16 March 2015

Cost of EU red tape to UK economy hits £33.3bn

As regular readers will be aware, cutting EU red tape has been a subject close to our hearts here at Open Europe and our latest briefing, the latest installment of our ongoing Brexit series, finds that according to the UK Government’s own regulatory Impact Assessments (IAs), the cost of the top 100 EU-derived regulations to the UK economy has hit £33.3bn per year. This is a significant cost, exceeding the £27bn the Treasury expects to raise in revenue from Council Tax in the current (2014-15) financial year.

While regulation is necessary and comes with benefits including facilitating cross-border trade within the single market, the cost of regulation is too high relative to the benefits. This is particularly true in the area of social and employment laws which has virtually no cross-border relevance and yet affects the whole of the UK economy including the public sector.

According to the IAs, the top 100 EU-derived regulations provide a total benefit of £58.6bn a year. However, £46bn of this stems from just three items, and the benefits 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 emissions which was never struck. In fact, Open Europe estimates that up to 95% of the benefits envisaged have failed to materialise.

Our research finds that UK ministers signed off at least 26 of the top 100 EU-derived regulations despite the IAs explicitly stating that the costs outweigh the estimated benefits while a further 31 of the costliest EU-derived regulations have not been quantified. Between the over-stated benefits, the regulations that impose a net cost and those with unquantified benefits, it remains unclear how many of these EU-derived rules genuinely come with a net benefit. This begs the question of why they were adopted in the first place, and demonstrates that there is plenty of scope to cut regulatory cost to business and the public sector.

The ‘Norway option’ offers minimal scope for deregulation

While red tape is often cited as a reason to leave the EU, the costs imposed by EU-derived regulation would not disappear overnight – much would depend on what path Britain took outside the EU. Some supporters of Brexit advocate the ‘Norway option’ – leaving the EU but remaining within the single market via the European Economic Area (EEA). However, as Open Europe has exclusively demonstrated, if the UK were to adopt this model, 93 out of these 100 costliest EU-derived regulations would remain in place at a cost of £31.4bn (94.3% of the total).

Under the EEA scenario, the UK would continue to be bound by EU financial services regulation, social and employments laws, energy and climate change policies, and this is where the bulk of the regulatory cost stems from. Furthermore, EEA membership comes without any formal voting powers in the EU institutions, so the UK would lose its ability to both amend these regulations and shape new EU laws.

While the ‘Norway option’ does mean greater independence in certain areas – chiefly the repatriation of agricultural policy, regional policy, trade policy and justice and home affairs – overall, it would make little sense to leave one club only to join another with many of the same costly rules.

EU has finally made some progress on cutting red tape

Encouragingly, over the last two years, the EU has taken some welcome steps to relieve the pressure of EU regulation on businesses and adopted several of Open Europe’s ideas in this area. In particular, the appointment of Frans Timmermans as Vice-President of the European Commission with a responsibility for Better Regulation. Since his appointment, Timmermans has already proposed scrapping 80 out of 450 pending legislative proposals, however, there is still a long way to go, particularly in terms of addressing the existing stock of EU legislation.

Stepping up this reform drive from within the EU or a finding a far better trading model outside of it (watch this space) remain the UK’s best options for cutting regulatory costs.