How poor regulation is holding back the UK economy
Regulation is not an issue that will feature prominently on the doorsteps in this election campaign.
That’s hardly a surprise. Few voters, after all, will be swung around with a detailed plan on how Parliament could more effectively hold watchdogs to account.
However, regulation is still a pressing concern for both businesses and consumers. Getting it right could help unleash growth and deliver better outcomes for consumers.
The Department for Business and Trade suggests that the cost of red tape was worth about three to four per cent of GDP. Nearly half (45 per cent) of all businesses see regulation as a burden on their success.
This could easily lead to calls that the next government needs to slash and burn red tape to unleash businesses and get Britain growing again. There are certainly industries where that case can be made.
But looking at other sectors of the economy and you’d be hard-pressed to say that excessive regulation is the thing holding businesses back.
To take a couple of prominent examples, customers have had to shoulder a £2.7bn bill due to the collapse of 29 energy companies in June 2021. Their collapse was partly a consequence of Ofgem having lax financial requirements for new entrants into the market.
In water meanwhile, Ofwat has watched on as asset managers have loaded up on debt to pay out millions to shareholders while failing to invest in core infrastructure. There were 3.6m hours of sewage spills in 2023, more than double its 2022 level.
So the overarching issue is not necessarily the sum total of regulation but its effectiveness. A number of recent reports from think tanks and legislators have tried to find out why regulation is failing both businesses and consumers.
These reports have one thing in common. Regulators are playing an ever larger role in the economy, but there has not been a commensurate increase in levels of scrutiny.
This works on two levels, with insufficient oversight of both the regulation when it is introduced and the work of the regulators themselves.
The Centre for Policy Studies (CPS) argues that the British state has not recognised the growing power of regulators. “The entire regulatory apparatus in Britain is not fit for purpose…we simply do not take regulation seriously enough,” the think tank argued in a recent report.
The CPS focused on the impact of regulation on business, but their report reveals worrying shortcomings in the decision-making process.
Take impact assessments, and documents produced by the government to justify a given regulatory or legislative change.
According to a 2023 report from the Regulatory Policy Committee (RPC), 63 per cent of impact assessments were rated ‘weak’ or ‘very weak’ on one of four major areas on which they were assessed.
The CPS report found that impact assessments were “generally handed to the most junior person in the office”, often with an instruction to make it justify whatever policy has already been decided. One “long-standing” Cabinet minister said he had never read an impact assessment during his time in office.
Departments also don’t tend to keep track of all the regulations they have imposed. Only a single Whitehall department, the Department for Environment, Food & Rural Affairs, has ever carried out a full audit of all the regulations it has imposed.
This is not a point about deregulating. It’s about whether the regulations that are put in place have been properly assessed.
Then there’s scrutiny of the regulators themselves. It was not until last month that the government actually had a list of all the different regulators operating in the UK.
Given this, it’s not that surprising that some parliamentary committees do not know which regulators they are responsible for scrutinising, as a recent report from the Institute for Government (IfG) found.
According to the IfG, almost a third of regulators (35/116) were not called into parliament over the past five years to be scrutinised on their work. A further third were only ever scrutinised in a reactive function, i.e. only after something had gone wrong.
Weak democratic oversight is a problem in itself, but it’s particularly important post-Brexit when many regulators have assumed powers which used to be held at a European-wide level.
It’s also important when regulators have been handed many extra responsibilities.
Stuart Hudson, formerly of Ofgem and the CMA, told the House of Lords Industry and Regulators Committee that “the job given to economic regulators has become more complex since they were first created”, increasingly encompassing “public policy considerations” such as social and environmental issues.
So what should be done about it? Both the IfG and the Industry and Regulators Committee argue that a new body should be established in parliament to provide support to understaffed committees.
The CPS want to go further and give a senior government minister oversight of regulation in the same way the Chancellor has of fiscal policy.
Whatever, the next government chooses this is a big issue. As the IfG notes, regulators “could be central to delivering the next government’s policy agenda”.