One in one out regulation: Will it add up?

10 August 2010
How much does regulation cost businesses in the UK?  Looking at the figures, this seems tantamount to asking the length of a piece of red tape.

Yet, as the Government moves to implement its 'one in one out' approach to regulation it is a question worth asking.

The Business Secretary Vince Cable has said that a system will operate whereby for every £1 regulation brought in, there must be a similar-sized reduction elsewhere in the regulatory system.

However questions have been raised over whether there is reliable measures by which such costs can be gauged, and, if the burden is removed whether this would immediately yield the exact equivalent saving to businesses.

A spokesperson for the Department for Business, Innovation and Skills (BIS) explained how the costs were measured.

"Every regulatory proposal the Government comes up with, if it levies a cost or benefit on business has to produce an impact assessment (IA).  A significant part of the IA is a detailed economic analysis of the costs and/or benefits to business that will be formulated by Government economists looking at the whole range of impacts," he said.

Yet the last Government was criticised for using unreliable data on the costs and potential savings that had been found from reducing the regulatory burden.

For instance, the old regime estimated both the administrative costs and potential savings to be found from regulatory changes used the 'Standard Costs Model' (SCM).

When the National Audit Office looked at this method it raised concerns about how reliable the data was.

A 2008 examination of regulatory reductions said the figures for the savings from admin costs needed to be "treated with caution as they were not statistically reliable" due to factors such as extremely small samples used in the research.

So would such problems undermine how the £1 in £1 out plan could operate?

When we spoke to BIS, they explained their analyses of regulatory costs will include consideration of the administrative costs as calculated by the SCM, but would also take into account the economic costs of regulation as well.

It is intended that most IAs should take account of the full economic cost, looking at, what they consider to be both the administrative and policy costs.

Yet research has suggested that this process is not necessarily quite as thorough as it could be. The most recent report on the matter by the NAO found that from 50 IAs analysed 10 had still not given any monetised assessment of the policy costs or benefits, but did find 86 per cent had used 'some' quantification of costs/

Likewise, the Regulatory Policy Committee, looking into impact assessments conducted under the last Government, warned of impact assessments that "lack analytical rigour, are poorly presented and appear to be produced as a result of being required to do so, rather than as a means of open and thorough investigation and inquiry."

Even if there was no debate over the accuracy of the cost estimates, it is not necessarily guaranteed that removing a regulation would see an equivalent for businesses.

Full Fact spoke to the Association of Certified Chartered Accountants (ACCA), who are due to published their own report on business regulation this week.

  Senior Policy Adviser Emmanouil Schizas told us that, over time, businesses adapt their behaviour to accommodate changes in regulation thus bringing down the costs they incur.

"When you repeal these regulations, if you take the sum originally calculated for the cost of the regulation, this will actually be a lot greater than what compliance costs businesses now."

"This means once you remove a regulation you can show a saving that is a lot larger than what has actually been achieved."

He added: ""The government will need to carefully review the impact of regulations it intends to repeal, and not rely on the original impact assessments"

This would mean that in addition to potentially inaccurate estimates for how large the administrative costs actually are, estimating how much the removal of a regulation would save for businesses would be similarly contentious.

Such concerns only deal with the methods actually used by the Government, and other analyses have produced different estimates of the burdens placed on business by regulation.

For instance, earlier this year, the Institute of Directors used a different method to produce estimates of the size of the regulatory burden.

Looking at survey data for the amount of hours spent complying with regulation to figures for average cost, it was suggested that the regulatory burden was £80 billion — significantly higher than the £13 billion suggested by the Government.

So where does this leave £1 in £1 out?

When Full Fact spoke to the Department for Business, Innovation and Skills a spokesman accepted that Government estimates of the cost of regulation were not "an exact science".

"It's fair to say it's not an exact science but it's based on the same methodology so effectively you can assume for all the potential inconsistencies within the process of estimating these costs they are by and large roughly equally," he said.

He added: "One can assume there is a give or take, plus or minus the same level of inconsistency within them, because obviously to work out the specific cost for every single business would cost far too much."

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