In the midst of severe recession, one industry has been thriving. As small businesses struggle to survive the downturn, the army of bureaucrats and inspectors tasked with regulating their activities has arguably never had it so good.
The regulation industry has boomed under a government that has enthusiastically embraced state intervention and micro-management of the economy. But the cost has been very high, particularly for small businesses.
Smaller firms generally can’t afford to set up the compliance departments, install the dedicated software or employ the specialist consultants that enable large companies to deal more easily with regulation. The economies of scale simply aren’t there. To take one example, a recent IEA study, Taxation and Red Tape, found that the administrative costs of tax compliance bear approximately sixteen times more heavily on the smallest businesses than on the largest.
But political attitudes may be changing. There are almost five million small businesses in the UK, employing over ten million people. Clearly the main political parties cannot afford to alienate the small-business vote. The sector – known for its innovation and flexibility – is also crucial to a sustained economic recovery. And given the size of the budget deficit, tax cuts may be impractical in the short term, making deregulation particularly appealing as a way of lowering business costs and encouraging growth.
Accordingly, all three main political parties are campaigning on a pro-small business platform and deploying the rhetoric of deregulation. Ideas include sunset clauses on new rules, simplifying employment law to make it easier to hire employees, and speeding up the process of starting a new firm.
Yet for every proposal to deregulate in the parties’ proposals there seem to be several measures that will actually increase bureaucracy and red tape, including much tighter controls on the financial sector and additional planning controls. Regrettably there are also hints of a new industrial policy, with talk of ‘rebalancing’ the economy away from banking and promoting ‘green’ industries with subsidies and tax breaks. This has echoes of the policies of the 1950s and 1960s when successive governments tried to ‘pick winners’ with economically disastrous results such as Concorde and the nuclear power programme. Those businesses not in the chosen field will inevitably suffer as taxes rise to pay for the government support and resources are transferred to the su