Evaluating Regulation in the Brexit Debate

Placing a value on the UK’s regulatory flexibility after Brexit should be key to informing the policy choices that need to be made by Parliament. But the government has adopted conflicting positions. It has told one story for general consumption and another in the Brexit debate. Which is right? 

What is the value to the UK economy of the ability to set its own rules after Brexit? How much could be saved in costs to British business if unnecessary regulations were repealed and bad regulations replaced by better ones?

These questions are fundamental to the debate about what type of Brexit the UK should be working towards – or, for some people, whether it should still be working towards Brexit at all – but it is hard to find any convincing answer to them. The UK government appears to have no coherent position on the issue.

Why the question matters

In the referendum on 23 June 2016, the British people told their elected representatives that the country should leave the EU, but left to the politicians themselves the question of how exactly this should be done.

In the light of this there are competing conceptions of what Brexit can, or should, mean. But if it has any real meaning at all, it must at its core involve foregoing the benefits of EU membership for the sake of the greater freedoms that come with being outside the Union – in particular, freedom for the UK to conclude trade deals with other countries, and (which is my concern here) freedom to regulate businesses within its territory as it thinks best. In the public debate, these are usually grouped together under the collective term ‘sovereignty’.

There are differing degrees to which the UK’s freedom to set its own regulatory policy – its regulatory sovereignty, in effect – can be restored, depending on the terms on which it chooses to deliver Brexit.

At one extreme, it can achieve total regulatory discretion at the cost of heavily disrupted trading arrangements with the EU 27 (a no-deal Brexit); at the other, it can maintain the smoothest possible terms of trade at the cost of even less control over regulatory policy than it has as an EU member (the ‘Norway plus’ option). Making an economically rational choice between these options requires an understanding of the value to be placed on the freedom to set regulation at a national level.

It might be assumed that during the period since the referendum politicians would have taken care to evaluate the options thoroughly. But this assumption would be misplaced.

There is no coherent information emerging from Whitehall as to the value of the UK’s regulatory discretion post-Brexit. In fact, the government finds itself caught between two inconsistent narratives, and has made no attempt to resolve the conflict between them.

Narrative 1 – regulation as a burden

For most of the last decade, the government’s position has been that regulation – which in this context it likes to call ‘red tape’ – is a burden on business that both can and should be progressively reduced. David Cameron famously promised (during a 2011 speech to the Federation of Small Businesses) that his would be ‘the first government in modern history to have reduced – rather than increased – domestic business regulation during our time in office‘.

Initially, delivery of this pledge took the form of a promise that for every new regulation introduced, one would be removed – One-In, One-Out. In due course, that became One-In, Two-Out.  Later it turned into One-In, Three-Out. By this latter stage, it was no longer just a policy commitment, but was underpinned by legislation at Part 2 of the Small Business, Enterprise and Employment Act 2015.

In order to achieve these increasing targets, the range of public authorities subject to the policy had to be extended beyond the main government departments; under the Act it now includes many of the statutory regulators. Together, these branches of the executive are set a ‘business impact target’ for reducing regulation, determined by the government to apply during the life of each parliament (section 21 of the Act).

Because it is absurd to think of the quantity of regulation as a matter of how many words there are on the page, the business impact target has been expressed in monetary terms. The target for the lifetime of the current parliament is £9 billion, which represents the value of net costs to business by which the government aims to reduce the ‘regulatory burden’ over the period 2017-22.

But evaluating the net cost of regulations is a complicated business, so in service of this policy an elaborate Whitehall machinery has been set in motion, the somewhat baroque workings of which are summarised in the Better Regulation Framework Guidance. This is a bureaucratic shadow world of regulatory impact assessments, post-implementation reviews, and small and micro business assessments. With presumably unintentional irony, it even has a regulator of sorts – the Regulatory Policy Committee, whose main remit is to scrutinise the work of civil servants to ensure that they are not making-up the numbers, or just doing a poor job of calculating them.

Despite the relative sophistication of its implementing bureaucracy, the attitude towards regulation which underlies this policy is too simplistic and reductive to provide a sound theoretical basis for controlling the excesses of the regulatory state. However, it would be a mistake to expect too much of it, since it exists primarily on the plane of politics rather than of rational public administration. In this context it is noteworthy that, when Donald Trump became President of the United States he adopted his own version of the One-In, Two Out rule, imposing it on the US federal government via an early Executive Order. This fact may assist readers to locate its position on the political spectrum.

However, this is not the place for a critique. For present purposes it is sufficient to notice that the policy exists, that it constitutes the government’s dominant narrative about the burden of regulation, and that it has done so for the best part of ten years.

Narrative 2 – regulation as cost neutral

Fast forward to the Brexit debate now taking place. One feature of the government policy described above is that regulatory provisions ‘that implement new or changed obligations from European Union Regulations, Decisions and Directives‘ are excluded from the scoring against the business impact target (see the government statement made for the purposes of section 22(2) of the 2015 Act).

