Red tape has fuelled the cost of living crisis, argues new IEA paper
22 February 2024
SUGGESTED
Housing and Planning
Matthew Lesh quoted in The Telegraph
20 February 2024
Economic Theory
Tax and Fiscal Policy
19 November 2024
Since 2000, sectors with heavy state intervention have experienced large price rises while competitive markets have experienced price falls.
Red tape significantly contributes to higher living costs in the United Kingdom, according to a new briefing paper from the free market think tank, the Institute of Economics Affairs.
The briefing highlights how price rises have varied across sectors since the turn of the century. There have been significant price rises in heavily regulated fields, while in more competitive, innovative and open markets, there have been price reductions for consumers.
United Kingdom price changes between 2000 and 2023:
Highly regulated
Competitive markets
Matthew Lesh, paper author and Director of Public Policy and Communications at the IEA, highlights how regulation increases prices by erecting barriers to new competitors and innovative ideas. Housing, childcare, and energy production have been restricted through measures like planning regulations, mandatory staff-child ratios, and decarbonisation policies.
Lesh cites academic research demonstrating that overregulation damages growth and increases prices. Studies have found that a 10% increase in regulation is associated with a 0.7% increase in prices, 2.5% increase in the poverty rate and 0.5% increase in income inequality as measured by the Gini coefficient. This is further evidenced by findings that low income households bear between six and eight times the cost of regulation compared to high income households.
Governments have often responded to higher prices by offering taxpayer subsidies like ‘help to buy’ for housing, but this can worsen the problem, according to the briefing. “Together regulation and subsidies have created a price-spiral effect, with government ratcheting up subsidies because of consumer hardship that in the context of restrained supply, only end up further pushing up prices,” Lesh says.
The paper acknowledges other factors have contributed to price changes – such as the Russian invasion of Ukraine and the difference between tradable and non-tradeable goods – but concludes that these do not fully explain the scale of price increases across the economy.
Matthew Lesh, paper author and IEA Director of Public Policy and Communications, said:
“Brits have grappled with soaring living costs over recent years. But this is really a much longer story. For decades, red tape has forced British families to pay more for everyday products, from electricity and housing to childcare and insurance.
“But the news is not entirely grim. The rapid fall in prices of cameras, computers and televisions demonstrates how innovation and competition can improve our lives. Now the challenge for governments is to undo damaging overregulation.”
ENDS
Notes to Editors
Contact: media@iea.org.uk / 07763 365520
Read a full copy of Graphic Content: How red tape is fuelling the cost of living crisis.
You can also access the graph’s underlying data.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.
- Average consumer prices increased by 80% between 2000 and 2023.
- Heavily regulated and subsidised sectors like electricity (+425%), housing (+254%) and childcare (+193%) have seen the most rapid price increases.
- Products in more competitive markets, like computers (-93%), TVs (-80%), and clothing (-29%), have become significantly cheaper.
- Cutting red tape could lower business costs, increase competitive pressures, and reduce consumer prices.
Red tape significantly contributes to higher living costs in the United Kingdom, according to a new briefing paper from the free market think tank, the Institute of Economics Affairs.
The briefing highlights how price rises have varied across sectors since the turn of the century. There have been significant price rises in heavily regulated fields, while in more competitive, innovative and open markets, there have been price reductions for consumers.
United Kingdom price changes between 2000 and 2023:
Highly regulated
- Electricity (+425%)
- Housing (+254%)
- Childcare (+193%)
- Rail transport (+143%)
- Council rates (+139%)
Competitive markets
- Cameras (-94%)
- Computers (-93%)
- TVs (-80%)
- Clothing (-29%)
- Toys (-25%)
Matthew Lesh, paper author and Director of Public Policy and Communications at the IEA, highlights how regulation increases prices by erecting barriers to new competitors and innovative ideas. Housing, childcare, and energy production have been restricted through measures like planning regulations, mandatory staff-child ratios, and decarbonisation policies.
