The UK's rising tide of regulation

Last month was certainly Black October for those swamped by red tape. On 1 October employers, landlords, advertisers and innovators were hit by more than 50 new business regulations. But what is the cost of this tide of new regulations?

In 1997 competition, exchange rates, skill shortages, interest rates and controlling costs were all considered more pressing concerns for captains of industry than government legislation. Now it's a major gripe.

Last month was certainly Black October for those swamped by red tape. On 1 October employers, landlords, advertisers and innovators were hit by more than 50 new business regulations. There is a rise in the minimum wage from £5.05p an hour to £5.35p, an extension of paid maternity leave from six to nine months and age discrimination laws. There are new rules on fire safety that scrap fire certificates and instead companies will need to appoint a responsible person to ensure compliance. If a building and its fire strategy conformed to the previous standard, it may no longer be a defence in a civil court against a claim of negligence. Time and again the onus on compliance and responsibility shifts onto businesses instead of government agencies.

More than 50% of our regulations emanate from the EU.

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The accretion of EU legislation is truly astounding. In 1971, there were around 1,000 EU directives, regulations and decisions in force. This number hit the 5,000 mark in 1990 and 10,000 acts were in force by 1997. This cumulative total became 15,000 in 2001 and 20,000 in 2004.

And what about the costs? Gunther Verheugen the EU Enterprise Commissioner admitted earlier this month that the bureaucratic costs to business of complying with EU regulation, almost all to do with the Single Market Programme, is some €600bn a year. The ballpark figure for the UK would be around €100bn.

At present the EU produces roughly four pieces of legislation a week. You would have thought that was enough. If rules are needed for business, then they should apply equally across the EU, so any additional national regulation from Whitehall is superficial 'gold plate'.

However since the mid-1980s there has been plenty of scope for 'gold plate'. In order to push through the mass of 'single market' legislation, whenever 100% agreement could not be reached, Brussels passed frameworks and left individual countries to fill in the gaps. National departments like making their own laws, and being different. Being different flatters national vanity and gives the misleading impression of preserving national sovereignty. But, alas, we are lumbered with a second tier of regulation from home.

The hallmark of the Blair administration is the desire to legislate. If it sees an outcome it doesn't like, then its first instinct is to frame a law to prevent it happening. It uses a sledgehammer to crack a nut. Too often legislators take too little account of individual incentives and the unintended consequences of new regulations.

The collapse of Britain's occupational pension industry has been the biggest catastrophe to befall the City in a generation. The regulatory demands to make good pension fund deficits are costing shareholders far more than the Chancellor's much publicised £5bn tax raid in 1997.

According to Watson Wyatt, occupational and private pension fund deficits stood at £78.5bn for FTSE 350 companies as at 31 October 2005.

The traditional life companies were effectively put out of business by a House of Lords judgment in 2000. The Upper House forced Equitable Life to pay out bonuses that were always conditional upon investment performance as if they were contractual guarantees. In doing so the House of Lords totally misunderstood the nature of economic life. If you want a financial product with a predictable and guaranteed outcome, it had to be invested in bonds rather than equities. Over the long term bonds have delivered lower, though less volatile, returns than equities. And these low returns have made it impossibly expensive for companies to provide generous pensions that British workers used to enjoy.

Gone are the days when pension funds made asset allocation decisions based on their investment merits rather than to comply with the regulators. Once pensions were turned into contractual guarantees, the defined benefits pensions industry in Britain became defunct.

Life is inherently risky. If we demanded 100% security from the threat of terrorists, the costs would impoverish us all because every extra pound spent needs no justification and receives no scrutiny. Similarly the provision of generous defined pensions with contractual guarantees for all is prohibitively expensive:

Meanwhile, while company funds use scarce resources to shore up their defined pensions obligations, there is an even bigger threat to the performance of the productive sector of the British economy. It's the tide of corporate regulation generated by both Whitehall and Brussels. Unlike taxation, which is often a high profile issue, regulation is the insidious way to strangle the economy. More often than not the motives behind the regulations are laudable. But each imposes a cost in terms of wasted time complying with them and the economically inefficient company decisions that follow.

For governments, regulations are a convenient and cheap way of satisfying its interest groups, redistributing income and achieving wider social goals.

The minimum wage, for example, is effectively a tax levied on an employer paid directly to the employee. But regulations can be so insidious that people do not see it that way. Indeed, the costs of regulations are insufficiently visible to the legislators themselves.

