Has the Government saved British businesses £3bn by slashing red tape?

"We have already got rid of about £3 billion a year of red tape costs to businesses, but there is more to be done."

William Hague, Sky News, 2 September 2012

As the Prime Minister went on the offensive in the weekend's media ahead of today's Cabinet reshuffle, Downing Street promised "take drastic steps to slash red tape" in a bid to kickstart the economy.

These sentiments were echoed by Foreign Secretary William Hague, who told Sky News's Dermot Murnaghan that the Government had already slashed £3 billion per year from business' outgoings by slashing burdensome regulation.

However as we found when we probed the claim, it no longer seems to be accurate.

The source

The £3 billion in savings to businesses from less 'red tape' is easily traced to the Department for Business, Innovation and Skills' (BIS) Third Statement of New Regulation.

Since the Government introduced its 'one in, one out' policy (for every £1 regulation brought in, there must be a similar-sized reduction elsewhere in the regulatory system), it has reported on the net savings achieved.

Released back in February, the Third Statement did indeed find that, as it stood at the time, businesses had benefited to the tune of over £3 billion since the new regime was introduced. As the press release at the time recorded: 

"The Third Statement of New Regulation shows that the cumulative net reduction of regulation since January 2011 is around £3.3 billion."

In fact, the vast majority of these savings were achieved in the first year when the Department for Work and Pensions switched pensions indexation from the RPI measure of inflation to CPI, meaning that £3 billion was wiped from business outgoings in 2011 alone.

The problem

Unfortunately for Mr Hague, this change to the uprating of pensions is something of a double-edged sword, as the Government has also introduced the auto-enrolment of employees into pension schemes as part of its pension reform package.

As was made clear at the time of the Third Statement, this was expected to add significantly to the regulatory costs to businesses, with BIS noting:

"The bulk of the savings (just over £3bn) delivered thus far continue to be attributable to the change to private pensions indexation, introduced by the Department for Work and Pensions in January 2011 and was expected to be offset in part by pensions auto-enrolment."

Sure enough, when BIS issued the Fourth Statement of New Regulation back in July, the cost of pensions auto-enrolment had been factored into the calculation, and the Government reported a much lower savings figure as a result of one in, one out regulation.

According to Business and Enterprise Minister Mark Prisk in the foreword to the Fourth Statement:

"Since 2011, savings to business from cuts in regulation have outweighed the costs of new domestic regulation by over £850 million."

Looking at the accompanying table, we can see that £2.84 billion was added to the regulatory costs as a result of this change between the time of the Third Statement (SNR3) and the Fourth (SNR4).

So while William Hague's claim could once have been accurate (albeit with some important caveats) it now seems rather out-of-date.

What does the cost actually measure?

It's also revealing to take a closer look at the way that BIS calculates the savings made from regulatory changes, as these raise further concerns about the scope of the £3 billion figure.

In particular, it's important to note that BIS considers European Union Regulations, Decisions and Directives 'out-of-scope' for the purposes of calculating these costs.

As the British Chambers of Commerce (among others) has noted, this leaves out regulatory burdens placed upon British businesses, such as the Agency Workers Directive - which the BCC estimates will cost £1.6 billion per year to implement - and the uplifting of the National Minimum Wage.

If we were to factor these into the mix, then it is possible that the costs to businesses of new regulation may outweigh the benefits gained from the red tape that has been 'slashed'.

Conclusion

Based on the information we have, it seems the only way that William Hague's claim can be stood up is by using out-of-date information. While the Government did claim £3 billion in cumulative savings for businesses back in February, the introduction of new pension regulation has since cut the net benefit substantially to closer to £850 million.

Depending upon how we define regulation, the cost to business could even have increased as a result of new EU directives, although whether or not the Government is responsible for easing the burden to employers from Brussels is a matter of hot debate.