Continuing to follow EU regulations after Brexit could cost the UK economy up to £240 billion a year, senior economists warn today.
As a member state of the EU, excessive regulation costs the UK £120 billion a year but if the UK continues to align closely to EU regulation – specifically satisfying EU social and political objectives – the cost could rise to as much as 12 per cent of GDP – £240 billion.
The forecast comes as the Cabinet continues to debate whether the UK should align or diverge from EU regulations after it leaves the bloc in March 2019.
The Economists for Free Trade estimate that EU regulations currently cost the UK economy around 6 per cent of GDP, having been brought in over the past three decades since the introduction of the single market gave the EU overarching regulative powers. This works out at a loss of growth of around 0.2% per annum. If the EU continues implementing an intrusive regulative regime, this rate of loss could continue as new regulations are piled on to the existing ones at the same rate as for the last three decades.
These costs are estimated on the Liverpool model of the UK economy that was the first to estimate the cost-raising effects of regulation on the supply-side of the economy; and also on more recent modelling by Cardiff University of the effects of business tax and regulation on growth. Regulations act similarly to taxation in reducing business competitiveness, productivity, real wages, and output. Examples include restrictions on working hours, greater powers for unions, large compliance employment to deal with massive financial regulation and high energy costs to pay for renewables.
The direct costs to business, such as large HR and compliance departments, are transformed into lost output as these higher costs are passed on and lower sales. Jobs may be restored by falling real wages but the higher overall costs lower productivity and output permanently. The UK’s poor productivity growth in recent years are partly associated with these effects.
The worst EU regulation offenders include the UK Renewable Energy Strategy that costs £4.7bn a year alongside the Capital Requirements Directive IV, and the Working Time Directive, which both cost £4.2 billion a year.
Professor Patrick Minford, Chair of Economists for Free Trade said:
“Historically, the EU has adopted aggressive levels of regulation on the UK, which have restricted the workings of our labour market and have lowered productivity. To date, the UK has avoided the full gamut of union-friendly arrangements usual on the continent but there can be no certainty they will not be forced in over time if Britain continues to stay aligned to Brussels regulation – particularly if we become a rule-taker.
“Agreeing to stay subject to EU regulations could cripple the UK economy. Product regulation in the EU favours large incumbents while labour market regulation doles out rights for workers that are expensive for employers, discourage employment, inhibit innovation, and deter business expansion. In the energy and finance sectors the EU has brought in intrusive regulations that raise business costs materially. The Government must rule out regulatory alignment after Britain leaves the EU.
“The 6 per cent of GDP EU regulations have already cost us could be just the beginning if we remain aligned and the EU becomes even more of a federalist bloc, pursuing wide-ranging social and industrial policies through business regulation. A conservative estimate would be that EU regulation would continue at the same pace, doubling up on the existing accumulated regulations; this would continue to lower our growth rate by 0.2% per annum. But even this may be an underestimate, given the EU’s commitment to an agenda hostile to business and innovation and dominated by social and political aims.”
“In contrast, if Britain seizes the freedom to move away from EU regulations, the current 6 per cent cost could be cut by a third – boosting GDP by 2 per cent and our growth rate in line.”
The Government is due to set out whether it will continue to follow EU regulations or take advantage of its newly won freedom and move away from it after Britain leaves the EU. Chancellor Philip Hammond advocates very close regulatory alignment and has consistently claimed that Britain will continue to be a ‘European style economy’, which would mean the Government would fail to capitalise on the many economic benefits of Brexit.
Note to Editors
The costs to business of regulation include widely-reported compliance costs; however even without compliance costs, businesses’ costs can be raised by regulation whose essence is a hidden tax on business to provide benefits to particular groups such as certain workers or consumers. The effects of such actions to the economy come through the rise in business costs which impact on jobs and productivity, reducing employment and GDP. In general providing benefits to such groups is best done when transparent and paid for out of general taxation.
The supporting analysis for all this work is in chapter 2 of ‘Should Britain leave the EU?’ second edition by Patrick Minford and co-authors, Edward Elgar December 2015. There are two sources of work: a) the supply-side aspects of the Liverpool Model developed to analyse the Thatcher programmes; these mainly involve links to output and employment from labour market regulation and other cost-raising measures such as occur with general tax rates as well as regulations . b) more recent work in Cardiff University on a model of the UK linking the growth rate to supply-side policy on business costs.