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More on Deregulation

    In the lead up to the new year, six authors connected with the CPS will outline a policy resolution they would like to see adopted by the government in 2013. Today, Ryan Bourne talks about deregulation. Yesterday, Dominic Raab MP wrote about reviving Young Apprenticeships.

    It almost sounds cliché now to talk about deregulation as a potential spur to growth. Politicians prefer grand schemes and new spending announcements, because the effects tend to be directly observable, whereas the damaging effects of regulation tend to be unseen and unquantifiable. But it is intuitively easy to understand the basic theory: having to comply with regulations takes time and money which could be put towards more productive activity. There is therefore a clear trade-off between well-intentioned regulation (which might aim to prevent a certain outcome) and productive activity.

    But there’s a further mechanism through which regulation can have damaging effects on the economy: it can undermine competition or contestability of markets. This tends to occur for two reasons. First, onerous regulations can act as a barrier to entry to potential new firms in their own right. Second, when new regulations are being devised, they tend to entail consultation from the relevant incumbents in the market, which tends to mean that not enough thought is given to potential entrants.

    Under the New Labour period in office, the number of regulations on businesses across the country increased dramatically. The British Chambers of Commerce calculated in 2010 that the total burden to business amounted to £90 billion. Some of these were due to European Union legislation (the Working Time Directive, for example, was estimated to have cost £17.8 billion), others knee-jerk responses to events (see in particular the effective professionalization of child-minding, which restricted the supply and contributed to driving up childcare costs), and many more which were merely well-intentioned laws (health and safety, for example) that have the perverse effect of diverting resources away from productive activity.

    Both the Conservative and Liberal Democrat parties in opposition pledged to ‘slash red tape’. In Government the parties adopted a ‘one-in one-out’ rule and a red tape challenge. But many new regulations are out of the scope of the Government’s deregulatory drive because they are implementing EU initiatives or relate to policy areas deemed non applicable, notably environmental regulations or tax legislation. Consequently, 52% of all new regulations fell outside the “One-in One-out” policy in 2012. The red tape challenge will see 3,000 regulations, including on health and safety inspections, abolished or scaled down for 2013. But overall there hasn’t been any meaningful deregulation so far.

    The Coalition has also made use of Impact Assessments and has started implementing sunset clauses for new regulations (automatic reviews of regulation after a set period of time), though this is not mandatory. In addition, over 30% of the impact assessments have been rejected as not fit for purpose by the Regulatory Policy Committee (the watch-dog which oversees regulatory issues).

    Quite simply, deregulation is still the tax cut that doesn’t cost any money. Given the tight public finances, the Coalition should be looking to move much further in this area.

    They have made a good start by announcing in the Autumn Statement that they will now be operating a ‘One-in Two-out’ regulation policy. But they could go even further in a number of ways.

    First, as a forthcoming CPS paper will make clear, they should strengthen the role of the Regulatory Policy Committee in overseeing the impact of new regulations across the board.

    Second, the scope of the ‘One-in two-out’ regime should be expanded to as many areas which are currently exempted as possible. This could include tax legislation for example, where substantial simplification is required.

    Third, the Government should roll out a robust, mandatory framework for effective ‘sunset clauses’ for new regulations.

    Fourth, they should exempt permanently all small businesses (0-10 employees) from a range of regulatory and employment legislation burdens, including: the extension of flexible working regulations; requests for time off for training; pension auto-enrolment.

    Fifth, in terms of other business and employment regulation and legislation, the government could devolve (much like in the way of enterprise zones) power to local authorities to decide whether they want to enable businesses in their area to be exempt from waves of regulation. This would enable little experiments at local levels to take place and, if certain regulations are perceived to make areas uncompetitive, will create downward pressure on the scope of requirements.

    In Michael Fallon the Business department now has a minister who believes in deregulation as a policy objective. So we’ll be particularly interested in what Michael has to say in a policy speech on the subject for the Centre for Policy Studies in late February.

     

    Tomorrow, Professor Jeremy Jennings writes on reducing legislation in 2013. 

    Ryan joined the Centre for Policy Studies in January 2011, having previously worked for a year at the economic consultancy firm Frontier Economics.

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