Administrative Costs; Simplification Plans; Regulatory Budgets; and 'One In, Three Out'
Concerns about the burden of regulation received a good deal of attention from early 2005 onwards, initially driven, no doubt, by the Government's need to be seen to be business-friendly around the time of the May 2005 general election. There were several strands to the activity, summarised in a separate note. But there were four particularly innovative and inter-related sets of proposals, including one which was introduced by the next government after the 2010 elections.
Measuring Administrative Burdens
Regulatory costs may in principle divided into policy costs, one-off costs, financial costs and administrative costs.
- Policy costs are those costs directly attributable to the policy goal. For instance, if a new regulation requires employers to reduce their employees' exposure to a particular chemical in the workplace, the policy cost might include buying new equipment such as local exhaust ventilation or personal protective equipment, and regular checking that the equipment is in good working order.
- One-off costs are those costs only sustained once (such as in taking professional advice and initial staff training) when a business is adapting to a new or amended regulation.
- Financial costs include paying tax and license fees.
- Administrative costs are all those costs associated with familiarisation, record keeping and reporting, including inspection and enforcement. Such costs would include ongoing staff training, keeping records of exposure levels and equipment checks, and supplying that information to the authorities.
In March 2005, the Better Regulation Task Force put forward a range of recommendations aimed at reducing the regulatory burden on business:- Regulation - Less is More: Reducing Burdens, Improving Outcomes. The main thrust of the Task Force report was that the Government should for the first time (a) measure and then (b) reduce the stock of regulation, beginning with the administrative burden, and then move on to a sizeable programme of regulatory simplification and reform, in part driven by suggestions from business.
This was a fundamental change of approach as most previous deregulation initiatives had focussed on reducing the flow of new regulation, rather than attacking the existing stock. The Government published its response to the report in July 2005, accepting all the recommendations. This led to the the Administrative Burdens Measuring Project in which consultants asked the business community to estimate the administrative cost of the existing stock of regulations. The NAO (see further below) later reported that the total was just under £20bn, not including around £11bn "business as usual" costs - such as the cost of preparing accounts which would anyway be needed by managers and shareholders, even if they did not also need to be submitted to Companies House and/or the tax authorities. About one quarter of this £20bn was represented by burdens imposed by the tax authorities. The balance was in December 2006 said to be £13.7bn pa but the NAO subsequently estimated it a little higher.
This exercise, and the subsequent Reductions Programme, led to some fierce Whitehall battles. The BRE argued, for instance, that the cost of telling an employee what hours they are going to work, what they will be paid, and so on, was an administrative burden - and that was certainly the view of many employers. Much the same applied to the cost of defending Employment Tribunal claims. The Business Department however - equally understandably - regarded these burdens as policy costs and they were not going to try to reduce such hard-won protections.
Administrative Burdens Reduction Programme
In December 2006 the Government published a number of departmental Simplification Plans which supposedly identified 500 "red tape busting actions" which would save businesses etc. over £2bn in administrative costs. Examples included (already enacted) changes to company law, improvements to the planning system and less intrusive health and safety, and retail premises, inspection regimes. The aim was to save 25% (around £3.5bn) of the £13.7bn total administrative cost burden by 2010, together with a smaller proportion of the cost of complying with tax legislation etc.
It was easy to be cynical about this programme. Those close to it believed that businesses wildly over-estimated the administrative cost of certain of the regulations, thus making it very easy for officials to target reductions in those costs. But the programme was nevertheless welcome and there was little doubt that it would do some good, even if it were to achieve much less than the Government's headlines would have had us believe. This conclusion was echoed in the NAO's report Reducing the Cost of Complying with Regulations: The Delivery of the Administrative Burdens Reduction programme, 2007.
The NAO particularly noted that:
- The Government's targets were for a net reduction in administrative burdens. Departments therefore need to deduct any new administrative burdens from the savings achieved in the delivery of older regulations.
- The results of similar programmes in Denmark and the Netherlands had either "not been noticed in full [by business]" or "not been noticeable" at all. This was presumably because the relative importance of administrative burdens is not known, and may in practice be only a small part of the four-fold cost of regulation (see above), and also, as the NAO pointed out:
- Business find it particularly irritating and burdensome to keep up-to-date with changes in existing regulations, to comply with regulations, and to find appropriate information and guidance. These "irritation factors" are not necessarily the most burdensome in monetary terms, and hence are less likely to be targeted as part of the burdens reduction programme.
- A regulation can appear to impose large administrative burdens because it applies to a large number of businesses, even if the burden is not particularly high for individual firms. Equally, a regulation may not appear to impose significant burdens because it affects only a small number of firms, but the burdens may still be significant for individual affected firms.
