Strangled By Regulation

It is unfortunate that the first act of the new minister for deregulation was to enact the latest tranche of the federal anti-money laundering and counter-terrorism financing laws – a major regulatory increase for the financial sector.

To be fair, the legislation’s origins lie in the halcyon days of the Howard Government. But it illustrates just how big the job of finance and deregulation minister Lindsay Tanner is going to be. The Labor government inherits an Australian economy which is rife with Byzantine and often unnecessary regulations.

Federal and state governments have been legislating and regulating at an ever increasing pace. Where less than 30,000 pages of Commonwealth legislation were passed during the 1980s, we are on track to pass nearly 80,000 pages this decade.

Regulation has accelerated similarly – the Howard Government has the record for the most enthusiastic regulators and legislators in history.

It is hard to get a concrete grip on the consequences of such increasing regulation on the economy, but it is certainly having an effect. The Business Council of Australia recently identified one example of this increase: a total of 227 pages of documentation need to be given to a customer to open a simple cheque account with an overdraft limit and home loan, roughly five times the number of pages in 1985.

The Rudd government has rightly acknowledged high regulatory burdens as a major economic problem. However, the fixation that the Labor Party had during the 2007 campaign on reducing “red-tape” – that is, the paper-burden cost of regulation – may prove to be a distraction from the real effects that regulation has on the economy.

Certainly, the significance of the paper-burden cost varies by sector – in the food industry, most regulatory costs can be attributed to the paper-burden. But for much of the economy, that paper-burden cost is dwarfed by the restrictions on economic activity imposed by the regulations.

For instance, the “chilling effect” of mandatory third-party access regulation far outweighs the paper-burden cost of those regulations by holding back infrastructure investment. Focusing only on “red tape” in these cases is like focusing on the time spent filling out a tax return rather than the amount of tax paid.

If Tanner is to fulfil the promises of a minister for deregulation, it will be necessary not only to tackle excessive “red tape” but to seriously cut back the regulations which distort investment, divert entrepreneurial and innovative activity, and inhibit business flexibility. His recent reaffirmation of the election promise of adopting a “one-in, one-out” approach to regulation is a positive sign, but his uncritical support for the Australian Competition and Consumer Commission is less so.

Tanner will be continually pressured by his fellow lawmakers, regulators and bureaucrats, activist groups and the community, and too often businesses to increase regulation. Cropping back the regulations which restrain the Australian economy will require challenging nearly everyone with a political voice.