Why reduce administrative burdens?

 

Regulation is important in a society. Business and industry are subject to a range of different requirements and obligations imposed by regulation. This is done in order to regulate the businesses conduct so that overall societal considerations are observed. But if the businesses are subjected to expenses through regulation, that could have been avoided, then it is a matter of a societal waste. It is thus important to regulate the businesses’ conduct in a more optimal – and, for the businesses, a less resource intensive – manner, without the overall societal objectives with the regulation being set aside.

The challange is to find a right balance.

Rules should never be an objective in themselves, but always a means of assuring a public interest or achieving a public goal. In the last few decades, the system of rules in a lot of countries has become increasingly complex, due to which the cohesion and logic of rules for companies and citizens are not always easy to grasp. This hampers compliance and is unnecessarily time-consuming and expensive, not to mention irritating. As countries, we have an obligation to create the best possible conditions for our business community. We must reinstate the balance.  

Why focus on Administrative Burdens?

Complying with regulations usually involves costs for businesses, which can be divided into various different categories. The figure below shows the costs incurred by businesses as a result of legislation and regulations.

Financial costs are the result of a concrete and direct obligation to transfer a sum of money to the government or the competent authority. Compliance costs are all costs to businesses of complying with regulation, with the exception of the financial costs. Compliance costs can be divided into ‘substantive compliance costs’ and ‘administrative burdens’. Substantive compliance costs are the costs that businesses make in order to comply with the content obligation that legislation and regulations require of a production process or a product. Administrative costs are the costs imposed on businesses, when complying with information obligations stemming from regulation.

A lot of countries are constantly working on all these kinds of regulatory costs. However, analyses showed that most of the time only improvements are made in reducing financial and substantive compliance costs. The administrative costs are constantly rising.

It’s relatively easy for a government to deal with financial costs and substantive compliance costs. These are real and concrete costs for a business and highly visible. Consequently the policy results are also very well visible. The profit is clear when a government agency reduces the fee of a licence from 500 to 150.

Administrative costs are not so visible. For instance you can not find the costs for the time used on filling in forms to get a licence in a company’s bookkeeping system. Although souch an activity is quite costly for businesses.

In the Netherlands alone all the paperwork companies have to do from government costs them € 16.4 billion a year. This corresponds with 3,6 % of gross national product! In Denmark the total amount of administrative burdens amount to approximately € 4.5 billion euros, equivalent to 2.4 per cent of GDP.

That’s why it is important that governments focus on reducing administrative costs for businesses.

To read more about the macro-economic effects of reducing administrative burdens please click here.