21 March 2016

During yesterday’s Treasury Select Committee evidence session with Vote Leave Campaign Director Dominic Cummings there was an exchange with Committee Chairman Andrew Tyrie over the cost of EU regulation and specifically Open Europe’s estimates. You can find the video here and the discussion starts almost immediately. You can find our full analysis of the EU’s top 100 costliest regulations here, and in the pdf below.

The dispute focuses on our view of the benefits of EU regulation and whether they have actually been realised. There is particular focus on this paragraph:

According to the IAs, these regulations also provide a total benefit of £58.6bn a year. However, £46bn of this benefit stems from just three items, which are vastly over-stated. For example, the stated benefit of the EU’s climate targets (£20.8bn) was dependent on a global deal to reduce carbon emissions that was never struck. In fact, Open Europe estimates that up to 95% of the benefits envisaged in the impact assessment have failed to materialise.

In retrospect, this could have been worded more clearly. However, for clarity, the 95% figure refers only to the forecast benefits of the Energy and Climate Change package (hence the use of the term ‘the impact assessment’ singular). So in that sense Tyrie was correct in his interpretation.

The more detailed estimate of how this was reached is laid out in our report into the EU’s energy and climate change policies. Looking into the impact assessment (IA), what we found was that the projected benefit was reliant on the assumption that a global deal on reducing emissions was agreed (around 2009) and that the EU was instrumental in striking that deal. Clearly neither of these has materialised. It is clear from the IA that the majority of the benefits which accrue do so thanks to a global deal to tackle climate change and the UK’s share of gains from that. Since this has not happened, only localised benefits can be considered to have accrued, which we back out to be around 5% of the headline benefits based on the IA.

The main thrust of our argument though is that the IA of this incredibly costly regulation/policy is based on outdated assumptions and has little bearing to reality – a widespread problem with the impact assessment of EU derived regulation, both in the UK and elsewhere. There may well be benefits from this policy but we cannot tell that from the IA and based on the IAs own assumptions, the majority of the benefits they identified have not materialised (this is explained in more detail in Section 2.1 in our paper on the issue).

This is not to say that the benefits of other costly regulations are without reproach and have been fully realised. We have also previously raised some questions about the headline recurring annual benefits from Capital Requirements Directive IV (CRD IV) as laid out in the impact assessment. We noted in our 2013 assessment that:

The Bank of England’s impact assessment gives an estimate of the cost of the specific CRD IV package, but notes that “it is not possible to disaggregate the benefits of the CRD IV package in isolation from other measures taken in response to the crisis” – which suggests the benefit figure of £15.3 billion stated in the impact assessment could be inflated. In addition, the Bank of England does attempt to model the net benefits of CRD IV, but the impact assessment estimates that the impact of these regulations could range from a net cost of £2 billion to a net benefit of £23 billion – illustrating the high degree of uncertainty in calculating a benefit from CRD IV.

In the same assessment we also looked at the Payment Services Directive (recurring benefit £9.6 billion a year) and noted:

A recent evaluation of the Payment Services Directive (PSD), carried out at the request of the European Commission, noted that “qualitative information gathered through the surveys of stakeholders undertaken for the current project suggests that the impact of the PSD on fees and charges for payment services appears to be small, ranging from nil for many stakeholders to a small decrease.” Although the evaluation does not assign a clear figure to the benefit or costs of the PSD, it notes that “the impact of the PSD on competition in the payment services market has been limited.” While the report does record plenty of benefits of the PSD, it has clearly fallen short in some key areas. Therefore, overall benefits are likely be lower than forecast. The Commission’s drive for a revamped Directive suggests more needs to be done to achieve the goals of the original PSD.

Between them, these three account for much of the recurring annual benefits – £46.02bn out of the total of £58.6bn. Hence why we believe it fair to raise questions about how precise and valid (particularly today) those estimates are.

All that said, once again for clarity, the precise estimate of 95% of the benefits not being realised only refers to the Energy and Climate package. It is hard to be precise on what level of benefits have or have not been realised from CRD IV or the PSD.

Post Brexit savings from deregulation

Obviously, part of the point of this whole discussion is to try to figure out the burden of EU regulation and how much of it could be removed post-Brexit. In our original economic assessment of Brexit and in our recent follow up report on a guide to making Brexit work we looked in more detail at potential deregulation scenarios. This work was cited by Tyrie as well.

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As the table above shows, what we found is that it is unlikely that the full £33.3bn per year would be saved. We estimate a ‘politically feasible’ deregulation would deliver a saving of around £12.8bn per year. Even here though the savings come in controversial areas and would involve changing social employment and workers’ rights regulations, a huge shift away from our current climate change approach (where the UK has gone further than the EU in many areas) and a more deregulated approach to overseeing parts of the financial services sector. A more extreme scenario could deliver high gains but would involve even tougher political choices. This is not to say that there are no other potential (non-economic) benefits from the UK regaining control over parts of regulation, but our assessments have been focused on the economic points.

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