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EU Referendum Report: Regulation and CostBack

EuropeanRegulation has been a large sticking point in the debate for Brexit. Often described as one of the EU’s largest pitfalls, with regulation causing unnecessary burdensome redtape and costs for businesses. Brexiters hold regulation and the cost of the EU as two of their most influencing and necessary reasons for leaving the EU. Conversely, Remainers argue that Brexit would not necessarily cause a reduction in redtape or significantly reduce UK contributions to the EU. These would be wholly dependent on the established trade deals between the UK and the EU in a post Brexit environment – repeal or refusal of adopting regulations would not necessarily be a possibility, similarly to cutting funding to the EU.

Remain

‘Rules at the EU level are designed to create common standards in order to make products more tradable: a lawnmower made in the UK can be sold in Germany without having to be manufactured according to German specifications, for example.’[1] Remainers therefore argue, that continued trade with the EU in a post Brexit landscape would be pinned on existing and new EU regulations, ensuring the UK could maintain its trade with EU member states. The argument that Brexit would create a redtape reduction is therefore said to be a fallacy.

If the UK adopted a trade link with the EU, as is had by either Norway or Switzerland, the UK would still have to implement and abide by a large proportion of EU regulation. ‘If Britain were to join the Norwegian club,’ comments The Economist, ‘it would remain bound by virtually all EU regulations, including the working-time directive and almost everything dreamed up in Brussels in the future.’, and the real sticking point here for Brexiters to counter, is that the UK would no longer have any influence on what those regulations said or required. Remainers argue that this would be an even larger loss of sovereignty than under the current system.

In an interview with the BBC on 2 March 2016, Norwegian Prime Minister Erna Solberg, told the BBC that she would like her country to be part of the EU because it lacks influence over important decision making. Solberg said:

“We are integrating the laws they are making for the single market…but basically we have left part of our democracy to Europe,”.

Whilst many Brexiters believe that the EU creates burdensome costs on UK businesses through its regulation, pro-EU’ers state that it is difficult to actually calculate the costs of EU regulation but note that many of the laws brought forward by the EU are heavily supported and endorsed by the UK Government.

Prime Minister David Cameron has also made ‘increasing competitiveness and cutting red tape’ a key part of his renegotiation agenda. This has been accepted by the EU and has become part of the UK’s EU reform package.

Wolfgang Schaeuble, Germany’s finance minister, has welcomed the initiative, calling the UK Berlin’s biggest ally in the fight against the “protectionist” and “illiberal” tendencies.

In regards specifically to costs, those in favour of the EU believe that the funding the UK pays into the EU, is far outweighed by the trade deals/profits received because of membership. Remainers are also quick to point to the rebate deal achieved by Margaret Thatcher, which ensures that since 1985, the UK receives an abatement (rebate) on all of its net contributions to the EU budget. In this regard, the figure denounced by Leavers of the UK sending £350 million per week to the EU is incorrect.

Remainers also point to the fact that countries outside of the EU must still contribute to the EU, although not directly to its budget. These policy contributions are part of the agreed trade agreements. Norway for example, participates in a number of EU programmes as per the EEA Agreement or on the basis of bilateral agreements with the EU. For the period 2014 – 2020, Norway’s average annual commitment to the EU is €447 million. Whilst this is smaller than the contributions of the UK as a full EU member, Norway does not have the same unfettered access to the EU’s single market as the UK, still having barriers to trade in some key areas. Therefore, Remainers argue that Norway does not reap the full benefits of the EU that the UK does and which it takes full advantage of but does still financially contribute to policy areas.

Leave

Brexiters have long argued that the EU has a heavy handed and unnecessary approach to the adoption of regulation. Four key areas of burdensome regulation are often highlighted by team leave, these are discussed in a report by the Economists for Brexit – The Economy after Brexit. The four areas of redtape are identified as:

  1. Regulation concentrating on Global Warming and the Renewables Agenda.
  2. Social legislation, such as the 2003 Working Time Directive and the 2004 Gender Equality Directive.
  3. Control over financial regulation which was passed from UK authorities to EU bodies (connected to the Commission) as per the 2009 Lisbon Treaty.
  4. Regulations banning substances and managing processes, especially in light of the ‘single market drive’ since 1992.

Those opposing membership of the EU, state that small and medium-sized British businesses, many of whom count the EU market as a tiny fraction of their income, if at all, find the cost of complying with EU regulations particularly onerous and costly.