This is for the good reason that the UK has no choice over these provisions, being bound to give effect to them under the EU Treaties. Consequently they cannot form part of the body of discretionary national rules and regulations which is otherwise assumed capable of being cut back in order to reduce the burden on business.

However, after Brexit, this limitation no longer holds true, in particular in any ‘no deal’ scenario when all bets are off and the UK can regulate (or not) as it chooses. Regulations which exist solely for compliance with EU law are suddenly brought within the ambit of the ‘red tape’ policy and able to be revoked, moderated or improved just like any others.

In principle, consistent with its long-held position on the regulatory burden, one would expect the UK government to welcome this and see in it the possibility for Brexit-derived gains to the economy. However, nothing of this nature is found in official publications.

On the contrary, in its November 2018 paper ‘EU Exit – Long-term economic analysis‘, HM Treasury adopts two positions in relation to regulation.

The first is that the cost of adopting new EU regulations in future is zero (paragraph 63). Plainly this is incorrect. The paper justifies it on the basis that it is a mere snapshot of the present and does not attempt to evaluate how EU regulation will evolve (paragraph 25). However, if anything in life can be said to possess the same certainty as death and taxes, it is that EU regulation will increase over time. Therefore all this means in practice is that the Treasury has made no attempt to cost the future regulatory burden that would be avoidable under certain forms of Brexit.

The second is that the value to the UK of ‘regulatory flexibility‘ in relation to the current body of EU regulations is no more than 0.1% of GDP (roughly around £2 billion). For the purposes of this the Treasury notes that a range of forecasts put the avoidable costs of EU regulation somewhere in the range 0% – 1.3% of GDP, but offhandedly dismisses all those towards the higher end of that range (paragraphs 57 – 61). It is self-evident that the Treasury has conducted no analysis of its own. It settles on 0.1% not because it has any underpinning for that number, but because it realises that it cannot credibly state zero and, for ‘illustrative‘ purposes, must acknowledge the existence of at least some scope for ‘relative regulatory efficiency‘ (paragraph 62).

In short, HM Treasury comes as close as it feels it can, without complete embarrassment,  to saying that the benefit to the UK economy of having sovereign control over all (current and future) regulation that falls within the scope of EU law is zero.

Reconciling the irreconcilable

How is it possible to reconcile narratives 1 and 2 – the contentions (1) that UK regulation is a burden on business, eminently suitable for progressive reduction over time, and (2) that EU regulation is an inevitability subject only to scope for minor efficiency gains?

Logically, there are three possibilities –

(A)  The government’s long-term policy on reducing regulatory ‘red tape’ on business significantly overstates what is being or can be achieved.

(B)  The Treasury’s assessment of what can be done to reduce the burden of existing and future EU regulation, when acting under conditions of post-Brexit regulatory flexibility, significantly understates the potential for savings.

(C)  There is something different in character between existing UK and EU regulation which makes one suitable for reduction when the other is not.

These are not mutually exclusive. In reality, there is something to be said for all three.

First, the ‘red tape’ policy is essentially a matter of political virtue signalling to part of the business community. There is something in it, of course – there is plenty of unnecessary and badly-designed regulation around. However, for all the sophistication of the way it is implemented, its impact is not nearly as large as the claims made for it.

Second, the Treasury’s assessment of post-Brexit economic models is not a dispassionate analysis of the potential outcomes, but a politically-inflected document designed to warn away from a ‘no deal’ Brexit and promote support for Theresa May’s EU deal (the effects of which it curiously did not model, as the Treasury Select Committee has pointed out).

Without question, the careful and professional civil servants who drafted this document made sure that it contained all appropriate caveats and statements of limitation. But it served its political purpose the moment it generated the headlines required, in tandem with the no-deal ‘worst case scenario‘ published on the same day by the Bank of England. Very few people read the small print (or, apparently, could grasp the difference between a scenario and a forecast). In any event, the fact remains that the Treasury has made no meaningful attempt to evaluate the burden of, or potential savings from, current and future EU regulation.

Third, the body of EU regulation is not obviously fertile ground for boosting the economy via One-In, More-Out style policies. Aside from the regulation that the UK would be likely to retain under any post-Brexit government (e.g. various environmental, employment and consumer protection regulations) there is the reality that companies doing business with the UK’s largest and nearest trading bloc will be motivated to use its standards (e.g. on product safety, data protection, compatibility of networks) whether UK law requires it or not. It is certainly not credible to act as if EU law, unlike its domestic equivalent, is uniquely resistant to the potential for reducing or improving regulation. But nor should crude assumptions be made about its capacity for de-regulatory gains.

Ultimately, there are many more aspects to the vexed question of sovereignty than are dreamt of on an economist’s spreadsheet. Even so, economic evaluations are essential to sound policy-making. Somewhere in the matrix of all of the above factors there is room for a genuine and unbiased estimate of the value to the UK of its regulatory flexibility after leaving the EU, under the various options available to it for doing so.

It says a great deal about the nature of the Brexit debate that we do not have it.