Regulatory Pay as you Go: Lessons from Other Countries

July 16, 2015

Reducing the regulatory burden borne by businesses and citizens is a central objective of governments all over the world. As part of that effort, different strategies and tools have been used to control the aggregate regulatory costs of new regulations (e.g. replacing paper submissions with electronic filing) and to reduce the burden of existing ones (e.g. reduction targets).

Exploring a legislative fix

The U.S. Senate Committees on Budget and Homeland Security and Governmental Affairs recently held a hearing “Accounting for the true cost of regulation: exploring the possibility of a regulatory budget,” to consider how that tool might work. However, the implementation of the regulatory budget has difficulties due to technical challenges and method pitfalls. The United Kingdom considered a regulatory budget proposal in 2008, but eventually concluded that despite the promise, “there were also some very obvious practical problems, not least the difficulty of measuring the regulatory costs, and the fact that no Secretary of State was going to give away his/her ability to provide rapid regulatory responses to new and urgent problems.” The U.K. regulatory budget idea was accordingly dropped in 2009.

An incremental approach holds promise

In order to achieve better controls on the burden imposed by regulation, a simpler variant of the regulatory budget concept, the “one in, one out” or “regulatory pay as you go” approach, has captured the attention of policy makers. The U.K., Canada, Spain, and Portugal, among others, have implemented this approach. The apparent success of this rule seems to be explained by its simple design, which focuses on controlling costs imposed by new rules by eliminating an equivalent burden elsewhere, and its incremental nature, which allows progress in the short run.

Successful reforms in Canada and the U.K.

While focusing in different costs, the use of a pay as you go rule seems to have delivered good results, at least in Canada and the U.K. One lesson of these experiences is the importance of having an outside reviewer that can challenge and approve the reduction proposals. For example, the Canadian Regulatory Affairs Sector of the Treasury Board is charged with ensuring Canada’s “one-for-one” rule is correctly implemented. In order to do so, it determines the application of the rule to regulatory changes and when exceptions exist, and must verify burden reductions to be used as credits. In order to facilitate the implementation of the rule and engage stakeholders, the Canadian government also has a Regulatory Cost Calculator to monetize the costs and conducts public consultation during the process.

The U.K.’s “One in, One out” rule, established in 2011, has evolved into a One-in, Two-out, in which  two pounds of cost have to be saved to offset one pound of new regulatory cost to businesses. The net costs imposed on business are computed as part of agencies’ regulatory impact assessments and, as with Canada, the U.K. requires an outside entity, the Regulatory Policy Committee, to validate regulatory impact estimates. But the latter is not the only institution in charge of monitoring the rule; its enforcement is the responsibility of the Reducing Regulation Cabinet Subcommittee, which has oversight over the whole U.K. regulatory policy.

Keys to success

The institutional maturity and the quality of the linked tools and processes, such as the RIA system, are keys to the success of these programs, as the Canadian and U.K. experiences illustrate. Absent strong institutions for ex ante regulatory analysis a regulatory offset program may face implementation challenges. For example, though Spain attempted to implement a regulatory offset program, the OECD questioned the policy’s effectiveness. Noting a lack of “strong rationale” for the reforms, the OECD concluded that attempting a regulatory offset approach “should not be a priority in a context of regulatory inflation and weak ex ante controls… Furthermore, lacking a strong challenge function in the Centre of Government to oversee implementation, the chances of success are diminished. Such a feature would be required to ensure compliance by verifying and approving ’offset’ proposals.”

As experience in other countries shows, a regulatory offset initiative could be a good tool for controlling burdens. Its straightforward design, the fact that it avoids some of the major challenges of broader initiatives such as a full regulatory budget, and that it permits an incremental approach in its adoption make it particularly appealing. However, the success of the rule depends on certain factors. Well established systems for controlling the flow of regulation, sound institutional quality and strong oversight are keys to effectively controlling regulatory while delivering benefits to society.