Long but detailed article on problems of "red tape"

 

Brexit opportunities: the burdensome red tape that Britain can begin cutting

In the first part of a new series, Telegraph Business explores how regulation has grown, and why past efforts at a ‘bonfire’ have failed

ByTim Wallace and Tom Rees21 February 2022 • 6:00am

Labelling is just one item on a mountain of regulation

Carolyn Jones imports six to 10 electro-stimulators for denervated muscles every year.

The specialist kit from Germany and Austria artificially stimulates the muscles of patients with spinal cord damage, helping them stay strong and staving off further problems such as ulceration.

Her supplies are under threat from a change in rules: the product comes with a CE label allowing it to be sold in the EU and US, but from January 2023 the UK is imposing its post-Brexit new UKCA marking.

“If they [suppliers] have to re-register for another set of regulations for a company they only sell six to, when they can cover the US and Europe under one [label], I can well imagine them asking if it is worth the effort,” says Jones of Anatomical Concepts, based in South Lanarkshire, Scotland.

“We are really hoping that, because we have a long standing relationship with these suppliers, we will be able to manage that.”

At the very least she faces more paperwork, and at worst being cut off from vital supplies. 

Prior to the referendum, deregulation was cited as a key reason to leave the bloc. Jones’ situation was not one that businesses expected to find themselves in two years after leaving the EU and one year after the close of the transition period.

But there are hopes the shift to independence might finally provide the impetus to cut red tape, which has only grown over the past 40 years, and alleviate burdens on businesses.

In 2016, Boris Johnson objected to “the torrent of EU legislation, coming at a rate of 2,500 a year and imposing costs of £600m per week on UK businesses”.

The Conservatives’ 2019 manifesto promised to “ensure that regulation is sensible and proportionate, and that we always consider the needs of small businesses when devising new rules, using our new freedom after Brexit to ensure that British rules work for British companies.”

Still, it remains a sticking point. In 2020, bosses cited “over-regulation” as the top threat for company growth, according to PwC’s global CEO survey. Last year, two in five UK bosses said regulation was having a negative impact in an Institute for Directors survey.

In 2016, Boris Johnson objected to ‘the torrent of EU legislation, coming at a rate of 2,500 a year and imposing costs of £600m per week on UK businesses’ CREDIT: Stefan Rousseau /PA

While Johnson has said he wants to cut £1bn of old EU red tape, the target is dwarfed by the pile of regulation the country added in recent years. Jones’ case is one such example. 

Victoria Hewson at the Institute of Economic Affairs (IEA) says accepting CE-marked products would show Britain is serious about supporting businesses and customers: “The UK has an opportunity to lead the world with a radical trade policy of recognising regulations, without requiring reciprocity, starting with the EU.”

A BEIS spokesman said: “Having our own regulatory regime gives us the opportunity to make our product regulations work in the best interests of UK consumers and businesses.”

Labelling is just one item on a mountain of regulation – and quantifying that proves difficult.

The cost it creates for the UK economy could be as much as £220bn, according to 2020 research by the IEA. Its estimate is extrapolated from an official gauge from 2005 that puts the burden at around 10pc to 12pc of GDP and does not account for the benefits of rules, indicating how difficult it is to measure accurately.

There are clearly opportunities to get chopping. Last year, the Prime Minister appointed former Conservative leader Sir Iain Duncan Smith to chair the Taskforce on Innovation, Growth and Regulatory Reform in drawing up a plan to trim regulations. Think tanks have produced reams of rules which could usefully be cut.

The City could be freed from overly stringent MiFID II rules that hurt analyst research; Solvency II laws that hold back investment by forcing insurers to hold huge sums of money on balance sheets; and ineffective banker bonus caps. 

In tech, the long reach of GDPR data rules could be pruned. Pharma regulations can be scaled back as the UK strives to become a global life sciences hub. More climate friendly and nutritious food could be grown by relaxing EU constraints on gene editing and boosting innovation, by revamping the Novel Foods Act to help start-ups, such as those for meatless products. 

Yet despite the opportunity and intermittent enthusiasm, those backing reforms say progress has been exasperatingly slow.

“The Government has done absolutely sweet FA since we delivered the report to them [in June 2021],” says Sir Iain, lamenting that Lord Frost was given too little authority to make progress when in Government.

“They should have been getting on with it, and they still have not done a single element of deregulation since I produced the report.”

His attempt is by no means the first.

Tony Blair introduced a Better Regulation Task Force in 1997, the Small Business Service in 2000 and the Better Regulation Commission in 2006, which declared it was “time to turn the tide” on red tape.

