Regulatory Budgets: A Consultation Document
Comments from ACCA
November 2008
Executive Summary
ACCA considers that the idea of a regulatory budget system deserves further consideration in the context of efforts to control the regulatory burden on businesses.
If successful, it could help government become more accountable and produce better regulation, and could firmly establish the UK as the global leader in regulatory reform. Regulation is itself a form of taxation. A system parallel to the fiscal budgeting cycle and based on similar principles will help achieve for regulation the same degree of scrutiny and accountability that is currently reserved for fiscal matters.
Regulatory budgets should account for all direct and indirect costs of regulation, matching these to expected benefits through a reporting structure similar to that of Public Service Agreements (PSAs). They should also account explicitly for the cost of regulation to small and medium-sized enterprises (SME). Extreme care should be taken to ensure that perverse incentives, such as biases in favour of specific regulatory instruments, do not creep into the system as a result of cost measurement and budgeting practices.
A world first for the UK would not, however, be all good news. Regulatory budgeting to the extent envisaged by the Government is unprecedented in practice. A shadow rollout should be used to build departments' competencies and assess the system's function. During this time, the Government should take stock of the costs of new regulation and introduce targets for their short-term reduction and long-term stabilisation. At the same time, it should acknowledge the limits on what is achievable under these proposals.
Finally, oversight of the regulatory budget system will be crucial to its success. It will require a substantially empowered Better Regulation Executive (BRE) charged with ensuring that government regulation delivers the best possible value for money. Under its new remit, the BRE will need adequate resources to review individual regulations, as well as the power to safeguard the credibility of budget constraints.
Specific Comments
1. Do you consider that the Government should proceed with a system of regulatory budgets as a way of managing the costs of new regulation?
We believe that a regulatory budget system, mirroring and complementing the fiscal budgeting cycle, would be a welcome, if demanding, initiative. It could help government become more accountable and produce better regulation, while sending a strong signal that the UK is the global leader in regulatory reform. Additionally, such a system could raise the status of Impact Assessments (IAs) and post-implementation reviews in the policy-making process, further improving the quality of new regulation.
Much will of course depend on how the system manages the incentives of regulators. Ideally, it should encourage them to examine regulations and their implementation with a view to improving their effectiveness and reducing the unnecessary burdens they place on the economy. In so doing, it should not bias the choice of regulatory instruments (eg in favour of bans or of instruments whose impact is hard to quantify).
That said, the government's proposals are still unclear on three elements without which this system cannot function effectively: the assessment of regulatory benefits, oversight and enforcement.
On the first of these points, the proposals suggest that there would be no inclusion, within the financial estimate of regulatory costs for any individual initiative, of the associated regulatory benefits. There would instead be a requirement for such benefits to be considered in some non-financial way. We appreciate the practical difficulties of quantifying the associated benefits. But we suggest that there needs to be some standardised and transparent means of relating benefits to costs. In fiscal matters, Public Service Agreements (PSAs) complement the Comprehensive Spending Review (CSR) by explaining what objectives the budgeted amounts will be spent on, what they ought to achieve and what indicators will be used to gauge success. A similar structure, applied to regulatory budgets, would not only clearly link the costs and benefits of regulation, but also vastly improve the transparency of the regulatory pipeline over the medium term.
The proposed system of regulatory budgets will rely heavily on IA information, but the standard of many IAs is still, in the National Audit Office's (NAO) words, ‘disappointing'. Moreover, government departments produce the very IAs that will count against their budget allocations, giving rise to perverse incentives. We believe that oversight of the regulatory budget system will require a substantially empowered Better Regulation Executive (BRE), charged with ensuring that government regulation delivers the best possible value for money.
Finally, there is no discussion of enforcement in the Government's proposals, except perhaps a suggestion that any departments exceeding their regulatory budget allocations will have to seek permission and explain why they need to do so. This is of course a very weak constraint. The government needs to offer assurances that, once a reasonable margin of flexibility is exhausted, departments will no longer be allowed to introduce new regulations until the costs imposed are back in line with agreed targets. Alternatively, departments could be required to pay for some of the overrun out of their fiscal budgets.
