18  June 2010

In its second report on EU regulation, Open Europe’s analyses the cost of regulation in the UK since 1998, when the British Government began to produce Impact Assessments for regulatory proposals. Since last year, we have examined an additional 320 Impact Assessments, putting the total number of IAs studied above 2,300. This is arguably represents the most comprehensive study to date of the cost and flow of regulations introduced in the last eleven years.

The purpose is twofold: on the one hand, to measure the cost of regulation to the economy over the last eleven years, and, on the other, to measure the proportion of that cost coming from EU legislation.

Our research into the cost of regulation is divided into three categories:

  • The cumulative cost of regulation, which is the sum total cost of regulation coming into force since 1998
  • The annual cost of regulation, which is how much regulations adopted since 1998 cost the economy each year
  • The benefit/cost ratio of regulations

Key findings

Since our last report we have noticed evidence of genuine progress arising from UK and EU initiatives to cut down on and simplify regulations. While this is encouraging, there is still a long way to go.

Overall, the cost of regulation keeps going up year on year, and the economic downturn has added pressure for new, hastily formulated laws which risk adding unnecessary burdens on businesses and the public sector.

The cost of regulation keeps on going up

Annual cost of EU regulation
1998 £2131.7m
1999 £3588.6m
2000 £3751.5m
2001 £6267.7m
2002 £6873.7m
2003 £9317.2m
2004 £11962.2m
2005 £11761.9m
2006 £13820m
2007 £16588.2m
2008 £18108.9m
2009 £19288.3m

Annual cost of EU regulation to UK economy, 1998 - 2009 (2009 prices)

Source: Open Europe, UK Government

Since 1998, regulation introduced in the UK has cost the economy £176bn. Of this, £124bn, or 71%, had its origin in the EU. This means that EU regulation in the past eleven years has cost every UK household an average of £4,912.

The annual cost of regulation in 2009 stood at £32.8bn. For this amount, the Government could cut corporation tax by two thirds. Since the UK launched its ‘Regulatory Reform Agenda’ in 2005, the annual cost of regulation has doubled (up from £16.5bn).

59% of the cost arising from regulation in 2009 stemmed from EU legislation. In 2008, the equivalent figure was 65%. Over the last eleven years, on average, the annual proportion of the EU-derived cost is 72%. The proportion of EU regulation as a share of the total has tended to go down in recent years.

Domestic regulations are 2.5 times more cost effective than EU laws

We estimate the benefit/cost ratio of the regulations we studied at 1.58. In other words, for every £1 of cost introduced by a regulation since 1998, it has delivered £1.58 of benefits. However, the benefit/cost ratio of EU regulations is 1.02, while the ratio of UK regulations is 2.35.

This means that UK-sourced regulations deliver a benefit almost 2.5 times higher on average than regulations coming from the EU. For every £1 of cost, EU regulations introduced since 1998 have only delivered £1.02 of benefits. Expressed differently, it is 2.5 times more cost effective to regulate nationally than it is to regulate via the EU. This also means that EU regulations come dangerously close to failing an overall cost-benefit analysis.

This is a clear argument in favour of regulating at the local or national levels as much as possible, and an indication that deregulation efforts should be targeted at the EU level.

EU labour market laws account for 22% of the total cost of regulation

EU employment legislation introduced since 1998 has cost the UK economy £38.9bn. This means that 22% of the overall cost of regulations introduced in that period in the UK can be sourced to EU employment laws alone.

The previous Government’s claims to have cut the cost of regulation do not stack up

The last UK Government did take positive steps to increase the transparency and accountability surrounding regulation, and also improved the quality of its Impact Assessments.

However, while improvements have been made, the previous Government’s initiatives did not strike deep enough to have a lasting impact on the overall regulatory environment. 30% of businesses state that it has become more difficult to comply with regulation in the last 12 months – only 3% believe that it has become easier. In no small part, this is down to the failure to stem the flow of new EU regulations.

At the same time, the last UK Government’s claimed savings in regulatory costs do not match the figures we have extrapolated from its own Impact Assessments.

The Coalition offers hope – but need to turn their attention to EU regulation

The Conservatives have proposed a series of fresh regulatory reforms that are innovative and could cut the cost of regulation. However, they have chosen to focus their regulatory reform agenda almost exclusively at the domestic level.

This, in turn, could lead to contradictory or undeliverable policies since the Government will only have full control over 28% of the cost of regulation. The new Coalition Government therefore needs to make it a priority to set out how they intend to apply their domestic reform proposals to the EU decision-making process.

Some progress at the EU level – but cultural change in Brussels is moving slowly

The European Commission is pursuing some worthwhile initiatives to cut regulation. However, the prevailing culture in Brussels is still ‘more Europe means more regulation’.

The financial crisis and the recession have created a greater pressure for regulation that threatens to roll back the positive steps that the Commission has taken so far.Since 2003, the European Commission has only dropped four proposals following cost-benefit analysis.

Reform is possible: 30 ways to cut red tape

Fewer and better regulations would give Europe a massive economic boost. This is possible but a radical new approach is needed. We set out 30 ways to achieve this, with particular focus on strengthening the filters at the beginning of the EU’s decision-making process.

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