Counting the Cost of European Union Regulation, You Couldn’t Make It Up

Gary FooksTom Mills

The fact that strong, well-designed regulation can save lives, enhance public health and welfare, and protect 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 produced a vibrant cottage industry of aggregate estimates of the costs of EU regulation to British 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, was never seriously stress-tested. By contrast, the benefits of key regulations were described as “vastly over-stated”, with Open Europe claiming that in respect of more than half, there were “no clear benefits”.

There is a real risk in simply dismissing these claims as little more than artefacts of a campaign characterised by dubious assertions with little relevance to the present. Open Europe though appears to have been reasonably systematic in its calculations. More importantly, aggregate estimates of the costs and benefits of EU-derived regulations based on similar methods have been instrumental in shaping political thinking in the UK and 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
The US Office of Management and Budget has described cost estimates in impact assessments as “no more than an informed guess”, which “may or may not prove to be accurate, once real-world experience with the rule is accumulated and analysed”. This partly reflects the difficulties officials encounter in obtaining reliable data. 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 some cases, assumptions appear to have been made with reference to no data at all. Take the Road Transport (Working Time) Regulations 2005, which establish a working time ceiling for transport workers. Just under half of employers claimed that new vehicles would be required once the regulations took effect. But no evidence was cited on either the number of, or length of time for which additional vehicles would be required. Nonetheless, the impact assessment provided an “illustrative” cost, assuming an extra 12,600 vehicles would be required, each leased for six months at £500 per month.

In the absence of bias, uncertainties arising from poor data, or other unknowns, in impact assessments 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 is 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. Information and estimates provided by businesses 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. Occupational health and safety regulations, such as The Control of Vibration at Work Regulations 2005, that reduce worker discomfort, absences, turnover, and early retirement, for example, increase worker and business productivity, and reduce business administrative costs associated with absenteeism, recruitment and retraining. 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 in our sample were routinely overlooked. Lack of attention to benefits also compounds technical problems in monetising benefits, which are often complex, multi-causal, difficult to measure, long-term, and not priced in the market. This problematises their monetisation and may also lead to them being out of scope of impact assessments, where the typical appraisal period is ten years.

Problems of quantification are exacerbated by a dearth of impact assessment-ready evidence, which reflects the political economy of research on issues relating to regulation. 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. The effect is that systematic monetisation of benefits is rare (1 in 11 of the impact assessments we reviewed).

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 is despite the fact that the best available measures suggest that the UK has the second least regulated product markets in the OECD, and employment protection legislation that is only marginally more restrictive than the US or Canada, less so than Australia, and far lower than other European countries in the OECD.

This conviction in competitive deregulation as the best means of insulating the British economy of the destabilising effects of Brexit 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 Confederation of British Industry (CBI) stresses that the advantages of access provided by regulatory equivalence with the EU outweigh the costs, it nonetheless recognises the value of regulatory divergence over the longer term. In practice, business associations will tend to lobby on the basis of their membership is likely to experience regulation in the short term, which may, or may not, reflect the longer term collective interests of the economy and society. 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.

Either way, the methodological weaknesses of aggregate calculations of the cost of EU-derived regulation suggest that their key significance resides less in what they can tell us about the relationship between regulation, business performance, and public welfare, and more in what they suggest about the interdependencies between the economisation of public policy, the fungibility of impact assessment data, and the political market for contemporary policy-relevant knowledge. Impact assessments represent a key component of government efforts to embed economic rationality into every-day routines of policymaking. They seek to standardise how government intervention in the economy should be perceived and evaluated and have become an authoritative basis for the deliberation of policy: partly because they represent a genuine attempt to systematise the evaluation of projected effects and place an emphasis on numerical values, which implies precision, but also because of how they are governed. Impact assessment methodologies rest on the disciplinary practices of microeconomics and are policed by new administrative institutions, such as the Regulatory Policy Committee, which determine which data government departments should collate, from whom, and how they should be interpreted. This framework has progressively reinforced their status as trusted measures of policy effects, but, at the same time, provides a basis for their misappropriation by rendering their assumptions, biases, and uncertainties relatively inaccessible to independent scrutiny. Opacity to summary analysis, in conjunction with the availability of multiple (and incomplete) numerical values creates a fungible pool of data for policy reappraisal, which affords various representations of policy proposals that can be spliced and interpreted in different ways to suit the political programmes of different constituencies. In this respect, aggregate analyses are as much a measure of desired direction of political travel, as a statement of the problems of the British economy. In practice, they compete for political space with other ideas for boosting productivity and competitiveness which are likely to have a more benign effect on social inequalities and environmental protection (such as addressing skills shortages, underinvestment in research and development, overinvestment in property, and public investment in green technologies) and drown out the implications of other sources of data, such as those provided by the OECD, which point to the limits of deregulation as a means of boosting economy wide growth and competitiveness.