The Coalition Government launched its Red Tape Challenge in 2011, leading to a one-in-one-out rule for new regulations, which became two-out and then three-out.

Sir Vince Cable, then-Business Secretary, says “there were a lot of silly things hanging around from the 19th century, and anything that was completely obviously stupid, we got rid of it”.

But major roadblocks remained. “Certain key departments didn’t believe in it and wanted to opt out. The Home Office said you cannot have immigration control without regulation. So we had proliferating regulation in the Home Office with more and more red tape,” he says. 

Sir Vince adds that the Treasury also demanded regulation around tax evasion and avoidance, as well as banking regulation brought in during the financial crisis.

Similarly, EU law could not be scrapped, and in many cases was designed by British officials to suit UK companies.

The Challenge risked replacing relatively insignificant rules with expensive new laws, and so the Business Impact Targets were introduced to cut the net burden of regulation regardless of the number of individual rules.

In 2015, the Government sought to cut a net £10bn of regulatory costs over that parliament under David Cameron. One year later, a National Audit Office report found £0.9bn of costs were cut from qualifying regulations, while £8.3bn of costs were added by rules outside the target’s scope.

Now, on top of that, Covid and climate action require even more regulation.

While ministers have pledged not to add to businesses regulatory costs, the Regulatory Policy Committee (RPC) estimates Johnson’s administration added £5.6bn to their burden in the first year after the 2019 election.

Whitehall may look despairingly at Britain’s graveyard of previous red tape campaigns, but they can take inspiration from a successful drive almost 5,000 miles west.

The Canadian province of British Columbia was a laggard in economic growth and employment, but turned its performance around in the early 2000s, slashing regulation by a third in just three years. Advocates of the “British Columbia model”, including Mike Cherry at the Federation of Small Businesses, say this helped the province’s growth jump above the Canadian average while maintaining high health and environmental standards.

Allies of Jacob Rees-Mogg say he has Boris Johnson’s backing in a mission to deregulate, and hopes to use Sir Iain’s report as a blueprint. 

The new Brexit minister has raised the prospect of showing flexibility on CE-marked imports. He gave a supportive comment to the IEA’s report on the mark, stating: “non-tariff barriers are the delight of protectionists and should be removed wherever possible”. Even the Treasury is understood to be gearing up for financial services reforms.

Changing the Government’s mindset in its treatment of existing rules and regulations is expected to be key.

Matt Hancock, the former Health Secretary, says Covid can provide lessons: “We’ve learned through pandemic how even in highly regulated areas like healthcare, you can flex those regulations to improve people’s lives, as we did in the clinical trials for vaccines and treatments, meaning the UK was the first to develop these in the world.”

Stephen Gibson, head of the RPC, says a red tape drive should not be about “whether we have too much or too little regulation”, but “whether the regulations are still fit for purpose”.

Back in South Lanarkshire, Jones just wants to avoid any unnecessary extra burdens.

“Of course if there is a better way, we are open to it,” she says. “At the moment, I don’t feel particularly optimistic.”

Extension material on business cycles:

 

Why the Business Cycle Happens

• LEE ESTO EN ESPAÑOL

TAGS Booms and BustsBusiness Cycles

02/18/2022Murray N. Rothbard

The student of economics is invariably taught a certain mythology about the history of the study of business cycles. That mythology holds (a) that before 1913, nobody realized that there are cycles of prosperity and depression in the economy—instead, everyone thought only of isolated crises or panics, and (b) that this all changed with the advent of Wesley Mitchell’s Business Cycles in 1913.

Mitchell’s supposed achievement was to see that there are booms and then depressions, and that these cycles of activity stem from mysterious processes deep within the capitalist system. It is Part III of this work (the other parts being outdated historical and statistical material) that is here reprinted for the second time, this time in paperback.

It is certainly true that the late Wesley Mitchell had an enormous influence on all later studies of the business cycle and that he revolutionized that branch of economics. But the true nature of this revolution is almost unknown. For there had been great economists who were not only aware of, but also discovered theories to explain, the dread phenomena of boom and bust. They did this much before Mitchell’s time, and went far beyond him.

For one thing, Mitchell and his followers have never tried to explain the business cycle; they have been content to record the facts, and record them again and again. Mitchell’s famous "theoretical" work is only a descriptive summary. Secondly, these same economists were discovering a great truth that escaped Mitchell and has continued to escape economists ever since: that boom and bust cycles are caused—not by the mysterious workings of the capitalist system—but by governmental interventions in that system.

