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CIPFA response to Regulatory Budgets Consultation |
Regulatory Budgets Consultation 12 November 2008 Dear Sirs Regulatory Budgets: a consultation document CIPFA is pleased to offer its comments on the above consultation document. We are the leading professional accountancy body for the public services. CIPFA is responsible for the education and training of professional accountants and for their regulation through the setting and monitoring of professional standards. CIPFA is also the leading independent commentator on managing and accounting for public money. CIPFA members are well-represented across the accounting community in central government, its agencies and NDPBs, and the wider CIPFA group is active in supporting financial management improvement in government. This response has been prepared by CIPFA officers and has been reviewed by a panel of our members drawn from senior financial position across central government. Overall CIPFA supports the principle that regulatory budgeting can be a valuable public policy management tool. The discipline that setting a budget for the costs of compliance with legislative programmes would impose should help to make clearer to policy makers the wider financial consequences of legislation and improve decision-making when it comes to choosing between regulatory options. In theory it should also help to improve the quality of legislation, as attention is focussed on achieving regulatory aims with minimal financial impact. Constructed properly, regulatory budgeting should also help to address concerns, reiterated recently by the PAC, regarding their call for policy proposals, submitted to Ministers and board members, to carry a full assessment of their financial implications (HC510 43rd report of the PAC refers). However we have a number of significant concerns with regard to the current proposals which, if not addressed prior to implementation, would undermine the effectiveness of a regulatory budget regime. These may be summarized as: • The limited trial period; Our concerns in these and other areas are set out in more detail in the attachment to this letter using the context of the specific questions posed in the consultation document. Yours sincerely Ian Carruthers CIPFA’s RESPONSE TO QUESTIONS RAISED IN ‘REGULATORY BUDGETS: A CONSULTATION DOCUMENT’ Question 1. Do you consider that the Government should proceed with a system of regulatory budgets as a way of managing the costs of new regulation? As noted above we are broadly supportive of regulatory budgeting in principle but would have some concerns were Government to proceed on the basis of the current proposals. In particular the proposed roll-out programme involves a shadow budget for all regulators falling within scope for the 2009-10 financial year to allow for a trial of the process and methodology. However there must be concerns as to how much can be learned from such a short trial programme, particularly when it is accepted that the “real” programme will involve setting budgets for a three to five year period. There are perhaps lessons to be learned from the US approach which has seen similar trials run over a longer timescale, with a smaller test population which should allow for swifter and more detailed evaluation. We also note that these proposals come close on the heels of several measures to improve the existing Regulatory Impact Assessment framework in the UK. These include: • The creation of a publicly-available impact assessment library in 2008 As these are both relatively recent developments, neither has been given the opportunity to bed in and be assessed for their effectiveness in improving regulation. We would therefore recommend that time be taken to assess the success of these measures before proceeding with further initiatives. Question 2. Do you think regulatory costs should be scored at the point of enactment or when they come into effect? The scoring of regulatory costs upon enactment would appear to be the approach most consistent with best and actual practice. In accounting terms scoring costs upon enactment aligns more closely with the concept of accruals accounting. It also aligns more closely with the planning and delivery of the legislative programme and avoids the need for linking costs back to legislation that has been enacted in the past. It is also the case that those industries facing a long lead time to meet a new legislative requirement will be incurring costs from the point of enactment in preparation for the effective date of those regulations. By accounting for costs on enactment this will tie-in more closely to the actual experience of those incurring the costs. Question 3. What, in the range of three to five years, would be an appropriate budget period? We would favour the 3 year period as it has the advantage of being aligned with the government’s current approach to forward spending plans, the triennial Comprehensive Spending Review. This will allow regulators to match a specific funding envelope (the 3 year settlement) with a specific legislative programme. By selecting a three year budgetary period this should help to avoid the need for a new budgetary planning and approval process, and the need to reconcile administrative spending to regulatory costs over different lengths of budgetary period. Question 4. What are your views on the possible system to manage regulatory budgets outlined in paragraphs 2.9-2.31? Would this deliver a credible and effective system of regulatory budgets? We note the proposals do not consider whether the costs to the regulator of developing, implementing and monitoring compliance with regulations (internal costs) should count against the regulatory budget. To exclude this element of the costs of regulation (which can in themselves be significant in relation to the total cost), whilst being consistent with current RIA practice, misses using the opportunity of introducing a regulatory budgeting regime to also address the issues raised by PAC in the report mentioned above (i.e. that the costs to the department/regulator associated with a particular piece of legislation be made clear to those making policy decisions). It also means that the “full” cost of regulation is being understated. This becomes an issue when comparing policy options on a “gross cost” basis e.g:
