EU regulation: playing the cost card

22/09/2013

If it hadn't been entirely his own fault, one could have had some sympathy with Farage as he surveyed the train wreck of his conference. "There is no media coverage of this conference. It's gone. It's dead", he complained to his faithful, yesterday. "It's all about Godfrey hitting a journalist and using an unpleasant four-letter word. It's gone!"

Had not Bloom intervened, there would perhaps have been far more focus on the policy issues. That would most certainly have been the case with this blog, as I had already done some preliminary work with a view to writing a response to Tim Congdon's conference presentation on the costs of EU regulation. Without Bloom, the work would have been completed and posted yesterday.

However, the issue is far too important to be left to the Daily Express, which seems to have been the only newspaper to have taken any interest in Congdon's claims. So the work has been done anyway.

Congdon, of course, is UKIP's economics spokesman and for some time he has been touting his paper on the costs of our membership of the EU. There, he puts the cost at £150 billion a year, representing ten percent of GDP. But, for the conference he increases this to eleven percent, bringing the cost to about £170 billion.

In his paper, the biggest single component of this, Congdon asserts, comes from 120,000 pages of EU law, accounting for five percent of GDP or about £75 billion. But, on the assumption that regulation reduces GDP by about a half a percent a year, he now puts the total cost of regulation at about £90-95 billion.

This is a difficult subject, it is a controversial subject and anyone looking at it in an objective way could only come to the conclusion that EU membership has been damaging to the UK, says Congdon, and one would not disagree with that. But does that make Congdon's regulatory cost figures right?

Nigel Farage seems to think so. He claims that they: "are to date the most comprehensive study of the overall cost of our membership of the EU. And that cost is staggering". But, as to the depth of that study, Congdon in his published paper tells us:

Given the vast scope of the EU’s regulatory effort, the present study cannot pretend to offer detailed and rigorous new quantitative research. All that can be done here is to synthesise the results of other analyses that seem well-intentioned in purpose and well-grounded in fact.

Further on, he tells us:

While exact quantification of the cost of the vast body of EU interferences is impossible, both the broad-brush approaches and the more nitty-gritty specific analyses suggest that each year the UK is losing between 2% and 5½% of GDP a year because of EU regulation. The number has undoubtedly been rising and, on that basis, must now be closer to 5½% of GDP than 2% of GDP. Given that the regulatory onslaught is gaining momentum all the time, the figure must be expected to increase in the next few years. We are therefore talking of the cost of EU regulation of, in the round, 5% of GDP.

In other words, far from being a "comprehensive study", Congdon is merely dipping into the work of others and then plucking out a figure somewhere in between the extremes, originally opting for five percent. This does not even qualify as an estimate. It is guesswork, dressed up in quasi-academic terminology.

Furthermore, this guesswork is based on several assumptions. By default, Congdon assumes that, had we not joined the EU, none of the regulation he attributes to the EU – or anything like it – would have been adopted by the UK. The UK would be a regulatory clean sheet.

Congdon also assumes that all EU regulation represents a cost to the economy and that there are no compensatory benefits. To that effect, he asserts: "the entire 120,000 pages of EU legislative enactments have effects, mostly negative, destructive and deleterious, on output and employment". He then assumes that the cost which he allocates to EU regulation is attributable entirely to EU action. Then, by inference, he leads us to believe that if we left the EU, the total assumed cost would represent a saving. The UK, he writes:

… has no need to suffer from the enormous burden of the 120,000 directives and regulations that constitute the acquis. We do not have to lose 5% or so of our GDP, with the toll rising over time, to participate in the great historical drama of "ever closer union". On the contrary, the move "towards ever closer union" is a process to which the overwhelming majority of our citizens are opposed.

The citizens of other European countries may be able to persuade themselves that a regulatory burden costing 5% of GDP is desirable and necessary for larger reasons of European "destiny". But most people in Britain are not interested in this destiny, whatever it was, is or may become. We should not allow a foreign bureaucracy to squander a colossal chunk of our national output for a purpose that in fact we despise.

However, all of these assumptions, overt and implicit, can be challenged. For instance, in terms of climate change legislation, Congdon asserts:

The EU bureaucracy has accepted the so-called "warmist" doctrine that, because of the carbon emissions arising from modern industrialism, mankind is largely to blame for the global warming of recent decades. The purpose of the 2009 Renewables Directive is, explicitly, to move towards a 20% drop in the EU's carbon emissions by raising the proportion of electricity generated by renewables (wind, wave, solar and so on) to 20% by 2020. The cost of electricity generation by means of renewable energy is much higher than that by conventional methods (gas and coal firing, mostly). For example, electricity from offshore wind farms costs at least three times as much to produce as electricity from a gas-fired combined-cycle power station.

