and all UK regulations are good, and that success is to be judged on the number of EU rules removed.

It is unsurprising that officials confronted with a deadline by which time all EU regs must be deleted focus like lasers on ensuring the UK state does not collapse, and not on the actual goal of pro-competitive regulation in the UK. We will get more of what we measure.

But our real benchmark should be how undistorted UK markets actually are. There is plenty of blame to share around as to why the UK market is highly distorted and anti-competitive, contributing to its sluggish GDP per capita growth going back 20 years or more.

There has been a steady creep of anti-competitive regulation in the UK – some of it, to be sure, from the EU, but much of it home-grown. For example, the Climate Change Act of 2008 imposed a £18 per-tonne carbon floor price when most US states put their own at just $3-4 per tonne. It is simply impossible to be a competitive manufacturer of anything with input costs so much higher than our competitors. This is but one example of homegrown anti-competitive regulation. 

But the moral philosophy that should underpin one’s approach to new regulation should be based on the original principles of competition policy, which is to ensure that the regulatory system promotes consumer welfare gains.

Unfortunately, it is here that the UK package is at its weakest.  It is not enough to talk about competition, we must be clear what we mean by it. The recent CMA activity in the digital space seems to be more about competitor welfare than competition. Coupled with the activities of the new Digital Markets Unit in the CMA, this could lead to less pro-competitive regulation and more interventionist approaches that will ultimately damage the competitive process. It is in this area we are most concerned that the reforms may do more harm than good. 

What is needed now – and what Business Secretary Kemi Badenoch’s package of reforms has initiated – is a regulatory structure pointing to better rules in the future, and to an effective way to deal with some of the most pernicious retained EU law (especially labour market regulations that make it difficult for new businesses to hire anybody). This is commendable – but it should only be the beginning, not the end of the story. Above all, the way forward should be guided by the welfare of consumers, not competitors.

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Shanker Singham and Alden Abbott are co-authors of 'Trade, Competition and Domestic Regulatory Reform' (Routledge 2023).

Columns are the author's own opinion and do not necessarily reflect the views of CapX.