The UK is sliding down the international competitiveness league and increased regulation is to blame, according to a new report from the independent think-tank Civitas.

In The Red Tape Economy Graeme Leach, chief economist at the Institute of Directors, points out that many countries are loosening their regulatory grip as the UK government tightens it. Over the 1997-2004 period the UK fell from 4th to 11th place in the World Economic Forum competitiveness league; from 13th to 30th on regulation; and from 11th to 26th on bureaucracy.

The most extensive UK study of regulatory impact is the British Chamber of Commerce (BCC) Burdens Barometer, which covers the direct costs of regulations introduced since 1998 (but not all). The latest 2005 Burdens Barometer (covering 46 major regulations) shows the cost to business of regulations introduced since 1998 is now approaching £39 billion, up by nearly a third since 2004. These regulations have a recurring annual cost of around £7 billion, but do not capture the full direct and indirect knock-on effects of regulation (p.10). For example, they do not include the effects of National Minimum Wage legislation of 1999, estimated to have cost £13.5 billion by July 2004, and rising since then. It is therefore quite reasonable to assume that the annual costs of just those regulations introduced since 1998 amount to one per cent of GDP. This is not including knock-on effects such as lower employment and investment (p.10).

Unfortunately, comprehensive measures of the full impact of all regulations in the UK do not exist . We only have a very partial picture at present. The knock-on indirect cost of regulation can be even greater than the direct cost. Indirect effects include the impact on GDP growth, labour market performance, innovation, productivity and investment. The recent Hampton Review cited various approaches to estimating this, which put the total regulatory cost in a range of up to £30 billion per annum, or more.

Just enforcing regulation costs the taxpayer around 0.5 per cent of GDP per annum. The total budget of national regulators (£3.4 bn), local authority trading standards (£168 mn) and environmental health (£718 mn) is £4.3 billion per annum.

The top six regulations in the Burdens Barometer all have an EU origin. There are various estimates of how much of the UK's regulatory burden comes from the EU. The CBI has estimated that around a quarter of regulations and half the regulatory cost is derived from the EU. Other estimates suggest that around 40-50 per cent of regulation comes from the EU (p.4).

Various studies show the burden of regulation falls disproportionately on small firms (p.14). Employment law is cited as the most burdensome regulation, particularly for small firms. A recent CBI survey found that 73 per cent of human resources directors considered employment law to be a major or significant disincentive to grow their businesses (p.5). The Prime Minister's personal experience in this area—he was an employment lawyer by profession—has not prevented a surge in regulation.

A recent survey commissioned by the DTI suggested that cutting the burden of employment red tape could create 200,000 small-business jobs.

The government's stated policy is for better regulation, not de-regulation. However, the negative economic impact of regulation in the UK strongly suggests that the policy emphasis is wrong and the focus should shift back towards deregulation, without abandoning the search for better regulation where it is unavoidable.

The time has come for the government to compile a total UK intervention index, showing the combined impact of the burden of taxation and regulation on the economy. The annual direct cost of regulations introduced since 1998 in the UK is roughly one per cent of GDP. Between 1996-97 and 2008-09, HM treasury projections show the tax burden rising by approximately 3.5 per cent of GDP—a crude total Government intervention index rise of 4.5 per cent of GDP.

‘The Red Tape Economy' by Graeme Leach is published by Civitas, 77 Great Peter Street, London SW1P 2EX, tel 020 7799 6677, www.civitas.org.uk, price £5.90 inc. p&p.

For more information e-mail CIVITAS on:
    info@civitas.org.uk

Return to the Top