Thus, Congdon would have it that all climate change costs are attributable to the EU, something which simply isn't the case. Firstly, the fount of the all evil, so to speak, is the UNFCCC (UN Framework Convention on Climate Change) as advised by the IPCC, along with the Kyoto Protocol, to which the UK is not only a signatory but one of the more enthusiastic contributors.

To that extent, the EU is largely implementing international treaties, and – as evidenced by its Climate Change Act - the UK has gone further than EU requirements. Even without the EU, the UK would have adopted Kyoto and much more, so UK climate change regulatory costs cannot be attributed to the EU, even when they have an EU label.

This is in fact the case with so much of the legislation bearing the EU label. A very significant proportion of the "120,000 pages of EU legislative enactments" originate with international agreements, to which the UK is party, or would have been in the absence of EU membership.

Addressing a different aspect of regulation, one then has to concede that much of the regulation would have existed in some form or another, even if the EU had never existed. One only has to look at the meat hygiene and inspection regime in the UK. Long before the EEC came into being, the UK had hygiene and inspection rules.

If at one level, joining the EU/EEC had simply changed the label on the regulation, and the controls had carried on just as before, then despite the industry having become subject to EU law, the actual cost of EU regulation would have been nil.

As it turned out, the EU requirements were more rigorous than the UK had previously demanded – although not drastically so. Much of the cost resulted from "gold plating" by our own officials. Once that was addressed, and the fact that UK law needed updating, the actual costs for implementing the structural improvements were minimal.

What was significant, but only to the small slaughterhouse sector, were veterinary inspection costs, which were definitely attributable to EU membership. Part of the costs, though, was attributable to the clumsy and expensive way that the British government implemented the law. This might well have been reduced but for the BSE crisis, which brought a torrent of new law, all designed to "improve consumer confidence".

That additional law was made in the EU, but much of it was first implemented by the UK and then adopted by the EU. The cost cannot be attributed to the EU because it would have been adopted even if we had not been members of the EU. Specifically, the law was intended to avert an export ban, and the costs of implementation were regarded as a small price to pay to keep trade flowing.

Carried across the board, a huge amount of EU legislation simply replaces and/or updates UK legislation, or is there to facilitate trade. Some UK updates have been held back, pending EU action, and in other instances, law-making in the UK has been restrained by the EU. But for the EU, we might have gone further and incurred greater cost.

On this basis, the EU regulatory costs should be measured not by reference to the cost of implementing EU legislation per se, but by reference to the cost of additional requirements which we have adopted solely and exclusively as a result of our EU membership. Even then, there is the cost-benefit to address. The Open Europe report on costs of regulation argue for a ratio of 1.02, with regulations delivering £1.02-worth of benefits for every pound spent.

Putting these things together, calculating (or estimating) the cost of implementing EU regulation is only the start of the process of determining how much the EU has cost us. To get to a correct figure, there has to be an allowance for regulations we already had, or would have made anyway, and for those which have an EU label but are made in response to international agreements.

To come to a valid regulatory cost, we can only take account of those regulations which we have introduced solely and exclusively as a result of our EU membership, and the cost of measures in excess of those which we would have applied anyway.

Whatever the final cost is, it is likely to be very considerably less that the £90-95 billion than Congdon estimates. If we reject Congdon's view that regulation is mostly "negative, destructive and deleterious" and accept some laws deliver benefits, then the overall cost drops even further.

As to what the figure might be, we can't even make a rough estimate. It would be a major task just to establish the proportion of our law that is attributable specifically to the EU, and which would not have been implemented (or something like it) had we not joined the EU.

Playing the cost card, therefore, needs to be done with the very greatest of care. Unless we can come up with sound, challenge-resistant figures, it is probably best not to offer any at all. To present what are clearly grossly exaggerated estimates risks being discredited, and raises expectations that cannot be met.

On the whole, focusing on cost savings is probably bad strategy anyway. Even if there were no savings at all, the case for leaving would remain. It is that case, I feel, which we should be making – not haggling over unknown and probably unknowable regulatory costs.

COMMENT THREAD