The real founders of business-cycle theory were not Mitchell but the British classical economists: Ricardo and the Currency School, whose doctrines have unaccountably been shunted by historians into the pigeonhole of the "theory of international trade." They first realized that boom-bust cycles are caused by disturbances of the free market economy by inflationary injections of bank credit, propelled by government. These booms themselves bring about a later depression, which is really an adjustment of the economy to correct the interferences of the boom. The sketchy theory of the classicists was elaborated during the nineteenth century; later, the important role of the interest rate was explained by the Swede, Knut Wicksell; and finally, the full-grown theory of the business cycle was developed by the great Austrian economist, Ludwig von Mises.

Mises’ theory shows the complete workings of the boom-bust cycle: the inflationary injection of bank credit, fostered by government; a boom marked by malinvestments caused by inflation’s tampering with the signals of the free market; the end of inflation revealing these unfortunate malinvestments; and finally, the depression as the correction by the free market of the wastes and distortions of the boom. Ironically, the work where Mises first outlined his theory appeared about the same time as Mitchell’s.

The classical, and now the Mises, theories have been generally scorned by modern writers, and mainly for this reason: that Mises locates the cause of business cycles in interference with the free market, while all other writers, following Mitchell, cherish the idea that business cycles come from deep within the capitalist system, that they are, in short, a sickness of the free market. The founder of this idea, by the way, was not Wesley Mitchell, but Karl Marx.

The Mises theory, then, is universally dismissed as "too simple." Professor Rendigs Fels’ new book is a typical example of current work on business cycles. Fels deals with the cycles of late nineteenth-century America, and he certainly reveals a great many valuable facts of the hitherto neglected cycles of that era. But how does he explain these cycles? Here he tries to synthesize the most fashionable of current theories, with most emphasis on the theory of the late Professor Schumpeter. Almost every theory is incorporated in some way, except that of Dr. Mises. Oddly enough, whenever Fels does mention monetary factors, or the "shortage of capital" aspect of Mises’ theory (which he discusses fleetingly and misleadingly, and without mentioning Mises’ central role), he has to acknowledge that it fits the facts neatly. But then he is quickly off again, in pursuit of more and better fallacies.

Schumpeter’s theory, alone of all theories aside from Mises’, has one great merit: it attempts to integrate an explanation of business cycles with general economic theory. Other economists are content to fragment business cycles as if general theory simply does not exist, or is irrelevant to the "real world." But Schumpeter’s theory is simply wrong, as can be seen by his conjuring up a large number of "cycles," nearly one for each industry, which are supposed to interact to form the total economic picture. An economist should realize that industries in the market economy are bound up together, so that basically the economy is in the throes of only one cycle at a time.

The reader will gain little enlightenment, therefore, from these works on business cycles. From Mitchell he will obtain only a descriptive summary of a typical cycle; from Fels he will find many important facts, but all distorted by erroneous attempts at explanation. Both authors virtually ignore what we can call the "monetary malinvestment" theory of Mises and his classical forebears.

It is true that, in recent years, the so-called "Chicago School" has been placing more emphasis on monetary causes of the cycle. But these economists have only thought of money as acting on the general price level and still do not realize that monetary inflation creates maladjustments in the economy that require subsequent recession. As a result, the Chicago School still believes that government can eliminate business cycles by juggling the monetary system, by pumping money in and out of the economy. The Misesian, on the other hand, sees government as having one and only one proper role in the economy: to keep its hands off and to avoid any further inflation. This is the only "cure" that government can bring to us.

Author:

Murray N. Rothbard

Murray N. Rothbard made major contributions to economics, history, political philosophy, and legal theory. He combined Austrian economics with a fervent commitment to individual liberty.

Windfall taxes - analysis

Labour’s call for a windfall tax on North Sea oil and gas follows in Thatcher’s footsteps

The call has gone up to raid oil and gas profits as crude prices soar and the cost-of-living crisis bites. But would it do more harm than good, asks Jon Yeomans

Jon Yeomans

Sunday February 13 2022, 12.01am, The Sunday Times

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Bernard Looney was feeling confident. After a bumpy couple of years for BP, he had some good news to impart. Oil prices had rebounded from their Covid-induced lows and money was pouring back into its coffers. Presenting BP’s fulsome third-quarter results last November, the chief executive remarked that it was “literally a cash machine”.

Looney may wish he had been more circumspect. The throwaway comment has become a stick with which to beat the industry, emblematic of oil producers making out like bandits while ordinary people suffer. Global gas prices are soaring and millions of households face the prospect of bills rocketing from April, when the energy price cap goes up.

On the same day that industry regulator Ofgem announced that the cap would rise by £693 a year to just shy of £2,000, Shell said it would buy back $8.5 billion (£6.25 billion) of its own shares and raise its dividend. The optics, as they say, were not good. Now oil is heading towards $100 a barrel and the Labour Party is calling for a windfall tax on oil majors to keep down energy bills. “North Sea oil and gas producers who have made a fortune... should be asked to contribute,” said Ed Miliband, the shadow climate secretary.