According to the pro-leave camp, the top 100 regulations imposed by the EU cost Britain’s economy over £33 billion per year. Leavers argue, that if the UK leaves the EU, businesses, particularly small businesses, would have more freedom to make their own operational decisions, tailoring company regulations and practices accordingly.

Many Brexiters, such as Economist for Brexit contributor, Tim Congdon, believe that often the only aim of regulation ‘has been to impose on the UK a standard already existing in France or Germany, even though the UK has previously been happy with its own arrangements’.

This is in line with the comment made by former leader of non-EU member state Iceland, Sigmundur Gunnlaugsson, who warned (during an interview with the Telegraph on 9 March 2016) that larger member states like the UK wield “diminishing power” in institutions still under the sway of the Franco-German alliance. Mr Schaeuble also stated that Brussels would not adopt deregulation, particularly in services, which would harm its economic interests. This is a belief held tightly by camp Brexit.

Specifically regarding cost, it is argued by Brexiters that leaving the EU would result in an immediate cost saving, as the country would no longer contribute to the EU budget. Leave campaigners state that the UK’s ‘net contribution to the EU has risen by over 100% in the last decade’, totalling ‘more than £15.7 billion’ in 2016. They hold that the UK’s contributions to the EU will only continue to rise. The UK’s contributions to the budget vary from year to year and as Full Fact points out, they have ‘been larger recently than in previous decades.’

Team Leave states that UK contributions benefit other EU member states, over the UK. By leaving the EU, they state that ‘the UK would no longer be forced to subsidise farmers in other EU countries (UK consumers currently get a very bad deal out of the Common Agricultural Policy, or CAP, which effectively adds around £400 to each family’s living costs each year).  UK policy-makers would also have much greater control over our VAT rates (and would no longer have to send VAT revenue to the EU).’ Brexiters believe that the money saved from EU membership could be distributed throughout the UK’s welfare policies.


Assessment

The Facts

  • The UK received £4.5 billion worth of spending from the EU last year (Full Fact)
  • The UK’s net contribution was £8.5 billion (Full Fact). That’s about 7 per cent of what the Government spends on the NHS each year.
  • The UK’s rebate was worth between £3 billion and £5 billion between 2009 and 2015.
  • Last year (2015), Britain paid £13bn to the EU (Full Fact).

 

Contributions

Table 1: UK contributions to the EU budget

£ million

2010      2011     2012     2013     2014

Gross contributions (before rebate)                              15,196 15,356 15,745 18,135 18,778

Less UK rebate                                                             -3,047   -3,143   -3,110   -3,674   -4,416

Less Public Sector Receipts                                         -4,768   -4,132   -4,169   -3,996   -4,576

Net contribution to EU Budget                           7,381    8,081    8,466   10,465  9,786

Source: HM Treasury, European Union Finances 2015.

 

What is the ‘rebate’?

As Full Fact explains, ‘[e]ach year the UK gets an instant discount on its contributions to the EU—the ‘rebate’—worth almost £5 billion [in 2015]. Without it, the UK would have been liable for £18 billion in contributions.’

However, because of the rebate, the UK does not in reality “send to Brussels” £18 billion, or anything equivalent per week or per day. The rebate is applied straight away.

Note:   This figure excludes payments from centrally managed EU programmes that go directly to end beneficiaries such as universities. According to Treasury data, these direct payments were worth around £1.4 billion to the UK in 2013.

There are other measures of the UK’s net contribution. For example, a 2014 European Commission Financial Report stated the UK net contribution was under €5 billion in 2013. 4 The lower figure results from including payments made directly to UK beneficiaries, and also discounting some of the UK’s contributions. The Treasury figures are also based on cash flow within the calendar year, whereas the European Commission figures match transactions to particular EU Budgets.
Assessment breakdown

Regulation and Cost

When assessing the two arguments regarding regulation and costs, it is fair to state that if the UK was to leave the EU, the government would be able to repeal some of the existing EU legislation currently transposed into UK law. It is possible that the Government could concentrate on repealing the most bureaucratic and expensive pieces of legislation, especially with pressure from business lobby groups pushing the cause. This could also be especially beneficial for SME businesses that are disproportionately affected by regulatory business legislation and the cost of these regulations.

However, the ability of the Government to be able to repeal legislation and thus reduce costs would depend on two main points: trade and desire.