Lesh cites academic research demonstrating that overregulation damages growth and increases prices. Studies have found that a 10% increase in regulation is associated with a 0.7% increase in prices, 2.5% increase in the poverty rate and 0.5% increase in income inequality as measured by the Gini coefficient. This is further evidenced by findings that low income households bear between six and eight times the cost of regulation compared to high income households.
Governments have often responded to higher prices by offering taxpayer subsidies like ‘help to buy’ for housing, but this can worsen the problem, according to the briefing. “Together regulation and subsidies have created a price-spiral effect, with government ratcheting up subsidies because of consumer hardship that in the context of restrained supply, only end up further pushing up prices,” Lesh says.
The paper acknowledges other factors have contributed to price changes – such as the Russian invasion of Ukraine and the difference between tradable and non-tradeable goods – but concludes that these do not fully explain the scale of price increases across the economy.
Matthew Lesh, paper author and IEA Director of Public Policy and Communications, said:
“Brits have grappled with soaring living costs over recent years. But this is really a much longer story. For decades, red tape has forced British families to pay more for everyday products, from electricity and housing to childcare and insurance.
“But the news is not entirely grim. The rapid fall in prices of cameras, computers and televisions demonstrates how innovation and competition can improve our lives. Now the challenge for governments is to undo damaging overregulation.”
ENDS
Notes to Editors
Contact: media@iea.org.uk / 07763 365520
Read a full copy of Graphic Content: How red tape is fuelling the cost of living crisis.
You can also access the graph’s underlying data.
- Lesh cites the work of Chambers, McLaughlin and Stanley (2019) & Loayza, Ovíedo and Servén, 2005 which point to price increases as a result of more regulation.
- He cites Diana Thomas (2012) & Bailey & Thomas and Anderson, 2018 which outline why low income households bear more of the costs from regulation than high income households.
- IEA Editorial Director Kristian Niemietz wrote Abundance of land, shortage of housing in 2012 which argued that liberalising Britain’s planning system could reduce housing costs by around 40% and retail costs by 25%.
- IEA Editorial and Research Fellow Len Shackleton and former IEA Head of Public Policy Ryan Bourne wrote Getting the State out of Pre-School & Childcare in 2017 which highlighted how childcare regulations have significantly increased costs.
- Shackleton’s 2017 book Working to Rule highlights the significant costs imposed on businesses by employment regulation.
- Sean Rickard’s 2016 paper Ploughing the wrong furrow found that excessively precautionary agricultural regulations have increased the cost of farming by a little more than five per cent in England, or £590 million a year in 2016, negatively impacting the affordability of food.
- Carlo Stagnaro’s 2015 book Power Cut? highlights how poorly designed regulatory policies to promote green energy have pushed up electricity and decarbonisation costs. Between 1990 and 1999, electricity prices fell for consumers by 26% and between 1990 and 2010, energy-related greenhouse gas emissions fell by 12%.
- Former IEA Head of Regulatory Affairs Victoria Hewson highlighted how trade barriers impose significant costs on businesses and reduce competitive pressures in her 2022 paper Changing the Rules.
- George Benston’s 1998 paper Regulating Financial Markets shows how financial services regulations intended to protect consumers create costs that are borne by consumers that exceed the benefits.
- IEA Senior Academic Fellow Philip Booth’s 2015 paper Thatcher: the Myth of Deregulation shows that financial regulation has significantly grown from one regulator for every 11,000 people employed in finance in 1979 to one regulator for every 300 people employed in finance in 2010, with compliance costing the sector £673 million by 2014 (with additional costs from reduced innovation and competition).
- Chittenden, Foster and Sloan’s 2010 paper Taxation and Red Tape find that the regulatory cost associated with collecting tax in the United Kingdom is particularly damaging for smaller businesses.
- Sir Ian Byatt’s 2012 paper Water: Supply, Prices, Scarcity and Regulation says that water prices have risen too quickly as a result of poor regulation.
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.
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