We all know that the British state has grown dramatically over the past decade. The most obvious manifestation of that is in public spending, which the last government raised by 60% in real terms. The upshot is apparent to all: record-breaking budget deficits, an explosion of debt and the pressing need for spending cuts.
But public spending is only ever part of the picture, and its dominance in the political debate conceals one of the most striking trends in British government: the extraordinary growth of the regulatory state. Indeed, many experts say that from an economic perspective, regulation is more important — and potentially more harmful — than taxation. Everyone notices the money disappearing from their pay packets, but regulation is the silent way to strangle an economy.
The impact of regulation is notoriously hard to quantify, but that hasn’t stopped people trying. The British Chambers of Commerce’s well-respected “burdens barometer” suggests that the net cost of new regulations passed since 1998 is almost £90 billion, while the Labour government’s own Better Regulation Task Force estimated that the annual economic cost of regulation could be as high as 12% of GDP.
The sad part is that it was never meant to be like this. Britain’s regulators were intended as a temporary feature of the bureaucratic leviathan. Their role was to supervise the privatised industries — which were typically dominated by big, quasi-monopolistic companies — and work to increase competition. The idea was that, as competition was increased, the regulator’s role could be scaled back. The final mark of success would be that a regulator could abolish itself, safe in the knowledge that it left behind a fully functioning, competitive marketplace that worked to consumers’ best interests.
Perhaps that was a naive hope. After all, Milton Friedman, the American economist, told us years ago that “nothing is so permanent as a temporary government programme”. And so it has proved. In the early 2000s the regulators were given a sweeping new agenda, the government adding broad social and environmental objectives to their original, purely economic role. Staffs and budgets grew; burdens on enterprise rose. Regulation had, in a sense, become the new nationalisation: politicians realised they didn’t need to own businesses, much less fund them, to use them as instruments of government policy. For our lords and masters it was a rather happy arrangement.
But it is an arrangement we can no longer afford. We need to streamline the state, making government leaner, more efficient and less costly. And we need to create the conditions in which dynamic, private enterprise can lead a return to strong, sustainable economic growth. There are no silver bullets in public policy, but a thorough regulatory rethink could check both of those boxes, at little political cost. The government should start by cutting the regulators down to size. Refocus them on economics, and leave social and environmental objectives to Whitehall departments. Make their remits narrow and specific, and ensure that their objectives are clear. Even make them plan for their eventual winding-up, and have them report on their progress towards that ambition. The overarching goal must not be to build bureaucratic empires, but to make markets function effectively.
Reforming the regulators can be done quickly and easily. Ofcom, the media regulator, could be phased out fairly swiftly. But it is only one side of the story. The government also needs to take a strategic approach to regulation itself — working to stem the flow of new regulations (which often emanate from Brussels), to rationalise existing regulations and to make regulatory compliance simpler and less costly. The government should also undertake sector-by-sector regulatory reviews, examining each area of the economy for opportunities to remove barriers to competition and market entry. The more competitive a market is, the more effectively it can regulate itself — this should be the guiding principle behind the coalition’s regulatory policy agenda.
As things stand, the government has good intentions on regulation, but it is struggling to put them into practice. And this speaks to a further, even more long-term shift that we need to make: we need to rediscover some humility about what government is for and what it can realistically achieve. Too often today, ministers leap to meet any new problem with a new set of regulations — if only to give an answer to that dreaded interview question: “Well, minister, what are you going to do about it?” But in the real world good intentions count for little, and intervention sometimes compounds the problems it seeks to solve.
Every once in a while, we need to take Ronald Reagan’s advice: “Don’t just do something — stand there!”
Tom Clougherty is executive director of the Adam Smith Institute
Published in the Sunday Times here.