23 April 2024

Why Britain needs a regulation revolution


There have been many academic theses written about the powers and role of government. But perhaps the neatest summary comes from an anonymous minister, quoted by former civil servant Tim Leunig.

They would explain to stakeholders begging for intervention that ultimately, there were five things they could do: ban something, mandate something, tax something, subsidise something, or give a speech about something. And of those, only the first four actually did anything.

But one of the most important facts about the British state is that it devotes far less attention to the second of those than the others. Decisions on tax and spend are the focus of huge attention: think of the circus that surrounds the Budget and the Autumn Statement, the endless pages of analysis from the OBR and the IFS, the wrangling over whether Labour and the Tories can actually afford this tax cut or that spending commitment.

By contrast, decisions about regulation get precious little attention. There is no regulatory equivalent of the Treasury, imposing its dominant will on the rest of Whitehall. The findings of regulatory impact assessments rarely if ever hit the headlines. 

Yet regulation matters hugely. Think of the biggest obstacles to growth this country faces. Why can’t we build houses in sufficient numbers? Why does it take so much time and money to build new power plants, roads or railways? Why is so much of the money from our pension funds locked up in bonds, rather than being reinvested into the productive economy? All of these issues matter far more for our national future than whether we take a few pence off a given tax, or pour a few more million down the maw of the NHS.

That is why the latest report from the Centre for Policy Studies, ‘The Future of Regulation’, is so important.

Over a period of many months, our research team analysed the regulatory impact assessments attached to more than 3,500 pieces of legislation across the 2010s – repeating an exercise carried out by the now defunct think tank Open Europe covering the 2000s.

The decade we examined should have been a time when the regulatory burden shrank. That, after all, was what successive Conservative governments kept promising. Instead, it continued to grow. 

In gross terms, a total of £35bn a year in regulatory costs were imposed on UK businesses over this period, in today’s money – or £57bn if you include the switch to auto-enrolment pensions. There were also £40bn in one-off transition costs attached to these regulations, or £148bn if you include changes to pensions indexation. 

Of course, these regulations brought benefits as well – or at least, the Government claimed they did. But even if you include those offsetting benefits, and exclude the pensions measures, you still get a net total of £6bn a year in extra costs over the decade – almost enough to cover a 2p cut in corporation tax.

How, then, could the Government claim to have cut regulation?

Well, the reason is simple. The Cameron Government set ambitious targets for reducing regulation. But these targets only covered some of the rules it imposed – and in general, not the really expensive stuff. So anything done by the Treasury, for example, was exempted from the targets. As was anything to do with procurement. Or any of the thousands of regulations imposed by the EU, which were incorporated straight into UK law. (Often while gold-plating them in the process, despite a commitment from the Government not to do so.)

There was also some extremely creative accounting. At one point, Defra was on track to miss its target for cutting red tape. So someone had the bright idea of reclassifying the imminent plastic bag tax as a deregulatory measure, because you were liberating supermarkets from the hassle and expense of having to offer their customers plastic bags. This was marked as a £200m a year saving for business, which repeated across the five-year Parliament became a cool £1bn in red tape axed.

As Tom Clougherty and I describe in today’s report, the result was a regulatory regime that counted red tape imposed in the same way as a dieter counts calories – while allowing that dieter to scoff a burger or a milkshake whenever they wanted.

But that’s not even the biggest problem with our regulatory regime. It’s that the regulatory impact assessments themselves are simply not fit for purpose.

In theory, as we set out in the paper, Britain has a really good system for analysing the costs and impacts of Government decisions.

In practice, the impact assessments are usually filled out long after the decision has actually been taken, often by the most junior person in the office, and rubber-stamped with scarcely any scrutiny.

We spoke, on background, to ministers and former ministers who had run departments spending hundreds of billions of pounds. More than one told us they’d never looked at the impact assessments when making decisions, and that they were not regularly included in their red boxes.

A senior civil servant described the agonising process of trying to get extra money out of the Treasury – then acknowledged that by comparison, they could impose the same cost on businesses or consumers with a click of their fingers.

And this shows up in the quality of the assessments themselves.

