Counting the Cost of European Union Regulation, You Couldn’t Make It Up
The role of regulation in saving lives, enhancing public health and welfare, and protecting the environment rarely features in policy debates in the UK. More often, regulation is depicted as a social ill, which acts as a drag on enterprise, with ruinous implications for growth and employment over the longer term. This sort of thinking has driven British conservatism’s antagonism towards the European project, and has spawned a cottage industry of research that seeks to quantify the costs of EU regulation to UK business. In evidence to the Treasury Committee, the Campaign Director of Vote Leave, drew on estimates produced by the think tank, Open Europe, to claim that EU regulations cost the UK economy £33.3 billion per annum. This figure, based on UK impact assessment data, gained a lot of political traction, but was never seriously stress-tested, even though monetary estimates of the benefits accruing from EU-derived regulations drawing on the same data source were heavily criticised.
Aggregate estimates of the costs and benefits of EU-derived regulations provide the evidential grist to calls for regulation to be scaled back once the UK formally leaves the EU. What though should we make of them? How confident can we be about cost and benefit estimates in UK impact assessments, and can we be certain that EU-derived regulations are so spectacularly poor at producing benefits?
Questionable Estimates of Costs
Estimated costs and benefits in impact assessments are notoriously shaky. This partly reflects the difficulties in obtaining reliable data upon. We looked at a sample of labour-related impact assessments reported in Open Europe’s analysis of the most costly EU-derived regulations and found that many of the estimates relied heavily on assumptions based on either weak or inconsistent data.
In the absence of bias, uncertainties arising from poor data, or other unknowns, in impact assessments – such as projected levels of compliance, or how business may innovate, learn and adapt in response to regulation – would have little bearing on the validity of studies which seek to aggregate estimated costs and benefits. In practice though, the best available evidence – studies comparing impact assessment cost estimates with actuals in post-implementation reviews – suggest a systematic bias towards the overestimation of future costs.
One explanation for this concerns the information asymmetries between regulated businesses and policy actors. In assessing the potential economic impact of policy decisions, policymakers are often imperfectly informed about the potential economic impacts of policy decisions and are dependent on information from potentially affected businesses. Relying on business estimates as a measure of actual costs assumes that businesses know the precise impacts of policy proposals and that they can be relied on to provide accurate information on these impacts, despite having a material interest in the outcome of policy proposals and an incentive to provide estimates at the high end of the range. In our sample, businesses were often unable to provide even the most basic information. Where they did, their information and estimates tended to be equivocal or were produced using opaque or questionable methods. More to the point, business data do not seem to have been systematically verified by government officials, meaning there is little disincentive for overestimation.
In short, whilst impact assessments may be a useful tool for encouraging policy actors to think about the implications of policy proposals, they are unlikely to provide accurate predictions of actual costs.
Questionable Estimates of Benefits
Aggregate estimates typically employ a rigid approach to allocating costs and benefits between different groups: costs are borne by businesses, whereas benefits are enjoyed by other dependent constituencies, such as workers, the public, and government. This binary approach can be misleading. In practice, regulations can also benefit businesses which works to offset some of their combined costs. Almost all the regulations in our sample provided at least some benefits to business, although these were neither systematically reported nor costed.
More importantly, benefits to workers, business, and government were routinely overlooked. This compounds technical problems in monetising benefits, which are often complex, multi-causal, difficult to measure, long-term, and not priced in the market. Data concerning the impact of working conditions on occupational health are also widely understood to under-report the effects of corporate activity on human health and welfare, which limits the measurable, and, therefore, monetisable pool of potential benefits a proposed regulation can deliver. In our sample, benefits were rarely monetised systematically (1 in 11 impact assessments).
Zombie Economic Ideas and the Continued Fixation on Supply-Side Reforms
The political constituency that formed around the Leave Campaign continues to extol the economic advantages of the regulatory flexibility offered by the Referendum result and has advocated that key environmental and social regulations should be repealed or radically scaled back. This conviction in the economically ameliorative potential of competitive deregulation is puzzling given the huge uncertainties in the likely costs and benefits of EU-derived regulation, the UK’s limited ability to differentiate itself from other OECD countries through further deregulation, its extant international commitments, the needs of its largest companies to maintain access to the EU, or econometric analyses, which generally associate the UK’s membership of the single market with higher growth, increased foreign direct investment, and higher average incomes. Simple economic interests provide part of the answer. Although the pragmatic position taken by the Confederation of British Industry (CBI) stresses that the advantages of access provided by regulatory equivalence outweigh the costs, the CBI also recognises the value of regulatory divergence over the longer term. Equally, we should not discount the independent effects of deeply held philosophical assumptions about the rights of business, the appropriate role of the state in market economies, and the primacy of capital accumulation. At their heart, regulatory debates are discussions about who should bear the costs and reap the benefits of economic activity. Many regulations have a redistributive effect, transferring resources from businesses to workers, the public, government, and future generations. Political-moral objections, based partly on the scepticism of the social value of redistributive politics and partly on the idea that “politicians have grabbed regulation as a ‘free’ way to increase social benefits without the transparency of taxation”, are embedded within a certain way of thinking among British élites about the social value of regulation.