Regulators have expanded massively over the last 50 years, in terms of headcount, expenditure and scope. This has created a risk aversion ratchet which is hampering growth and damaging democracy – there is another way, says James Vitali
Over the past fifty years, a silent revolution has taken place in the British constitution. While central government’s direct stake in the economy has largely been excised, power and responsibility have increasingly been outsourced to a series of bodies and agencies which are having a growing influence on our society.
These developments have had profound implications for our economy. Of course, there are the direct costs of funding the regulatory state which need to be accounted for. Policy Exchange has studied seven of the UK’s largest regulators and found that the average increase in headcount over the last decade was eight per cent, and that the majority had increased their annual expenditure – with the Competition and Markets Authority and Financial Reporting Council increasing theirs by more than 70 per cent.
The average increase in headcount at the UK’s largest regulators over the last decade was eight per cent while the Competition and Markets Authority and Financial Reporting Council have increased expenditure by more than 70 per cent
But more widely, the increased regulatory burden is perhaps the single most significant challenge our country faces if we are to improve productivity. The cumulative weight of rules and requirements has placed a ceiling on productivity growth by reducing competition, curbing innovation and creativity, and forcing a shift within businesses away from wealth generating activities. And it is not just the private sector which has been affected. Our doctors, nurses and police officers are being dragged away from doing the job they signed up to do in order to complete compliance procedures.
The rise of the regulators is also introducing a democratic deficit into the way we generate the rules we all live by. After examining over a thousand individual pieces of secondary legislation introduced over the last decade, Policy Exchange research found that more than eight in ten were not accompanied by a proper impact assessment. The fact is, we have little real idea of the cumulative impact of regulatory proliferation.
An increasing number of policymakers and parliamentarians seem to be aware of these concerning trends. Indeed, the Prime Minister and Chancellor have both spoken generally about their support for reform. But successive governments have largely failed in this enterprise. Why?
The risk aversion ratchet
In my latest Policy Exchange paper, The Rise of the Regulators, I show that the UK’s regulatory framework is driven by what I call a “risk aversion ratchet” – a dynamic by which the regulatory rulebook has experienced almost unchecked growth for decades, imposing increasing costs on businesses, stultifying innovation and economic activity and rendering the lives of public servants and professionals increasingly miserable.
There are three components to the regulatory risk aversion ratchet. Firstly, a political culture that is increasingly “safetyist”, which privileges risk-mitigation and security over other imperatives, and which expects the government to eliminate risk from people’s lives. Secondly, a bureaucracy in which it is remarkably easy and ostensibly “cheap” to generate new regulations. And finally, a complete lack of incentives to remove redundant or pernicious regulations from the rulebook. The interaction of these three components is the chief reason for regulatory proliferation in the UK.
Reversing this risk ratchet is essential if we are to build a more prosperous Britain and improve our public services. But too often, policymakers look at a problem, theorise it, and devise a solution based upon that theory.
Instead, the government should look to the empirical evidence offered by governments that have instigated successful reform programmes in the past. In British Columbia, the regulatory code was cut by 37 per cent in three years through departmental regulatory budgets. In Germany during the 2010s, a comprehensive database of the regulatory rulebook increased transparency and accountability. The UK coalition government’s use of gateway conditions and the ‘red tape challenge’ drove a £14.59bn reduction in the regulatory burden between 2011 and 2017 when adjusted for inflation. In the US states of Idaho and Texas, the use of sunsetting for both individual regulations and agencies themselves has had a remarkable disciplining effect on the regulatory state.
In our report The Rise of the Regulators, we propose a coherent strategy to rewire the incentive structures that our regulators operate within and reverse the risk aversion ratchet. It is informed by international evidence, and includes the restoration of a one-in-two-out gateway condition for new regulations, a new challenge function for erroneous impact assessments, the wider use of sunset clauses, and the creation of a comprehensive register of regulatory requirements. If introduced, our package of recommendations would help stem the flow of new regulations, bear down on the existing stock of rules, and deliver better regulation in the future.
The removal of regulations prohibiting a certain behaviour is not the same as inducing people to behave in that way. And to seek to cut regulation in general is not to be ignorant of risk, but to believe that some scope for risk taking is permissible and indeed necessary to the healthy functioning of any society
A false dichotomy has developed in the minds of many between “compassionate” regulation and “callous” deregulation. The safetyism that undergirds this view might feel good in the short term. But it is a cancerous doctrine which will make our society poorer, less free, and less innovative. The desire to reduce regulation is not ignoble or uncaring. The removal of regulations prohibiting a certain behaviour is not the same as inducing people to behave in that way. And to seek to cut regulation in general is not to be ignorant of risk, but to believe that some scope for risk taking is permissible and indeed necessary to the healthy functioning of any society. Our political leaders urgently need to start articulating this case.
The Prime Minister and Chancellor have staked their political fortunes on delivering growth. They are right that this is ultimately what the government will be judged on. Reversing the UK’s risk aversion ratchet could be the difference between success and failure.
James Vitali is Head of Political Economy at Policy Exchange