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Letwin: Government regulations are strangling British business

Is Britain the best place in the world to do business? When I discovered that this would be the opening question of this morning's session, the story of Mr Nicholas Hamilton came to mind.

Mr Hamilton runs a business from a small village in my West Dorset constituency. He provides urgent repairs for yachts around the world. His operation is an example of all that is good in modern business. Indeed, it fits into every fashionable category : it is 'virtual', 'high-tech', 'outsourced', 'global' and 'eco-friendly' since it relies on the internet, uses global positioning satellites, operates through a network of contracts and suppliers, has customers all over the world, and conducts its activities without any adverse effect on the environment of rural Dorset.

You would think that a businessman such as this - one who has been a model of ingenuity and inventiveness, who has shown such an understanding of the benefits brought by information technology, who has illustrated remarkable commercial insight—would be helped, not hindered by the business environment that exists in this country.

Unfortunately not. Instead he gets a knock on the door. Out of the blue the Financial Services Authority contact him to say that his company is in breach of Section 19 (1) of the Financial Services and Markets Act 2000.

Mr Hamilton explains:

"The substance of the FSA claim was that, by guaranteeing to repair yachts, we were providing insurance, whilst not registered with the FSA as being a company authorised to provide insurance. They pointed out that there is only a strictly limited list of activities which are exempt from this rule, and one is breakdown "insurance" for vehicles. This is excepted because in Directive 84/641/EEC, which is enacted in UK law through Article 12 of the "Regulated Authorities by way of Business Order 2001", assistance for accidents or breakdowns involving vehicles are excluded from the Directive.

We responded by suggesting that the EU Directive meant all vehicles, including planes and boats, and indeed why not? The circumstances of providing assistance for a broken down boat are exactly the same as for a car. In granting the exclusion only for vehicles, the EU had obviously overlooked the possibility of a seafaring nation having similar requirements for its yachtsmen as for motorists.

The FSA argued strongly that the Directive meant road vehicles and no other type of vehicle and we were not in a position to contest this. I was faced with the possibility of closing down my business because of an oversight by EU bureaucrats nearly 18 years earlier. I thus became embroiled in lengthy discussions with the FSA about how I could proceed to run my business lawfully. Indeed I had to visit the FSA offices in London to meet not one but two civil servants to argue my case.

The options open to me were to become an insurance company, an insurance intermediary or to close down my business. The cost and bureaucratic nightmare of becoming an insurance company or intermediary were impossible to bear. However, to give the FSA credit, they then helped me to reach a compromise whereby we re-drafted our terms and conditions of service so that we would no longer guarantee our services without condition. This removed our "insurance" status and we were allowed to continue to trade.

Now, I do not mention this story to criticise the Financial Services Authority. They were only doing their job. In fact, Mr Hamilton specifically acknowledged "their helpful and constructive attitude". It is not their fault that they have to enforce yet another EU Directive, implemented in highly restrictive UK legislation.

The point of the story is not to criticize hard-working and conscientious officials. It is, rather, to illustrate a serious deficiency in our system. What happened to my constituent, Mr Hamilton, is happening to hundreds and thousands of businesses across the United Kingdom, every hour of every day of every year. The many, wasted hours that Mr Hamilton spent dealing with his unnecessary regulatory obstacles, were hours of lost production—hours that contributed to reducing rather than increasing Britain's productivity growth.

Our aim must be to prevent such obstacles being put in the way of Mr Hamilton and many others like him. We have to create conditions in which his business and hundreds of thousands of others can flourish without unnecessary impediment from local and national Government, from regulators and from the European Union.

The cost of regulation to the economy is shocking. Your organization's own Burdens Barometer has identified a cumulative cost to business due to regulations introduced since 1997 in excess of £20 billion, and I understand that, on current trends, this is expected to rise to over £30 billion.

Another study by the Peninsula Group indicates that the amount of time spent dealing with government regulation by the average employer has increased by 200% since 1997, and that the average financial cost of regulation per business has increased by 50% over the same period.

It is no wonder that average productivity growth in Britain - across the board - has been so disturbingly low over the past few years, and that we continue to lag so far behind the United States.

The rate of return in UK manufacturing fell by 2.6% between 1997 and 1999 and by just under 5% between 1999 and 2001. As your organization has argued, it is no accident that these were periods when the costs of regulation had been increasing at a very worrying rate.

The fact is that all this extra regulation is having serious effects on our competitiveness. UK competitiveness has decreased significantly since 1997. The UK has now fallen to fifteenth in the world, behind Germany and Japan - a fall of eleven places in five years.