The NAO reported again in October 2008. On the positive side, they reported that businesses' perceptions of regulation had slightly improved. But they were not impressed by the reductions in burdens claimed by departments ("should be treated with caution", "not calculated on a consistent basis" "subject to only limited validation"). And two-thirds of the savings claimed by the four main departments (who were responsible for 75% of the total admin burden) were attributable to initiatives which had been identified before the programme had begun.
This was an even more ambitious initiative, kicked off by a consultation document in August 2008. The big idea was that each department should have a three year (not one year) budget for regulatory activity just as it has a (usually one year) financial budget. And rather like financial budgets, the regulatory budgets would be set:
in respect of new regulations
- after deducting reductions in regulatory costs consequent on the removal or simplification of older regulations, and
- after prioritising those regulations with higher benefit/cost ratios.
Competition enforcement and and economic regulation would be excluded, as (interestingly) would be regulation aimed at tackling climate change. The latter decision proposal was an early indication of the very low likelihood that this initiative would ever get off the ground. Most departments responded by providing a list of very expensive regulatory proposals for which they would wish provision to be made, including, for instance, the highly regulatory plan for automatic pension scheme contributions for all employees, and compulsory employer contributions, however small the business.
The regulatory budget proposal therefore had the unintended consequence of encouraging regulatory ideas to see the light of day rather earlier than might otherwise have been the case. There were also some very obvious practical problems, not least the difficulty of measuring the regulatory costs, and the fact that no Secretary of State was going to give away his/her ability to provide rapid regulatory responses to new and urgent problems. All in all, it seemed that the established system, under which the Better Regulation Executive scrutinised and challenged individual regulatory proposals, subject to political override, was likely to remain the best way of controlling Ministers' regulatory proclivities. The regulatory budget idea was accordingly dropped via a statement by Lord Mandelson on 2 April 2009.
One In, One Out
But the next (coalition) government decided to try again, using the somewhat simpler 'one in, one out' (OIOO) rule which requires any regulation which imposes a net cost on business, charities etc. to be balanced by a compensatory reduction in regulatory cost elsewhere. Crucially - and for the first time anywhere in the World - all four types of regulatory/compliance costs were to be included, and not just administrative costs. And the benefits of the new regulation were not to be taken into account in calculating the net cost. There were, on the other hand, significant exemptions from this rule including tax and spend decisions, EU legislation (such as employment law), emergency legislation, international agreements, and regulations which have no impact on business etc. The Regulatory Policy Committee had a major role to play in assessing the credibility of the numbers used in OIOO calculation. HMG's own methodology is here.
The main criticism was that the approach was over-simple in that it took no account of the non-business benefits that would result from the new regulation - improved health, greater equality etc. So a new regulation which offered limited benefits would be preferred to slightly more 'costly' one which offered much greater benefits. To be fair, though, much the same criticism can be applied to financial budget limits, which skew spending decisions against expenditure which has a significant short term cost despite offering large longer term benefits.
Another problem is that officials who are promoting a new regulation are strongly incentivised to assume low regulatory costs. A nice example of how this worked out in practice was contained in the March 2012 NAO report on the introduction of a new visa system for overseas students wishing to study in the UK. Here is an extract:
Government policy says each new regulatory burden must be matched by a reduction elsewhere, called 'one-in-one-out'. We examined the key assumptions the Department made about the costs and benefits of the changes to education providers. The Department estimated the net direct cost to education providers (costs less benefits) of changes to Tier 4 was £25.5 million a year. We found the Department underestimated the financial impact on sponsors in the following ways:
- The Department included a one-off cost of £25 per sponsor for familiarising themselves with the new rules. Sponsors told us that the true cost was at least £500 for staff to read the guidance and more if the cost of attending training seminars was taken into account.
- The assessment did not include the cost of applying for educational oversight and meeting the inspectorates' standards. The application cost for this varies, depending on the size and sector of institution, from around £9,000 to £20,000 in the first year. Implementation costs can add a further £10,000.
- The cost of the additional administrative work arising from new requirements was not included, such as checking English language test results, monitoring performance against Highly Trusted Sponsor standards, evidencing attendance and communicating rules to staff and students.
- The Department also assumed that colleges that lost their sponsor licence would be able to replace four out of five non-EEA students with domestic and European students. Private colleges and English language schools told us that there is little domestic and European Union market for the courses they offer. We estimate the extra regulation placed on colleges could result in an additional £40 million direct cost to sponsors.
