As far as business is concerned, regulation of any sort is a burden. How burdensome is the burden, asks Jyoti Banerjee? And what should government be doing about the burden?
The burden of regulation shows itself in three ways.
One, business carries the burden of much of the interchange between government and its citizens, whether processing tax, tax credits, maternity pay or even alimony payments. This represents an administrative cost on businesses for the privilege of being employers.
There is a separate regulatory burden that comes from meeting government policies that relate to public safety, correction of market failures or the promotion of a fair business environment. This is usually referred to as the policy cost of regulation.
Finally, there is a cost borne by business that relates to the policy cost – this is the administrative cost of complying with policies: getting to know the policies, keeping records on policy issues, reporting on compliance, and costs relating to government inspection and enforcement.
Each of these costs represents separate strands of regulatory burden. Although it is important to understand the components of the burden of regulation, it is fair to state that, as far as business is concerned, all these costs are taken together when it considers the costs of regulation.
Regulatory costs
While there are no firm measures on the cost of regulation in the UK, estimates from the United States and the Netherlands suggests that the total cost of regulation is around 10-12% of GDP. On that basis, the Better Regulation Commission (Note: I used to be a member of this body’s predecessor, the Better Regulation Task Force) estimates that the cost of regulation was in the region of £100 billion per year in 2005, slightly more than the combined annual yield from VAT and fuel duty, and almost up to the level of the projected income tax yield for 2005/6.
Clearly, the issue is not a small one.
For individual enterprises, regulatory costs have resulted in 86% of businesses increasing the resources needed for handling regulation over a three year period, according to a CBI/Grant Thornton report in 2004.
The Enterprise 2005 survey from the Institute of Chartered Accountants in England and Wales (ICAEW) found that the average annual cost of implementing new legislation per surveyed UK business was £13,464. For the purposes of this study, the figure was analysed by size of business.
As could be expected, the burden of new legislation rises in correlation with company size. On average, large businesses spend £25,761 compared to £6,444 amongst small businesses, with medium-sized businesses falling broadly in the middle of this range (£15,327). There was little difference between the average spent by medium I and II firms (£13,852 versus. £17,564). Note that the pivot point between Medium I and Medium II businesses is £22.9m annual revenues.
Policy actions
So what should government do to assist business in dealing with regulation?
I suggest we need to see three actions relating to regulation:
• Steady performance by government in reducing the regulatory burden, on the lines of the Dutch model, particularly where new regulation is considered only in the context of old regulations that can be scrapped.
• Simplification of the regulatory environment for medium organisations in particular, as they usually have to deal with regulatory issues on their own.
• Reconsideration of the overall burden of regulation in those industries where there is additional regulation from an industry watchdog.
While the accepted wisdom is that regulation hurts small businesses the most, and this blog does not seek to challenge that point of view, what is interesting to note in the SME context is that medium organisations face every single regulatory issue while small organisations face only a sub-set as they often do not meet the threshold of applicability. Also, small organisations are more likely to outsource their regulatory compliance to outside professionals such as accountants and payroll bureau providers who are better capable of handling those issues. Medium organisations tend to deal with regulatory issues themselves.
Also, while nobody wants to see less protection for consumers, it may be appropriate in a B2B context for some of the risks that regulation seeks to contain to be handled instead by the companies that are trading with each other. After all, the finance director or CFO of a company should be a rather more informed and sophisticated purchaser of a company’s goods and services than a consumer, and therefore should need less protection from regulation than the ordinary consumer.
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