Why our fears over red tape are overblown

What would you do to help more businesses survive and grow?

If you’re like most people, you’d probably call for greater deregulation and a cull of burdensome red tape. This is what Cameron promised at the start of this year when he announced plans to drop or change more than 3,000 business rules. Regulation was also the target of Adrian Beecroft’s infamous report in 2012, which proposed introducing no-fault dismissals so that small businesses could let go of staff at will. Only a few weeks ago, a senior EU official argued for a ‘bonfire of red tape’ across Europe, which would make small and medium sized businesses virtually exempt from rules affecting business practices. The rationale for these moves is clear: cutting red tape would reduce the risk and costs of doing business, and thereby encourage entrepreneurs to innovate, expand and take on staff.

Yet if this sounds too good to be true, that’s because it is. The reality is that red-tape just isn’t as big a deal as we like to make out. The OECD, for example, reports that the UK has the third least regulated labour market in the world – so flexible, in fact, that it is thought to be easier to dismiss someone here than in the US. Similarly, the World Bank consistently ranks this country as one of the easiest places in the world in which to do business – ahead of Germany, France, Japan and many other developed countries. The government also continues to enact measures that make the labour market more flexible for the benefit of employers. Last year saw the introduction of new fees of up to £1,200 for any workers seeking to make a tribunal claim. As a result, the number of employers being taken to tribunal have plummeted.

Given all of this, why do over half of small business owners continue to think that regulation is an obstacle to their success? Part of the reason for these exaggerated fears is a lack of information. A survey conducted by the accountancy body ICAEW, for example, found that as many as 70 per cent of businesses were unfamiliar with the government’s ‘one in, two out’ policy on new regulation. Likewise, few of the business owners interviewed in a recent BIS study knew that the rules relating to unfair dismissals had been relaxed in 2012. Fault may lie with the government for not doing enough to raise awareness of these measures. Yet part of the problem is that any messages must compete with a multitude of other drains on the attention of business owners. In an information-saturated environment, the messages most likely to be absorbed are those that are the most salient – namely negative stories related to red tape. And there are plenty of them around – see, for example, here and here.

Inaccurate and insufficient information explains only part of the puzzle, however. A more important factor fuelling these fears is a lack of self-efficacy among business owners. Put simply, people may report (and genuinely believe) that red tape is a barrier to growing their business in part because they intrinsically lack faith in their own abilities. The notion that business owners lack self-efficacy sounds odd, and clearly rubs against the mainstream cultural image of them as being heroic, risk-taking individuals. But we need to remember that the self-employed community is a highly heterogeneous group, with many people who do not share the same degree of confidence as the classic entrepreneurial stereotype (see the report we published earlier this year for a detailed segmentation of the self-employed community). Insufficient self-efficacy may be a particular challenge for the UK. One study found that business owners in this country are more likely than those of other places to have ‘conservative cognitions’ – a type mindset that predisposes people to be more risk-averse.

Of course, none of this is to dismiss genuine concerns over red tape. Form-filling and other types of bureaucracy are definite concerns, and certain tax and welfare changes may make life more difficult for the self-employed (e.g. the reporting requirements tied to accessing Universal Credit). But we need to understand that deregulation is not - and never was - the silver bullet that could solve the woes of business owners. Not only are further deregulatory measures likely to be ineffective in stimulating growth and recruitment, they may even prove counterproductive by heightening fears over red tape and in turn stifling ambitions to expand. The task for government and others in the business support world is to recognise that many of the barriers to success are psychological in nature, and that misperceptions and fears can be as big an obstacle as genuine difficulties.

The RSA will shortly publish a report looking at the psychological barriers to growth and recruitment among business owners.

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