Understanding Regulation

Facts, Analysis and Comment

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.

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. DTI 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 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.

Regulatory Budgets

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:

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.

Possibly the main criticism was that the approach is 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:

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.