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Calls for a fresh levy may play well with an electorate crying out for relief from the cost-of-living crisis. And it would not be the first time the UK has slapped a windfall tax on a big industry — even if such measures have been used sparingly in the past. But chancellor Rishi Sunak has indicated his aversion to the idea; after all, he needs to burnish some low-tax credentials with his Conservative backbenchers. In truth, the Tories are no strangers to a tax raid, yet the question remains: would a windfall tax on the oil and gas giants be an effective or desirable tactic at a time of national turmoil?

The key definition of a windfall tax is that it should be a one-off. It typically targets an “unearned windfall that has occurred to somebody not as a result of their own actions”, said Chris Sanger, head of tax at the accountancy firm EY.

Oil and gas companies have seen no change in their costs but a very big increase in the price of their products — “for reasons outside their control”, added George Dibb, head of the Centre for Economic Justice at the IPPR think tank. BP’s windfall was unexpected — because of very high gas prices.

Moral maze

There is also a moral dimension to a windfall tax. Dibb believes a line can be drawn between large oil and gas profits “and the fact that wide numbers of the general public are facing quite severe economic hardship” because of those same prices. “That is a fundamental injustice within our economy and it can be remedied with a relatively small tax,” Dibb said.

North Sea oil and gas companies already pay a surcharge on top of corporation tax, bringing their tax rate to 40 per cent; Labour’s proposal is to lift this to 50 per cent, raising about £1.2 billion. It would use this, along with a couple of other measures, to cut VAT on energy and expand the Warm Homes Discount, lowering bills for 9 million households most in need.

Unsurprisingly, the sector is opposed to a fresh tax, pointing out that surging gas prices mean that the Treasury will still rake in £3 billion in extra tax revenue if it leaves rates alone. A windfall tax would “send financial shockwaves through the industry”, trade body Oil & Gas UK (OGUK) warned; it would discourage firms from investing in North Sea gas and make Britain more dependent on imports.

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However, there is a precedent for a moralistic windfall tax, and it comes from Margaret Thatcher’s first government. In 1981, then-chancellor Geoffrey Howe imposed a 2.5 per cent levy on bank deposits to raise about £400m from the giant profits banks were making through interest rates as high as 15 per cent. At the time, millions were struggling through recession and high unemployment. Thatcher recalled: “Naturally, the banks strongly opposed this. But the fact remained that they had made their large profits as a result of our policy of high interest rates, rather than because of increased efficiency or better service.”

Labour also imposed a windfall tax in 1997 on a string of privatised companies such as British Airways and British Gas — sell-offs that were deemed to have been priced too cheaply and to have left the businesses too loosely regulated, allowing them to bank huge profits. Labour raised £5.2 billion from the measure. Sanger of EY, who worked on the tax for then-chancellor Gordon Brown, noted that the measure had been in Labour’s election manifesto, giving companies plenty of notice. “By including it in the manifesto, it was clear that there would be no other windfall tax,” he said.

Margaret Thatcher and her chancellor, Geoffrey Howe, imposed a windfall tax in 1981 — a 2.5 per cent levy on bank deposits

STEVE BACK/DAILY MAIL/REX FEATURES

In 2009, after the advent of the financial crisis, Labour levied a one-off 50 per cent tax on bankers’ bonuses, which brought in £2 billion — far more than the £550 million that had been expected. It differed from the previous windfall taxes in being prospective, rather than retrospective. It was supposed to discourage bank largesse, but instead, it encouraged companies to hand out even more to make up for the shortfall in take-home pay.

Banks continued to feel the pain under the subsequent coalition and Conservative governments, with the introduction of the banking levy and bank surcharge, the latter of which exists to this day — though neither was strictly a windfall tax in the sense they were not one-offs.

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Likewise, North Sea oil has been a regular target of tax hits. As early as 1980, Howe imposed an extra levy on the oil and gas industry, only to abolish it two years later. In 2002, Brown introduced a supplementary charge of 10 per cent on energy company profits, and doubled it in 2005 after the likes of BP and Shell reported bumper profits from higher prices. The déjà vu does not end there: Brown committed the funds raised towards the “Warm Front” scheme — to help poorer households with energy bills and home insulation. The industry warned that the measure would “severely undermine business confidence”, but this did not stop the coalition from raising the charge in 2011.