2. Do you think regulatory costs should be scored at the point of enactment or when they come into effect?
3. What, in the range of three to five years, would be an appropriate budget period?
We are strongly in favour of a three-year Comprehensive Review of Regulation, parallel to the Comprehensive Spending Review (CSR) and mirroring its structure of Public Service Agreements (PSAs). This would make the regulatory pipeline more transparent, allowing businesses to prepare and voice their concerns in a more timely fashion. As with fiscal budgets, however, annual reporting is crucial to the cause of accountability. To abandon this will reduce the 3-year Review to a high-level document of limited relevance.
To allow for a 3-year review period, and in order to elevate the status of IAs in the policymaking process, ex-ante measurements of regulatory costs should be scored against the budget upon enactment. However, costs should also be reviewed post-hoc and budget allocations adjusted accordingly, at least for high-impact regulations. This will help avoid perverse incentives and promote the use of badly-needed post-implementation reviews of regulatory impact.
4. What are your views on the possible system to manage regulatory budgets outlined in paragraphs 2.9 – 2.31? Would this deliver a credible and effective system of regulatory budgets?
Managing the transition
Regulatory budgeting of the scale and scope envisaged by the government's proposals is unprecedented in practice. Thus the shadow rollout approach proposed is a prudent measure. The shadow running period, however, should be used to build departmental competencies as well as assess the function of regulatory budgets. The government should develop a plan to build IA capability among departments, based on the NAO's programme of IA assessments.
We also believe that a fundamental shift in thinking needs to take place in order to support a system of regulatory budgets. The Hampton principles and the Code of Conduct provide guidance on the functions of individual regulators. Under an integrated system of regulatory budgets, they will not be sufficient. In accordance with the desired link between regulatory and fiscal budgets, the government should consider how the principles of transparency, stability, responsibility, fairness and efficiency, enshrined in the Code for Fiscal Stability, can be applied to regulation and reconciled with its existing principles.
Setting the budgets
Regulatory budgets will work best if they closely parallel, and coincide with, the fiscal budget cycle. Since public scrutiny is the primary instrument by which the system's performance will be ensured, responsibility for adhering to the budgets should rest unambiguously with those agents most directly accountable to the public. For this reason, budgets should be allocated to government departments, rather than broader regulatory initiatives or individual regulators.
Prioritising regulatory needs, both within and across departments, will be impossible without an overall budget constraint. This could be set in the long term by taking stock of the impact of new regulation on the basis of IAs and setting targets for the short-term reduction and long-term stabilisation of regulatory burdens. Such targets could take the economic cycle into consideration, allowing for a slightly higher ceiling (more regulation) during times of growth, and a lower one (less regulation) when the economy is weaker.
This overall budget should be allocated across government departments by valuing the benefits of proposed regulation using a risk-based approach. The regulators' code of practice stipulates this in the case of individual regulators, but the original Hampton recommendation stresses that such an approach also needs to apply to the regulatory system as a whole.
Managing the budgets
We agree that, as with fiscal budgets, some degree of flexibility must be built into a system of regulatory budgets. We believe, however, that this must not be allowed to jeopardise the credibility of the constraints imposed on departments.
Exceptional provisions of budget coverage in case of an emergency would be a reasonable feature of such a system. End of period flexibility is also arguably necessary within the same 3-year review period. If, however, this facility extends beyond the current review period, then it mirrors fiscal saving and borrowing. It should accordingly be subject to analogous principles.
Trading of regulatory budget allocations carries some risk, since the government's initial allocation will reflect social preferences which individual departments are not well positioned to assess. Such a facility will need to be fully transparent, subject to justification by both counterparties and limited to only a small share of the allocations of both ‘buyer' and ‘seller'.
Reporting against the budgets
We strongly favour an approach to reporting that makes use of the heightened scrutiny associated with the annual fiscal budget to maximise the impact of regulatory budgeting. A single, central report, timed to coincide with either the Budget or Pre-Budget report, would be the best means of achieving this. This should include post-implementation reviews of high-impact regulations, leading to retroactive adjustments of a department's regulatory budget allocation.
Finally, while we would not advocate trialling a separate budget for small and medium-sized enterprises (SMEs), we are strongly in favour of separate reporting of costs. Disaggregating the impact of regulation on small business is neither impractical nor futile. Producing this information alongside other regulatory budget reporting will provide badly-needed incentives for regulators to think small first, as well as robust measures of progress on the government's enterprise policy. Recognising this, existing IA guidance clearly calls for the annual impact on SMEs to be quantified. That this is currently followed in a mere 1% of cases only suggests that the quality of IAs needs to be improved.
