Increase In Regulatory Costs Under New Labour

A London Business School report published today reveals that the annual cost of regulating businesses through government watchdogs has spiralled by more than 80 per cent since New Labour came to power in 1997.

Spending by regulators rose from �141.5m to �261.5m between 1996-1997 and 2002-2003, the report says. These figures exclude the Financial Services Authority (FSA) - the regulatory model for Ofcom - which cost �221 million when it opened for business [excuse the pun] in 2000.

The same period also saw the headcount across the regulatory bodies increase more than 23 per cent to 2,566. This increased costs per employee above the rate of inflation.

The resultant financial benefit to the economy was not measured by the report, because - say the report’s authors - regulators do not provide financial results.

Of course, a cost-benefit analysis on a purely economic basis alone would always favour regulatory withdrawal.

Efficient and proportional regulation should result in a net benefit (for all stakeholders) for the relevant sector, i.e. good regulation results in efficient and competitive (and occassionally controlled) markets where producers meet demands for quality and choice.

Accordingly, measuring regulatory action is tricky and contentious due the inevitable economic inefficiencies of implementing public policy and economic goals together. In addition, the regulators are often required to trade one off against the other, promoting long term social goals over the short term economic fix.

So the report focuses rather narrowly on the direct economic costs and benefits of regulation, which is surely only one side of the coin or at least not the whole picture.

However, this does not mean that we shouldn’t counting the cost, and furthermore assessing (as the report does) whether the increases in regulatory costs - which trickle down to consumers - are a byproduct of an increasing politicisation.

The FT reports:

“Tim Ambler, a senior fellow at London Business School, who wrote the report with Keith Boyfield, an independent economist, said regulators had compromised their independence by taking on political rather than purely economic goals.

This is a fundamental shift of orientation and almost certainly negative for GDP,” Mr Ambler said. “One might wonder if the regulators have forgotten that free market business profits provide the wealth and the taxes for the country.”

Ofcom, which has been criticised over its set up costs, will cost �165 million during 2004-5. The combined total costs of the previous five independent regulators was �115 million - up from just �73 million in 1996-97 when New Labour came to power.

This does not neccessarily mean that Ofcom is expensive - it’s got a different remit to that of the legacy regulators in a sector that is rapidly changing. But Ofcom’s cost - in real terms - should in theory decrease if it does its job correctly since, overall, technology will likely make markets more rather than less contestable.

Still - regulatory withdrawal has always been Ofcom’s stated aim.