Thursday, April 07, 2005
When does red tape start to strangle?
Posted by David Smith at 08:29 PM
Category: David Smith' s magazine articles

The great economist Adam Smith, who had a cynical attitude towards the motivations of businessmen, once wrote that whenever they got together “the conversation ends in a conspiracy against the public, or in some contrivance to raise prices”.

These days, of course, the prospect of the Office of Fair Trading breathing down your neck means that when businessmen get together they emphatically do not discuss this kind of thing. It is a fair bet, however, that seldom do they meet and the conversation not turn to regulation and red tape.

Red tape is not confined to business. All aspects of our lives have become more regulated, and thus more complicated. The evidence is indeed that we live in a more litigious society, despite the fact that in most respects we lead safer and healthier lives than ever before.

But for business, red tape and regulation is more than an irritant. It costs money and, in some cases, it means that some things are no longer viable. And it is getting worse. According to the British Chambers of Commerce’s ‘Burdens Barometer’, published recently, the cumulative cost to firms of regulations introduced since 1998 is now £39 billion.

This figure is not snatched out of the air. It is compiled by academic experts Francis Chittenden and Chanyeon Hwang of Manchester Business School, together with Tim Ambler of the London Business School and, crucially, all the numbers are extracted from the government’s own estimates in so-called regulatory impact assessments (RIAs).

The £39 billion cumulative cost, in fact, is likely to be an underestimate. It is the cost of the 46 major regulations introduced by the present government (or European Union directives implemented during their period in office). Smaller regulations and some significant policies – most notably the national minimum wage (which is due to rise to £5.05 an hour in October, and £5.35 next year) are excluded.

The really costly regulations included in the calculation are the working time directive, with a cumulative cost of £13.6 billion; the vehicle excise duty (reduced pollution- regulations, £5.5 billion; the data protection bill, £5.3 billion; the control of asbestos at work rules, £1.4 billion; the disability discrimination regulations, £1.2 billion; the so-called National Insurance service provision through intermediaries rules, otherwise known as IR35, also £1.2 billion; and the flexible working (procedural requirements) regulations, £0.7 billion.

“British businesses are fed up with the spiralling costs of regulation,” says David Frost, the BCC’s director-general. “Businesses must be free to compete in the global economy. They simply cannot afford to be held back by the mounting costs of complying with regulation. As well as the cost, firms tell us all the time that they are spending too long dealing with paperwork and trying to get their heads around each and every regulation. Small firms say it takes large chunks out of their day, when they should be concentrating on running their businesses.

“While we recognize the need for proportionate regulation, the government must ensure that new regulations are well targeted and business friendly. Unnecessary burdens are not a sustainable option for our firms.”

Many would agree with his diagnosis, and with his concern that, on top of this, the proposed increases in the national minimum wage will hit firms in certain sectors – usually those already struggling to compete – hard. Red tape and regulation, together with the widespread perception that this is a government that does not really understand how business works, has been the bugbear of companies for the past few years.

What is harder, however, is to demonstrate the damage that this onslaught of red tape is causing. If we look at the big numbers for the UK economy – fifty consecutive quarters of economic growth (a record), record employment and the lowest unemployment for 30 years and, just recently, a revival for business investment, it is hard to claim that this is an economy hamstrung by over-regulation. Britain’s performance, in fact, is demonstrably superior to the euroland average, in spite of our having acquired a lot of new EU regulations over the past few years.

It would be wrong, though, to conclude from this that no damage is being done. The first point is that we do not know what would have happened in the absence of this additional red tape. Britain has done pretty well in comparison with the rest of Europe but less so in relation to other “Anglo-Saxon” economies such as America and Australia. It may be that the re-regulation of the UK economy is to blame for this.

The second key point is that these things take time. It took until well into the 1990s before the labour market reforms introduced when Margaret Thatcher was in office began to show through in improved flexibility. For some thing, there may be a 10-15 year lag between changes being introduced and their impact. By the same token, the red tape now being introduced may not have an adverse effect on the economy until after 2010. And by that time, there will still be plenty of people around ready to say: “I told you so.”

From British Industry, March 2005

Comments

The trouble with BCC and CBI opinion surveys and the like is they rarely ask businesses to rank all of the challenges facing their business and to specifically identify and quantify the consequences of regulation/red tape burdens. So we are left with little idea of how to qualify the voracity of their claims.

The surveys can often be little more than rudimentary surveys of perceptions and opinions.

Lets take the example of skill shortages - widely reported in the press to be rampant. But several years of evidence (the Employers Skills Surveys) from 75,000 odd employers in the latest incarnation (2003) reveal Skill Shortages to be a moderate problem. Once proper research is done, the hype can be tackled, the specific problems can be identified. In the case of skills shortages - not a major problem for each and every business, but where they were acute for certain types of businesses, research told us that they significantly negatively impact performance.

How far is the "red tape burden" hype, and how far is it reality? what are the measurable impacts on a businesses performance - which may go well beyond the costs of compliance and payment - for example the business may lose orders because too much time is spent on compliance.

I also have another big question relating to tax: is it the cost of compliance, or the cost of paying the taxes that is the burden? if it is compliance - what can be done to reduce compliance costs?

Posted by: Glenn at April 13, 2005 03:27 PM