Take the package of financial services regulation known as MiFID II. This is a pretty big deal. For example, it’s widely blamed for having ripped the heart out of independent financial analysis as a sector, with all sorts of knock-on implications on the markets. The Government recently commissioned an entire review to try to fix some of the damage. 

So how many billions did the Government expect these measures to cost the economy? The answer is that the official estimate was just £105.2m a year. But in fact, it wasn’t. The actual official estimate was that MiFID II would benefit the economy by £105.20 a year, because they got the plus and minus sign mixed up, and forgot to add the million. Which tells you something about how seriously the exercise was taken.

Our team’s analysis did find that, over the decade we studied, the quality of impact assessments got better. But it’s still very much a work in progress.

Take the recent rules on second staircases in tall buildings, introduced by Michael Gove. 

In the wake of the Grenfell disaster, the Government consulted on a requirement that all buildings more than 30m in height should have a second staircase, in order to mitigate fire risks. The relevant consultation paper estimated the annual net direct cost to business (EANDCB) at around £181m.

The Government then proceeded not just to implement the 30m restriction – as favoured in the consultation – but to bring the height limit down to 18m. The annual cost of this was originally estimated at £292m, but in the recently published impact assessment it has been reduced to £268m. 

The problem is that the costs refer mainly to the cost of building staircases. As anyone in the industry will tell you, the real problem is the loss of residential floorspace. Taking the value used in the impact assessment, and using industry estimates for lost space, the cost per building rises from £583,500 to, er, £7.3m. In other words, the Government’s estimates appear to be out by an order of magnitude.

There is, however, no way for anyone outside DLUHC to challenge the figures, not least because the new Better Regulation Framework exempts ‘regulatory provisions for the safety of tenants, residents and occupants in buildings’ from independent scrutiny.

To make things worse, the original consultation admitted (as Dame Judith Hackitt’s inquiry into Grenfell itself concluded) that the evidence for the safety impact of an additional staircase was ‘limited’. But the Government went ahead and lowered the limit anyway. In the process, it made it economically unviable to build many popular and attractive types of building, such as traditional mansion blocks – an issue unmentioned either by ministers or the impact assessment.

The assessment itself also makes it clear that the number of fatalities and injuries expected to be prevented in any major or catastrophic scenario is incredibly small in buildings under 50m high – indeed, it can cite ‘no incidents in practice that are appropriately comparable’, given that current fire service response practices ‘are effective to the point that mass evacuation via the stairwell is an extremely rare occurrence’. Again raising the question of why the extra staircase was actually needed.

So what can we do to improve this process?

Our report makes all manner of suggestions. But the most important is that we need to finally start taking rules and regulation just as seriously as taxing and spending. And that ministers should not be allowed to bring in measures because ‘something must be done’ without proper, independent scrutiny of what that something actually is, and how much it will cost.

The new Better Regulation Framework does argue that impact assessments should be part of the policymaking process, rather than an afterthought. But it completely undoes that by also rejecting any form of regulatory budgeting – such as setting a cap on the overall cost of new regulation, or insisting on a genuine one-in, one-out policy.

Oh, and only one department has even analysed the full stock of the regulations it has already imposed.

So we need all kinds of changes. A beefed-up Regulatory Audit Office, with the power to scrutinise regulation rather than letting departments mark their own homework. A senior minister who can challenge and veto new regulations, just as the Chancellor can block new spending. A full audit of the regulations that are already in place. A system of regulatory monitoring that covers every measure introduced, both by departments and quangos, rather than exempting anything inconvenient. Full reviews after a set period to see whether they are working properly, with ministers having to make an active decision to retain them. The list goes on.

Getting a handle on regulation isn’t a party-political issue. You can believe that some new regulations, or even many new regulations, are good and necessary. But even then, you should surely also want to know how much they cost, and whether they are actually working as you intended.

Regulation is arguably the least scrutinised part of government. But it may well be the most important. At the moment, Government too often sees imposing costs on business as a pain-free solution. Unless that changes, we can kiss goodbye to any hope of growth.

Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.

CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.

Robert Colvile is Editor-in-Chief of CapX and Director of the Centre for Policy Studies.