Deep freeze

Dire warnings that fresh taxes could send oil and gas investment into a deep freeze have returned to the fore. The industry argument goes that gas will be needed for decades to come as a “transition fuel” while countries target net-zero emissions by 2050. In particular, gas will have to plug a shortfall as coal-fired power stations close and ageing nuclear plants are retired. As recent price spikes have shown, demand for gas could remain higher than usual for years to come.

“If anything, the UK needs more gas, not less right now,” Looney said last week. “That’s going to require more investment … A windfall tax probably isn’t going to incentivise [that].”

BP and Shell have both been reducing operations in the North Sea to focus on easier, and more profitable, basins. In their place have come smaller operators, such as Serica Energy, which reckons it can still eke out profits from older wells.

Mitch Flegg, Serica’s chief executive, said UK gas had lower emissions than imports, such as the liquefied natural gas that comes from the likes of Qatar. But he warned: “A windfall tax may make it more difficult for companies such as ours to continue making the level of investment we’re planning in the next few years. That may lead to further shortages and price volatility.”

Looney argued that BP’s profits would be reinvested in green energy such as offshore wind and hydrogen — exactly the type of investment, and jobs, that the UK needs. Moreover, energy companies were racking up huge losses as recently as 2020, when oil prices briefly turned negative. BP and Shell recorded combined losses of $42 billion that year. As another industry executive put it: “You take the risk, but you do expect a reward. What you don’t expect, after years of hardly any money coming in, is to get that money taken off you.”

Harriet Harman, Alistair Darling and Gordon Brown at the Labour Party conference in 2009. That year the government levied a one-off 50 per cent tax on bankers’ bonuses

BEN GURR FOR THE TIMES

The economic theory holds that a windfall tax should not change the behaviour of the market because it is a unique event. Not everyone buys that. “Nobody would believe it was a one-off,” said one chief executive. “And the history of these things is that even when governments promise to remove it when prices go down, they are slow to take it away.”

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OGUK points to figures that show exploration for new fields cooled rapidly after the tax hike in 2011. But Professor Michael Jacobs, specialist in political economy at the University of Sheffield, said: “It cannot be the case that this is going to hit investments, because these companies have got much more money than they were expecting.” The former adviser to Brown, who described Labour’s proposed tax increase as “modest”, said: “You would expect them to invest more, not less.”

Labour’s proposed tax would only hit the profits made by oil companies in the North Sea, rather than their global earnings. Some have questioned how this would work in practice as some big firms do not break out UK profits. Moreover, not all energy companies make money at the market, or “spot” price, of gas; many sell forward their product at fixed prices. Those that have hedged sales in this way will not be banking as much profit. Nor would a windfall tax apply to Norweigian producers, who supply a large proportion of UK gas.

Dibb of the IPPR argued that the physical location of oil and gas resources lowered the likelihood of firms quitting the North Sea. “It’s not like a tech firm moving from New York to Dublin,” he said. “It’s highly unlikely they’ll go elsewhere.”

There is another argument that a windfall tax may simply miss the point. While it can act as a sticking plaster to help households facing the dire choice between heating and eating, it would do little long term to address energy supply, security and prices — let alone the transition to net zero. “With a windfall tax, you’re not discouraging people from consuming energy, which is what the UK should do if it wants to achieve climate neutrality,” said Alice Pirlot of the Centre for Business Taxation at Oxford University. Such a move would most probably require a “rethink of the entire UK tax system”, she said. Professor Jacobs suggested a more creative approach: “We need to insulate homes better so people don’t need to use as much energy. That’s the way to keep bills down.”

History of one-off hits

November 1980 Magaret Thatcher’s chancellor, Geoffrey Howe, raises tax on oil and gas producers

March 1981 Howe’s budget introduces a windfall 2.5 per cent tax on bank deposits

July 1997 New Labour implements a manifesto commitment to bring in a windfall tax on privatised companies such as BT, British Gas and the airports authority BAA

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April 2002 Gordon Brown introduces supplementary tax on oil and gas profits. It is raised again three years later

December 2009 Alistair Darling, the chancellor at the time, imposes one-off levy of 50 per cent on any banking bonus above £25,000

January 2011 Coalition government introduces banking levy; the rate is adjusted over time. The same year, George Osborne raises the surcharge on the North Sea to 32 per cent, before reducing it again.

July 2015 Conservative government announces the bank surcharge – an extra 8 per cent on profits in addition to corporation tax, while reducing the bank levy

December 2019 Labour proposes windfall levy on oil and gas companies in election manifesto

March 2021 Rishi Sunak raises corporation tax from 2023 but reduces the bank surcharge; overall tax for banks will go up slightly to 28 per cent

January 2022 Labour and the Liberal Democrats call for windfall tax on oil and gas producers