Oversight and enforcement
The BRE should assume oversight of both reporting and post-implementation reviews, reporting directly to Parliament under a wider but clearer remit reinforced by a stronger Regulatory Enforcement and Sanctions Bill. Its role should mirror the fiscal oversight role of the NAO, ensuring the public gets the best possible value for money for any regulatory costs assumed. This will require a substantial increase in analytical capability and a change in culture, to balance advocacy and facilitation with enforcement of regulatory reform.
Rather than stipulate an arbitrary ‘high-impact' threshold, BRE oversight should aim to extend to all regulation, but address individual regulations in decreasing order of impact. The BRE could then be evaluated on the amount, type and sources of regulation reviewed.
The government needs to offer assurances that oversight of the regulatory budgets will be supported and that it will not allow departments to regulate beyond their budget allocations, or penalise them in fiscal terms for doing so.
Assuming post-implementation reviews are allowed to credit and debit existing regulatory budget allocations, regulators' own best estimates should be used to measure the costs of regulation under uncertainty. By putting a price on ambiguity in policy outcomes, this will provide an incentive for compliance behaviour and unintended consequences to be better modelled.
5. Which forms of government action should be within scope of regulatory budgets?
8. What are your views on the approach set out in paragraphs 4.6-4.14 for treating independent regulators in a regulatory budget?
Proposals for regulatory budgeting are justified on the basis that regulation currently uses private resources without the need for prioritisation or the level of accountability afforded by fiscal mechanisms. Coverage should, in principle, extend to any non-fiscal initiatives that commit private resources to a government agenda or to honouring the government's commitments.
That said, it is not practical to include any government action that is not subject to impact assessment, or any regulators that are not required to perform IAs. This rationale is consistent with excluding independent regulators from the proposed system and restricting the participation of economic regulators. The latter should still be excluded during shadow running, and required to take steps during that period to build sufficient IA capacity and capabilities.
6. Do you agree with the outline of this approach to EU and international originating regulations? Are there other issues to be addressed in the context of EU and international law?
7. Is the approach outlined in paragraphs 3.14-3.22 to costs arising from specific regulatory action appropriate?
General treatment of costs
To ensure that the choice of regulatory instruments remains unbiased, all direct and indirect costs of regulation need to be monetised and considered against regulatory budgets. This is consistent with existing IA guidance.
Applied to the measurement of regulatory costs for budgeting purposes, the Equivalent Annual Cost (EAC) methodology could prove problematic. By disguising the substantial up-front compliance costs usually involved in regulation, it could allow severe over-regulation, as long as it is caused by new regulations with long-term effect. This could produce effects that are not reversed by subsequent regulatory ‘savings'. Regulation could, for example, create permanent barriers to entry or force consolidation in a sector.
For this reason, we feel that it is preferable to distinguish between the one-off and recurring components of regulatory costs. The one-off component could be allocated to the year of enactment, while the recurring component, costed in EAC terms, could be spread over the lifetime of the regulation.
Treatment of specific compliance costs
Three categories of compliance costs need to be accounted for especially:
Compliance with EU regulation. We agree that the cost of EU regulation should be accounted for fully in regulatory budgets. Additionally, IAs should distinguish, as they are required to, between burdens that are truly attributable to EU regulation and those arising in transposition. Under a system of regulatory budgets, this would offer clearer incentives for government to limit gold-plating and/or engage with the policymaking process in Europe earlier and more effectively. Both are required under existing guidance on transposition.
Non-compliance. All regulation faces a trade-off between compliance costs and non-compliance costs, such as fines. Excluding the latter from regulatory costs would bias departments in favour of instruments eliciting low compliance rates – ie poor regulation. The need to strike a balance would encourage regulators to better understand compliance behaviour, improving the quality of regulation.
Tax compliance. Whereas tax receipts are thoroughly scrutinised in the fiscal budget, the costs of tax compliance and administration receive far less attention. Counting tax compliance and non-compliance costs against HMRC's regulatory budget allocation would help account for its use of the resources of businesses, which remit about 88% of all tax revenues. Crucially, it would also provide incentives to contain the volume and complexity of taxation rules. It could also help regulate the assumption of additional powers by HMRC and reduce disparities in the treatment of errors made by taxpayers and HMRC. These benefits are substantial as all of the above have been highlighted by ACCA research as elements of perceived unfairness in the UK 's tax system.