- The Department expected that student numbers would fall as colleges came off the list of licensed sponsors for not meeting the new standards. It estimated the following impact of the reforms on the number of Tier 4 applications in 2013-14: ..... We estimate that if the Department's assumptions proved correct, the profit lost to sponsors who lose their licence would be, conservatively, some £30 million annually. Many organisations representing educational institutions expect the impact to be far greater, largely because of the effect of the loss of work rights on private sector colleges and the closure of the post-study work route on universities.....
One In, Two Out
Despite the scepticism summarised above, the Government's experience of OIOO was pretty positive. The benefit of OIOO may have been less than the raw figures implied, but it certainly seemed to slow down the introduction of new regulation and/or encourage the repeal of some old legislation. The bar was therefore raised in November 2012 when the rule became "one in, two out" or OITO. Again, only net direct business costs were counted, not the number of regulations, and EU legislation, taxes etc. remained exempt.
One In, Three Out
Following the 2015 election, Business Secretary Sajid Javid announced in March 2016 that the OITO test was to be replaced by ... OITO, where 'T' now meant three rather than two. And most regulatory activity was to be brought within its scope. Further information is in the detailed history section of this website.
Alice in Wonderland Figures !
I was not the only commentator who found it difficult to understand Ministers' claims that they had 'reduced regulatory costs for business by £10 billion during the 2010-15 Parliament'. An excellent NAO report in June 2016 explained how this was calculated and - just as important - what it did and didn't include.
First, the £10bn is calculated as follows. Let's say a regulation which costs business £20m a year is abolished in 2010. The saving over the coming five year Parliament is assumed to be 5 times this amount - £100m. Fair enough! But what happen if it is abolished in 2015 - during the last year of the Parliament? It is then still reported as £100m over the Parliament. That is a seriously weird way of reporting the figure.
A much better way of reporting the savings would be to take the annual savings as perceived by business - which started quite low but had built up to around £2.2bn over the five years to 2015. That is still a worthwhile saving - except ....
There are major exclusions before the net savings are calculated. These include massive areas such as:
- tax administration (particularly Income Tax, Corporation Tax and VAT),
- European Union regulation,
- the National Minimum Wage (see further below),
- the Living Wage (ditto),
- the Apprenticeship Levy,
- compulsory Workplace Pensions,
- fees and charges imposed by government or regulators, such as the fees paid by care homes to the Care Quality Commission.
The result of these exclusions is as follows.
2010-15: The NAO reckon that almost half (46%) of the 951 regulatory decisions made during the 2010-15 Parliament were not included in the estimated savings of £10bn. These 46% were estimated to have imposed annual costs of £2.8bn, rather more than the £2.2bn annual savings that had been achieved by the end of that period. In other words, the burden of regulation increased over those five years, not decreased.
2015-16: The Government claimed net savings of £0.9m during the period from the beginning of the next Parliament through to the date the NAO prepared its report. This however excluded the cost of the introduction of the National Living Wage (£4.1bn) as well as the increased minimum wage - adding another £3.1bn to businesses' costs. This was clear cherry picking of the measures that it chose to include in its targets. Other exclusions added up to around £0.8bn bringing the total to £8.0bn, a good deal more than the savings of £0.9bn!
The inclusions - those savings that are claimed by the Government - are interesting, too. Over 90% of the £10bn claimed savings 2010-15 was due to 10 changes, including:
- changing the inflation index used to increase pension benefits,
- reducing audit requirements for small companies, and
- streamlining the guidance relating to contaminated land.
These were hardly the sort of deregulation that would be appreciated by a typical small firm.
The inclusion - as deregulation - of a new law requiring larger retailers to charge £0.05 for each plastic bag was particularly odd. This counted as a regulatory saving of £1.0bn over five years because the shops would now spend less on buying the plastic bags. But was this really deregulation? As one MP noted: "we imposed this regulation on business to [make them] do something they were not previously doing, [and yet] we are claiming £1bn towards our target. That is like something out of Alice in Wonderland."
And note, by the way, that if this £1.0bn figure is excluded from the net saving of £0.9bn, there was in fact no progress at all towards the government's target during the 2015-16.
Note too that subsequent research showed that the gross proceeds from the plastic bag charge had been around half of the Government's first estimate, so the true five year saving to business (if it was a saving) was only £0.5bn. But the reported figures will not be revised.
Indeed, the NAO also pointed out that departments seldom monitor the ongoing impact of their regulatory decisions, And departments are supposed to evaluate their new regulations within five years of implementation - but they don't. 83 regulatory decisions were made in 2011. By 2016, only seven reviews had been scheduled of which only two had been completed.