Small Government, Less Red Tape, and Less Regulation: An Empirical Analysis

Disclaimer: The below article is part of our ‘Discussion Articles’ collection of publications designed to facilitate public discussion.  The views of the author do not necessarily represent the views or policies of the Reform UK Party.

1. Small Government and Economic Growth

The argument for small government rests on the premise that government intervention in the economy can often stifle growth through excessive taxation, inefficient allocation of resources, and bureaucratic inefficiencies. Research has demonstrated a negative correlation between government size and economic growth, particularly in advanced economies. For example, studies conducted by the OECD found that reducing the size of government by even 1% of GDP can increase annual GDP growth rates by up to 0.15 percentage points​ (Tax Foundation). This highlights the inverse relationship between excessive government intervention and the pace of economic expansion.

A key piece of evidence comes from the Fraser Institute’s Economic Freedom of the World Index, which ranks countries based on the size of government, legal system, property rights, and other factors. Countries with smaller governments, such as Singapore and Switzerland, consistently rank at the top of this index and also exhibit some of the highest levels of GDP per capita and economic competitiveness. Singapore, with its low-tax regime and minimal government intervention, has maintained a GDP growth rate of 3.7% on average over the past decade​ (Brookings), far outstripping many Western economies with larger public sectors. This success story provides empirical support for the notion that small government correlates with better economic outcomes.

2. The Burden of Red Tape on Business Competitiveness

One of the clearest cases for reducing red tape and regulatory barriers comes from the impact these obstacles have on businesses, particularly small and medium-sized enterprises (SMEs). Excessive regulations are often cited as a key reason for stifling business creation, innovation, and growth. According to the World Bank’s Doing Business report, which ranks countries based on the ease of starting and running businesses, countries with lower levels of bureaucratic red tape, such as New Zealand and Denmark, consistently perform better in terms of economic competitiveness​ (Brookings).

It is time that the 5.5 million small and medium sized businesses of the UK, making up 99.9% of all UK businesses, are freed from the shackles of red tape and regulation.

Empirical research shows that regulatory burdens disproportionately affect SMEs, which often lack the resources to navigate complex legal and compliance frameworks. A 2020 report from the Federation of Small Businesses (FSB) found that small businesses in the UK spent on average, £5,000 per year on regulatory compliance, equivalent to 12% of their operating budgets.  These costs diverts resources away from innovation, hiring, and investment, making our SMEs less competitive in both domestic and global markets.

On the other hand, countries that have aggressively cut red tape have seen significant improvements in business creation. Estonia, for example, has become a global leader in digital governance, reducing the time it takes to start a business to as little as 18 minutes through its e-government portal. This binning of administrative processes has encouraged entrepreneurship and attracted significant foreign investment, resulting in sustained economic growth.

3. Regulation and Innovation: A Delicate Balance

While certain regulations are necessary to safeguard public goods such as the environment, worker rights, and consumer safety, excessive or poorly designed regulations stifle innovation. A 2016 study by Nick Bloom and John Van Reenen from Stanford University found that overregulation, particularly in sectors like technology and manufacturing, reduces the rate of innovation by increasing the cost and complexity of developing new products.

Countries that find the right balance between regulation and innovation, such as the United States, have created environments where technological advances can thrive. The Information Technology and Innovation Foundation (ITIF) estimates that reducing the regulatory burden in the technology sector could boost U.S. GDP by as much as 0.8 percentage points annually. Similarly, in Israel, known for its thriving tech ecosystem, deregulation efforts in the 1990s were key to fostering the “Start-Up Nation” culture, resulting in Israel having the highest concentration of startups per capita in the world today.

This evidence underscores the point that while regulation has its place, an overabundance of rules can severely hamper a country’s innovative capacity, particularly in cutting-edge industries like technology, biotechnology, and renewable energy.

4. International Case Studies: Lessons from Other Countries

Countries that have implemented policies favouring small government and deregulation provide valuable case studies for the benefits of such approaches. In Hong Kong, for instance, the government has long pursued a minimalist approach to economic regulation, allowing the free market to dictate much of the economic activity. As a result, Hong Kong consistently ranks as one of the freest economies in the world according to the Heritage Foundation’s Index of Economic Freedom, and it has enjoyed sustained growth with an average GDP growth rate of 4.5% per year over the past three decades.

Similarly, Australia undertook a deregulation program in the 1980s, which included the privatisation of state-owned enterprises and the reduction of tariffs and subsidies. These reforms transformed Australia from a heavily regulated economy to one of the most competitive in the world. A report by the Australian Treasury found that deregulation contributed to a 2% increase in total factor productivity, leading to higher wages and improved living standards.

5. The Laffer Curve and Taxation: The Argument for Reducing Fiscal Burdens

One of the most famous arguments for small government is the Laffer Curve, which posits that there is an optimal tax rate that maximises government revenue without discouraging economic activity. When tax rates are too high, they disincentivise work, savings, and investment, leading to lower economic output. A 2012 study by Mertens and Ravn found that lowering corporate tax rates by 1 percentage point could increase real GDP by up to 0.8% within two years.

Countries that have embraced this principle, such as Ireland has a corporate tax rate of just 12.5%, have seen significant increases in foreign direct investment and job creation. In 2021, Ireland attracted over €210 billion in FDI, largely due to its favourable tax policies. This suggests that reducing the fiscal burden on individuals and bun stimulate economic growth without sacrificing tax revenues in the long term.