In regards to trade and regulation, the ability for the UK to repeal regulations will hang on the approved trade agreements made between the UK and the EU. The types of agreements to be reached, at this stage, are difficult to speculate. Whilst the Norway or Switzerland model seem most preferable, it is possible that if agreements cannot be made, the WTO model will be maintained by the UK.

However, these trade agreements will have an impact on the way in which the UK trades with the EU and will no doubt include regulation when trading goods and services. It is possible that the UK would be made to keep specific pieces of burdensome legislation in order to comply with EU standards and regulations, that would then become part of the binding trade agreement and would undoubtedly incur costs at a government level and also on businesses, to comply with regulation as per the current system. These types of standards and regulation have been implemented on countries such as Norway. To this end, the key question becomes whether the UK is happy to agree to new standards and regulations, that may become part of a trade agreement, yet have no say in what these standards/regulations are.

Secondly, repeal of regulation would also be dependent on Government desire. On this note, UK Government has supported a large majority of EU initiatives, such as the overhaul of consumer rights and the introduction of Alternative Dispute Resolution. These are big policies that are highly unlikely to be repealed in the light of Brexit. As John Springford explains ‘EU rules do not appear to impose rigid harmonisation on the union as a whole: under EU directives, member-states are able to impose higher standards on their own firms if they wish, and over time, the level of regulation in other member-states has converged on Britain’s liberal approach, rather than the other way round. It is hard to argue that Britain’s product and services markets are highly regulated as a result of EU membership.’ Much of the regulation, it can be argued, would have been implemented by British Governments regardless. It is perhaps the processes that would have been different.

Therefore, when considering the impact Brexit will have on business regulation and thus cost, it is important to assess what pieces of regulation impact business and whether there is a real likelihood of these being repealed. It is arguable here that the levels of regulation, in the event of a Norway or bilateral trading model are highly unlikely.


UK Budget Contributions and Cost

When looking at the cost of the EU, this has been a strong tool for Brexiters, whose campaign has centred on removing funding from the EU and putting it into national institutions, such as the NHS.

Whilst the high costs of the EU are a negative to membership and play well into the hands of Brexiters, the rebate, on the flip side, is a useful tool for ‘In’ campaigners.

As it stands, it is difficult to provide figures on the exact financial gains from its EU membership and how exactly this outweighs the costs and payments that are made to the EU. Those in favour of the EU will argue that the financial advantages of EU membership, such as free trade and inward investment outweigh the upfront costs. However, with no definitive answer of what this figure is, it becomes hard to back up the argument. Even the House of Commons Research report on the EU Referendum states that ‘[t]here is no definitive study of the economic impact of the UK’s EU membership or the costs and benefits of withdrawal’.

Therefore, the speculative benefits of cost savings, if the UK leaves the EU, must be weighed up against the probability of gaining preferable trade agreements post Brexit. The real question is, what will the UK secure if it leaves the EU? If it saves costs, which leaving the EU would arguably do, would these costs be enough to make up for the potential losses in trade? This is a policy matter where neither side have put forward clear or trustworthy arguments. For both sides, it is hard to assess cost savings. It is unclear post Brexit, what trade agreements will be made and what payments they will involve from the UK to EU initiatives. This is a fundamental problem for both Remainers and Brexiters in the policy argument of cost.

Furthermore, if trade continues to thrive and many trade and hopeful free-trade agreements are reached quickly and effectively, the costs saved from full EU budget contributions do have the ability to be beneficial to the UK’s national economy and welfare. However, the ability of the UK to negotiate important trade deals quickly, to see an initial cost saving, is highly unlikely. It must also be considered that it is likely trade regulations or financial contributions would still be costly and required as part of UK-EU trade agreements. However, some argue that these would not be as high as experienced by Norway – leaving the EU would signify that the UK was not prepared to agree to such financial terms, this would prevent the UK from signing up to such agreements. Alternatively, it is also argued that the Switzerland model would be difficult for the UK obtain. This model was agreed between the EU and Switzerland at a time when it was still possible Switzerland would join the EU; providing the country with favourable and beneficial terms was seen as an enticement for the country to become a member state. This is at odds with the UK which would have just left the club it was now attempting to make preferable deals with.  Remainers argue that the EU would not be so kind as to provide favour to the UK after leaving and thus regulations and trade costs would be high.

 

[1] John Springford – Brexit and EU Regulation: A bonfire of the vanities? (3 February 2016)

Posted by Sue Robinson on 10/06/2016