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Don't just sit there, undo something - deregulate for growth

    At the Margaret Thatcher Conference on Liberty held last year, Arthur Laffer argued vociferously in favour of radical deregulation to boost economic growth. His message to the politicians assembled at the conference was, “Don’t Just Sit There, Undo Something.” Given the historic stagnation in productivity facing the UK, a new wave of deregulation can help to create the conditions for stronger underlying economic growth.

    Unnecessary regulation adds to the costs of running businesses and diverts time and resources from more productive activities. This reduces the funds available for investment and saps one of the key drivers of productivity growth. Excessive demands from the State for regulatory compliance, especially when orientated around the existing market participants, often increase barriers to entry and reduce the competitiveness and contestability of markets. In some markets, such as housing, the regulatory framework has had a devastating impact on supply.

    The British Chambers of Commerce estimated that the cost of new regulations placed on British businesses introduced between 1998 and 2010 was £90 billion a year. Others, such as the Institute of Directors give similar estimates on the total cost of regulation to businesses. The IoD also estimated in 2010 that company workforces spent an average of 73 hours a month on regulation and administration. Whilst the Coalition Government carried out a number of measures to help stem the tide of regulation, including implementing the One-In-Two-Out rule and the Red Tape Challenge, the burden of domestic and EU regulation remains heavy.

    The evidence that deregulatory measures can increase investment and productivity growth is clear. On the broader level, the Government should include EU regulations in its One in Two Out rule. By doing so, the Government would be forced to be bolder in reducing burdensome regulations and in rolling back or at least offsetting the sharp rise in EU regulation. It would also encourage the Government to be more focussed on preventing the implementation of EU regulation in the first place. The Government should also aim to extend the use of sunset clauses on regulations. This would mean a requirement after a period of time to review the regulations and to check if the benefits derived from maintaining them still outweigh the costs.

    The Government should also enforce greater regulatory transparency across departments. Small businesses especially would benefit from clearer and easier access to information on the compliance issues which are important to them. Businesses will often have to deal with regulations emanating from different departments so clearer inter-departmental communication on efforts to cut the cost of regulation are essential.

    There are still plenty of sectors for which deregulation would be of great benefit. In food and farming it means simplifying and streamlining the inspections regimes. In housing it means simplifying and consolidating the planning system. In trade and exports it means simplifying Visa applications for businesses and entrepreneurs. In the digital economy it means improving broadband connectivity by relaxing mast heights and reforming the Electronic Communications Code. In energy it means significantly easing up on restrictions for exploratory drilling for shale gas. All this matters because the less time that we waste on long commutes to work, filling out endless forms and dealing with poor internet connections, the more time we have left for productive activities, investment and innovation.

    In the financial sector, too often new regulations which have been well intentioned have ended up being poorly targeted and heaped extra costs on the sector for little discernible benefit. This reduces the funds available to lend out and hurts Challenger banks in particular. Capital requirements for new, small banks should be eased along with greater flexibility in the risk weighting of loans and sharing of credit risk data. On the EU level, everything from the Working Time Directive to the Soil Framework Directive adds to the cost of business.

    Yes, there are some regulations which we need to keep. However, increasing the deregulatory momentum now will undoubtedly help to increase productivity.  

    Adam joined the Centre for Policy Studies as Head of Economic Research in January 2014. 

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