Finally, following the establishment of a Department of Energy and Climate Change, we see no need for the proposed exemption of regulation introduced to battle climate change. We appreciate and applaud the intention to prioritise such regulation. But regulatory budgets are in themselves a prioritisation mechanism – and Government will now have the chance to make its priorities known through a substantial allocation for the new Department.
NAO, ‘Evaluation of Regulatory Impact Assessments 2006-7' July 2007 http://www.nao.org.uk/publications/nao_reports/06-07/0607606.pdf
Perverse incentives are acknowledged in Better Regulation Task Force, ‘Regulation – Less is more' March 2005 http://www.berr.gov.uk/files/file22967.pdf
Crews, C. W. Jr., ‘Promise and peril - Implementing a regulatory budget' Competitive Enterprise Institute, April 1996. http://cei.org/pdf/1549.pdf
See, for instance, NAO, op. cit.
HM Treasury, ‘The Code for Fiscal Stability' 1998 http://www.hm-treasury.gov.uk/media/2/9/fiscal_stability.pdf
The benefits of reporting on regulatory reform alongside the fiscal budget cycle are documented by the World Bank in the case of the Dutch regulatory reform programme. World Bank Group, ‘Review of the Dutch administrative burden reduction programme' February 2007. http://www.ifc.org/ifcext/fias.nsf/AttachmentsByTitle/FIAS_CountryReports_ReviewoftheDutchAdministrativeBurden/$FILE/WBG+Review+of+the+Netherlands_February2007.pdf
The IA acknowledges that ‘ without some form of anchor or constraint there is no guarantee [a more robust process to determine regulatory priorities ] would control the total costs of regulation introduced and lead to effective prioritisation.' BERR ‘Impact assessment of regulatory budgets consultation' August 2008 http://www.berr.gov.uk/files/file47130.pdf
See for instance, BCC Burdens Barometer 2008 http://www.britishchambers.org.uk/6798219245170437228/Burdens_Barometer_2008.pdf
BERR, ‘Statutory code of practice for regulators' December 2007 http://www.berr.gov.uk/files/file45019.pdf
The option of a BRE review of high-impact regulations is recommended in House of Commons Regulatory Reform Committee ‘Getting results: The Better Regulation Executive and the impact of the regulatory reform agenda' July 2008 http://www.publications.parliament.uk/pa/cm200708/cmselect/cmdereg/474/474.pdf
BERR Impact Assessment Guidance v3.0, 2008 http://www.berr.gov.uk/files/file44544.pdf
Chittenden, F., Ambler, T. and Iancich, S. ‘The British Regulatory System' BCC, March 2008. http://www.britishchambers.org.uk/6798219246153456668/BCC_Regulatory_System_2008.pdf
In the US , a similar role is played by the Office of Information and Regulatory Affairs (OIRA). OIRA is evaluated in terms similar to those described in our proposal, and a host of performance metrics are made publicly available at http://www.reginfo.gov/public/do/eoCountsSearchInit?action=init
BERR ‘Impact assessment of regulatory budgets consultation' August 2008 http://www.berr.gov.uk/files/file47130.pdf
BERR Impact Assessment Guidance v3.0, 2008 http://www.berr.gov.uk/files/file44544.pdf
ibid.
Ibid. BERR acknowledges that ‘[t]he perception of regulation and in particular regarding the complexity of regulation relating to creating a business can adversely affect the decision to start a business,' and that ‘economic efficiency losses from fulfilling the required outcome […] can not always be recouped.'
This approach is employed, for instance, by the BCC Burdens Barometer: http://www.britishchambers.org.uk/6798219245170437228/Burdens_Barometer_2008.pdf
BERR, ‘Transposition guide: how to implement European Directives effectively' September 2007. http://www.berr.gov.uk/files/file44371.pdf
Shaw, J., Slemrod, J. and Whiting, J. ‘Administration and compliance' prepared for ‘Reforming the tax system for the 21 st century: the Mirrlees Review', April 2008 http://www.ifs.org.uk/mirrleesreview/reports/admin_compliance.pdf
Chittenden, F. and Foster, H., ‘Perspectives on fair tax' ACCA June 2008 http://www.accaglobal.com/documents/tech-tp-ft.pdf