Supporters of regulations tell us that the UK economy has thrived over the last decade. They point to those who warned that 'the sky would fall in' and unemployment would go through the roof if the minimum wage was introduced. But the point about regulation is that its costs are cumulative and delayed. The CBI notes that over the past nine years, 35 new employment rights have been brought in roughly four per year. Based on the Government's own 'regulatory impact assessments' these measures have cost employers a cumulative £37bn.

In the early days of new Labour there seemed to be an unwritten understanding between business and government.

If the government delivered stable economic growth with low inflation, business would put up with increased regulation. But although the government has largely kept its side of the bargain, businesses are increasingly unhappy. This reflects the cumulative or 'ratchet effect' of legislation.

Now according to the CBI three-quarters of employers believe that increased time spent on administrative compliance is having a damaging impact on their business. With the majority of employers dissatisfied with regulation we may be closer to a tipping point than many imagine. One of the consequences would be for hitherto law abiding employers to either close down or go underground. This would be dangerous. Historically the British have been highly law abiding. But if the demands of the state comes to be viewed as excessively onerous and unreasonable, then a culture of illegality could emerge.

The most likely tipping point is likely to occur in companies that hire less skilled labour. The minimum wage level has jumped by 27% since 2002. The question for the employer is: 'do you continue to hire legally and lose out competitively to companies that don't?'

This is a dilemma that faces us all when we are confronted by increasing demands to comply with government diktats while at the same time seeing lawbreaking being unpunished.

The alternative, if your company is large enough, is to take your business elsewhere. According to the CBI Britain has become significantly less competitive during the past five years as a centre for attracting and retaining large corporations. In particular there is a trend for US companies such as Google to base their European headquarters in Ireland, where the corporation tax is 12.5% compared to the UK's 30%. Indeed, HSBC has warned this month that it might move its headquarters overseas.

Meanwhile, at the household level regulation has become a subtle alternative to taxation. Take rubbish collection for example, which up until now was taken for granted as much as street lighting. Councils all over the place are trying to cut their refuse collection service from a weekly to a fortnightly one but with, of course, no commensurate cut in council tax.

Others are experimenting with new bins containing microchips so that rubbish can be weighed and big- rubbish households charged more. Faced with foul- smelling bins, a growing rat problem and the removal of one of the few visible services many councils provide, people are up in arms.

Britain recycles 23% of its waste; Austria and Belgium recycle more than half. Most ends up in landfill sites.

The EU directive on biodegradable waste calls for steady and large cuts, so that in 15 years' time only one-third of it will be bulldozed into landfill sites. That means more recycling. To force us to do that, the Government is putting pressure on local authorities; simply taking away our rubbish less often is meant to make us recycle more.

One inevitable consequence will simply be a smellier, dirtier country. Another is that people will load up cars and take their own rubbish to the nearest council dump more car journeys, more pollution, more queues.

Others, of course, will simply fly-tip it over the nearest hedge or even someone else's garden.

Of course there are other ways of reducing rubbish that goes into landfills without increasing public health concerns. By imposing regulation on the supermarkets the use of plastic bags has fallen by 90% in Ireland. A landfill tax on the packaging industry would also work.

But supermarkets are a special interest group while we, the silent majority, are not.

The last time a Labour government was defeated in a general election was in 1979. It lost against the background of images of rat infested, uncollected rubbish piling up during the winter of discontent, personal savings and pensions ravaged by double-digit inflation and punitive rates of tax that sent businesses and talent overseas.

The current Labour government may have an excellent record in industrial harmony and keeping inflation in check. But whether that's enough to keep them in power remains to be seen. For most political commentators the Government's Achilles' heel is its foreign policy, but it is in the area of regulation that this government has done the most damage to our prosperity. Because of this, the next election could once again be fought against a background of rat infested litter, inadequate pensions and an exodus of entrepreneurial talent.

Brian Durrant, for The Daily Reckoning

Editor's Note: A Cambridge economics graduate with nearly 25 years experience in the City, Brian Durrant is investment director of The Fleet Street Letter.

Brian has contributed to MoneyWeek with his expertise in investment strategy, for example how to quadruple your dividend income and how to navigate through the stock market in the 2008 financial crisis. He’s also touched on personal finance such as the housing market and the UK economy.