And the most damaging effect of regulation is visible in smaller businesses. Larger corporations can afford lawyers and accountants to handle the problem. SMEs, like that run by Mr Hamilton, find it much more difficult. Changing a payroll to administer a tax credit, for example, may cost a firm with 60 employees the same amount as one with 6,000. Very rarely does Government—in all its regulatory impact assessments—take a proper account of the proportionate costs on a small business that each new regulation brings.

I accept that the huge burden of regulation over the last few years has not been created with any malicious intent by the Government.

But good intentions—if they mean increasing government interference in business—can all too easily pave the road, if not to hell, at least to seriously impaired economic performance.

It was a sign of things to come when, in 1998, the Government replaced the previous administration's deregulation taskforce with what they termed as a 'Better Regulation' taskforce.

When agencies and officials are given target numbers for the 'regulatory contacts' they must have with business, is it any surprise that the regulatory burden increases?

When the DTI's budget rises by 44% in four years - with spending rising fastest on central administrative staff and on those regulating business - is it any wonder that there is little incentive to limit regulation?

But if Government has supplied the car that is driving increased regulation, it is the European Union that has provided the engine.

Close to 40% of regulation affecting UK business now originates in the EU. One estimate suggests that business is now subject to over 200,000 EU regulations. As many major EU Directives affecting business and employment have been implemented in the UK over the past 6 years as in the previous 25.

Many of you in the hall today will be well aware of these problems, and will be experiencing the ill effects of regulation in your day to day business activities.

Many of you will have heard politicians from all parties say that something must be done. Many of you will have wrung your hands in despair at the failure of any real substantive progress.

I am not going to stand here today and promise to burn 97,000 pages of EU law.

But I can make two pledges:

First: We will labour night and day to prevent the Government from sleep-walking this country into the European Constitution. As Martin Wolf set out in the Financial Times only last week:

"The draft constitution is far more than a tidying up exercise. It contains sweeping claims and objectives. It is a machine for ratcheting upwards an ever increasing regulatory burden".

If adopted, the constitution will hugely increase regulatory activity by expanding EU competences, by lowering the threshold for Qualified Majority Voting and by enshrining the new EU Charter of Fundamental Rights. In this context, the Government's famous 'red lines' are, I fear, of little more use than the scribbling of a child in a school text-book. The text as a whole provides a basis for remorseless increases in the regulatory burden. If we fail to resist it, we will be taking a one-way ticket to a yet more heavily regulated Britain. Therefore, resist it we must.

Second: We must set about changing the regulatory culture of Whitehall.

We recognize the lesson of the past. Ministerial will to intervene can be a powerful cause of increasing regulation. But ministerial will to deregulate is not, by itself, a sufficient basis for achieving deregulation.

The pressures from the lobby-groups and from the media for government to 'do something' about each passing problem, the desire of hard-working and imaginative officials to be seen to be 'taking action', and the lack of any real, personal cost to ministers and officials who over-regulate, all contribute to a culture of regulation.

To begin to change that culture, we will need both imagination and perseverance. As in any business, we need to find effective drivers of change.

One driver of cultural change will be reducing the size of the civil service from 500,000 to 400,000. We are committed to achieving such a reduction by means of natural wastage under a total recruitment freeze. That isn't just, or even primarily, a money-saving device. It is intended to force Permanent Secretaries to ask: 'how can we do less, how can we regulate less, so that our diminishing staff can cope?'.

Another driver of cultural change will be a series of measures to make regulating more difficult, and its costs more transparent. Sunset clauses will have a part to play; exemption of whole classes of business from whole classes of regulation will have a part to play; a requirement for independently conducted regulatory impact assessments both pre- and post-regulation has been proposed by Archie Norman; a right of civil redress in cases where EU legislation is gold-plated in the UK has been proposed by Jonathan Djanogly.

We have a clear aim.

We aim to make Britain a better place to do business.

Not by government telling business how to do its business better.

Not by government regulating business better.

Not by government thinking that it can spend business's money better than business can.

But by government getting out of the way.

By resisting the EU Constitution and changing the culture of Whitehall, we will begin to stem the tide of regulation.

By reducing the rate of growth of public spending so that the share of GDP taken up by public spending reduces, we will give ourselves the room for progressive and substantial reductions in business tax and for progressively pruning back the thicket of complex and intrusive systems of business tax.

By focusing the efforts of government on the core activities of government—on the provision of macro-economic stability, on the provision of effective schooling, healthcare and transport infrastructure, on the protection of the public and the prevention of crime, on the basic training of a skilled workforce—we will avoid the mistake of over-reaching ambition that so often results in under-delivery and over-interference.

During the past few years, British business has been too often let down by that combination of excessive ambition, under-delivery and over-interference.

The aim of today's re-invigorated Conservative Party is to stand up for British business, to give British business the framework it needs to get on with the job—and then to let it do that job, unimpeded by government.

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