We are also concerned, that whilst Chapter 2 of the proposals give a high-level view of how the process might work, there remain a number of areas where more detail is necessary to form a clearer view as to whether the proposals are sufficient to deliver an effective regulatory budget system. In particular: • What part of government would be responsible for setting, monitoring and enforcing budgets, and the management of the suggested year-end flexibility, inter-departmental trading and central exceptional provision? Question 5. Which forms of government action should be within scope of regulatory budgets? We believe that the resource budgeting boundary should also be used for regulatory budgeting purposes. The advantage of a regulatory scope boundary that follows that of used for the resource budgets, is that this creates an immediate alignment between the regulatory and the administrative budgetary and accounting regimes. It also offers an existing platform and process for collating financial information from across government, the Treasury’s Combined Online Information System (COINS). Bringing the scope of financial and regulatory budgeting into line is particularly important when one takes into account the significant project being led by HM Treasury to align the accounting, budgeting and estimating frameworks. The Alignment Project aims to modernise and simplify financial reporting to Parliament and wider stakeholders by bringing these three currently disparate reporting streams under a unified framework. To overlay a separate mechanism for regulatory budget reporting would appear contrary to the wider direction of travel of government financial reporting and would impose additional reporting costs on departments and other regulators at just the time when efforts are being made to reduce this burden. We would therefore recommend that the option of linking the implementation of regulatory budget reporting with the delivery of the Alignment Project be explored. CIPFA is actively involved in the Alignment Project and would be willing to discuss this further if required. We also note that the proposed scope suggests that local authority regulation (except where it is derived from implementing central government policy) will be excluded from scope. This division is unclear and results in a large area of regulation that is excluded from scope – local bye-laws etc. This could introduce the potential to use local authorities, indirectly, as a means to pursue policy initiatives whilst avoiding the regulatory budget cap. It is also unclear whether measures such as local congestion charging schemes would be within scope. Question 6. Do you agree with the outline of this approach to EU and international originating regulations? Are there other issues to be addressed in the context of EU and international commitments? We agree that EU and international originating legislation should form part of the scope of the regulatory budget regime. This would enable the UK to progress with a credible regulatory budgeting regime whilst maintaining its commitment to EU and international treaties and organisations. Question 7. Is the approach outlined in paragraphs 3.14-3.22 to costs arising from specific regulatory actions appropriate? We agree with the treatments set out at paragraphs 3.14 to 3.22 but would again draw attention to the benefits to be gained from scoring the costs to the regulator of developing, implementing and monitoring compliance with regulations against the regulatory budget as set out in our response to Question 4. Question 8. What are your views on the approach set out in paragraphs 4.6-4.14 for treating independent regulators in a regulatory budget? We agree that there is a strong case for excluding competition authorities and economic regulators from the scope of any regulatory budgeting regime in recognition of their specific roles in managing UK markets and the economy. However whilst we are mindful of the issues of independence that these proposals pose in the case of the “Hampton” regulators, their exclusion would again raise questions as to whether the regime has the appropriate scope. We would therefore again suggest that as far as is possible the regulatory budget scope follow the resource budgeting boundary. Question 9. Do you agree with the proposed categories of costs to include in a regulatory budget as outlined in Chapter 5? It is proposed that public service regulations (those that do not directly affect the private sector/third sector) be considered outside the scope of the regulatory budget. Two main reasons are given for this exclusion, both of which we disagree with. • The nature of the regulation is indistinct • There are likely difficulties with measurement This exclusion from scope of public sector specific regulation represents a potential missed opportunity to reduce the regulatory burden on the public sector and the associated costs of compliance that fall upon the wider economy through the taxation raised to pay for public services. Question 10. What are your views on the proposed assessment methodology outlined in Chapter 6, including whether budgets should set on a gross or net basis? The proposals suggest that the choice between competing legislation will be determined by which piece of legislation delivers the greater cost/benefit ratio. This overlooks the political drivers behind legislative programmes which can override other considerations, and the fact that, irrespective of the cost-benefit ratio, a department subject to a gross cost limiting factor may not be able to pursue the policy with the more productive cost/benefit ratio. For example:
The proposals recognise the potential shortcomings of a gross cost budget and recognise that a budget set on the basis of regulatory gain or a net benefit budget might also be considered. We would suggest that this option be explored further as it would place the emphasis on delivering a positive outcome from regulation and allow policy-makers to take into consideration not only the direct benefits of regulation but also assessing the preventative benefits of regulation in prevention and the opportunity costs that accompany failing to regulate in particular circumstances. |