'Can't touch this': Vince's MC Hammer moment

Business Secretary Vince Cable today announced a plan to ease the burden of regulation on small businesses in a bid to boost the economy. The plans would include a three-year break for small businesses from new regulation in addition to scrapping plans for extending parents' right to request flexible working and scrapping new rights for time off to train. The government has also vowed to review some 22,000 existing government regulations on business, with ministers forced to justify maintaining any that are challenged.

Now this is all welcome stuff, but the government has managed to completely ignore the regulation factory numero uno - that is Brussels - instead opting for a "can't touch this" approach.

When it comes to business, the EU is the main driver of regulatory cost in the UK. EU regulations do come with benefits, we don't deny that. But a lot of it is unnecessary or overly burdensome.

We can argue about the counterfactual (i.e. would the regulations have existed in the UK anyway), but what becomes clear during exercises like these is the extent to which the UK (and other member states) have lost control over their own regulatory reform agendas, as a huge number of laws are now locked in at the EU level. Changing an EU law requires re-negotiation and agreement amongst 27 different member states and the regulation-obsessed bunch that is the European Parliament.

Despite the fact that scrapping or amending unnecessary EU regulations could save the UK billions of pounds each year, and generate billions more in various dynamic effects, the Coalition has chosen to look the other way.

The problem with this approach is the familiar dilemma: you can leave EU regulation alone, but EU regulation will never leave you alone. The recent extension of the Gender Equality Directive by the ECJ to ban price differentiation between men and women should serve to illustrate this point (a ruling expected to cost the UK insurance industry an additional £1 billion).

We've been looking at the cost, proportion and impact of EU regulation in greater detail than most (see here, here, here, here, here, here for example). Just a reminder of our latest report on the topic: based on 2,300 of the Government's own regulatory impact assessments we've estimated that in 2009, 59% - or £19.3 billion - of the total cost of economic regulation (introduced since 1998) in this country stems from EU legislation. Cumulatively since 1998, EU laws account for £124 billion, or 71%, of the total cost.

And here are a few graphs showing the regulatory cost stemming from the EU to the main departments dealing with business regulation:

It's hard to better illustrate why any attempt to tackle regulation that doesn't focus on the EU level simply isn't credible. We would be lying if we said that the Coalition's refusal to engage with EU regulation doesn't frustrate us. In fact, we'll soon publish a list of EU laws that the Coalition must seek to re-negotiate. So do watch this space.

"One-in, One-out" for UK laws but EU're welcome anytime

The Government has today announced that it is to introduce a one-in, one-out system of regulation whereby "When Ministers seek to introduce new regulations which impose costs on business or the third sector, they will have to identify current regulations with an equivalent value that can be removed."

This is clearly a welcome initiative, as it will make regulatory costs (which are too often overlooked in austerity discussions) similar to spending, in that ministers would have to prioritise amongst different pieces of regulation just as they have to prioritise what to spend money on.

But what about rules and regulations coming from Brussels? Our research, based on the Government's own Impact Assessments, shows that in 2009, 59 percent of the annual cost arising from all regulation introduced since 1998, £32.8 billion, stemmed from EU legislation. So that's around £19bn. (Note that this includes all regulations introduced since 1998 - when the government started to produce IAs - which gave rise to a cost in 2009, as opposed to the government's figures which only include new regulations introduced last year).

Unfortunately, the Government has decided to duck the uncomfortable question and not include regulations from the EU in the scheme.

This could prove problematic for several reasons.

Firstly, it will limit the impact of the scheme, as it will not cover the bulk of the cost of regulation. As a point of comparison, imagine the Coalition having a series of proposals for how to get the country’s public finances in order, but only having full control of 40% (or less) of the actual budget.

Secondly, ignoring the impact of EU legislation leads to unrealistic expectations of delivery. This, in turn, could undermine the credibility and legitimacy of the Coalition government's entire regulatory reform drive.

Thirdly, and perhaps most importantly, the point of the budgets is to ensure regulatory prioritisation within departments. If so much of the annual regulatory cost originates in the EU – then how much of a real “prioritisation” can actually take place? This is particularly true for departments/agencies such as the DfT, FSA, HSE and DEFRA whose regulatory output is almost completely dominated by EU laws - in come cases over 90% of the cost (see table).


In addition, the Conservative party has been – rightly – a critic of ‘EU overregulation’ in the past. In a speech in May 2009, launching the party’s European election campaign, David Cameron said:

“Our next task is to fight the EU's culture of centralisation and over-regulation. Brussels can be a force for economic dynamism - but too often it acts like an economic millstone.”

Starting off with launching a flagship proposal which doesn't address EU regulation doesn't look too good, and gives the impression that the Coalition Government is in denial over how much impact laws stemming from Brussels has on the UK economy.

But there is another way.

According to negotiation theory, in the interaction between domestic and international (EU) politics, governments strengthen their bargaining power if they can convince their negotiation partners that their mandate from voters and business at home is very restricted – and that they are ready to stick to that mandate.

That is how the Coalition Government should use the one-in one-out scheme.

EU legislation should have to meet the same stringent criteria as domestic legislation (including being signed off by the Coalition's "Regulatory Policy Committee") . At a very early stage in EU negotiations, the UK Government should give its negotiators the authority to reject proposals that do not meet its priorities and threaten to break its own regulatory budget. UK ministers must make clear to their EU partners that they simply do not have the mandate to sign up to a proposal that will break their departmental regulatory budget. This would strengthen the UK's negotiating hand massively.

It would be radical but not more radical than other member states simply choosing not to implement EU laws properly or resisting CAP reform, for example.

An oldie, but a goodie

As readers are hopefully aware, EU regulation has been on our minds for the last few months as we put together our latest research on the ever increasing cost it has placed on the UK economy over the last eleven years. Old habits die hard and we were therefore (rather worrying) excited to come across this remark by the then President of the German Bundesbank, Prof. Hans Tietmeyer, from a speech in London in December 1997:

“Admittedly, the European ideal is sometimes used to mask nonsense. The anecdotes about pointless regulations planned by bureaucrats would fill volumes.”

Considering that EU regulation introduced in the UK since 1998 has cost the economy £124 billion, we can only wonder what Prof. Tietmeyer would say in 2010.

The first sentence is, however, perhaps more significant. This was a remark given in a speech about the introduction of the euro and, in hindsight, may prove to be very prescient.

No one should take pleasure in witnessing the current difficulties in the eurozone, because, after all, they have the potential for much wider repercussions across Europe and the globe, but maybe eurozone leaders could do well to heed the Professor's message: European ideals are not sufficient to paper over fundamental economic realities.