Address to the Pastoralists and Graziers Association of Western Australia 2016 Annual Convention
Friday, 2 September 2016 at Crown Perth, Burswood
Australia is a country with enormous potential.
We have some of the most productive and technologically advanced primary industries in the world.
While agriculture is only 2.3 per cent of GDP, Australian agriculture produces enough food to feed 80 million people.
Yet this productivity and potential is being limited by poor public policy settings.
In this speech I’m going to outline the cost and consequences of red tape on Australia’s economy and primary industries – how large the burden of red tape is, how much new red tape is introduced every year and the enormous army of bureaucrats employed to invent, design and enforce it, and how it puts us behind our international competitors like Singapore and the United States.
I’ll then explain how red tape reduction efforts have failed and how they can be revitalised. Red tape can be cut, as it has been in other countries like Canada, Sweden and the Netherlands.
Finally, I want to briefly reflect on the moral consequences of red tape – how it prevents us from achieving the human flourishing that should be the goal of every policy approach.
But I should start with the big picture.
Australian Commonwealth governments have been unable to return their budget to surplus after the dramatic increase in spending by the Rudd government.
We are now spending almost as much as that government did in their extraordinary stimulus ever single year. Expenditure for 2016-17 is projected to be 25.8 per cent of GDP, compared to the 26 per cent of GDP which was spent in the crisis year of 2008-09.
Australia’s gross public debt will soon rise to over 30 per cent of GDP. The Australian government owes its creditors half a trillion dollars. This will have to be paid off by our generation or the next.
Until then, each year we are paying interest on that sum. In 2016-17 the Australian government is expected to pay $12.6 billion in net interest payments alone.
To put that in perspective, this is almost as much as the Western Australian government spends on health and education combined.
The facts I have outlined are well known, if rarely stated in these stark terms. Each government since the Global Financial Crisis has promised to return the budget to surplus and ease the debt burden on the Australian economy, but each government has failed to do so.
The Coalition has been unable to reduce spending to the levels needed to make the budget balance.
Given that spending cuts seem to be off the cards, and the economic consequences of increased taxation would be harmful – there is only one other trigger left that would restore our public finances.
We need to focus on economic growth. Governments need a singular focus on growing the economy out of fiscal mess. If we are to learn to live with big government we need to be able to pay for it.
Growth would return those on unemployment benefits into work. Growth would increase government revenues without increasing the taxation burden on individuals and businesses. Growth would ease the strain on social services, allowing more people to fund their own healthcare and education.
Growth brings about increases in living standards, it brings innovation and technology to yield positive environmental outcomes, and most importantly, growth brings human flourishing – the ability for us to be the individuals, and the society, we want to be.
I’ve given this lengthy introduction to a discussion about red tape and agriculture because it’s vital to understand what Australia’s heavy red tape burden means.
By throwing up barriers to enterprise and development, red tape means a slower economy, less opportunity, lower living standards, and fewer people innovating, creating, and serving their communities.
In the last decade, between the years 2006 to 2016, Australia’s real GDP growth has been just 1.1 per cent per year.
In the IPA’s analysis, the answer to the question of why Australia has not recovered from the Global Financial Crisis as it recovered from the recession of the 1990s or the economic upheaval of the 1970s is over-regulation.
Governments now see their role as interfering in markets and controlling business with red tape and unnecessary regulatory control.
The result is unprecedented legislative hyperactivity whose consequences we are now seeing in slower growth and prosperity.
It took the Commonwealth just 358 pages of legislation to set the federal government up in 1901.
But in 2015 the Commonwealth passed an impressive 6,453 pages of legislation.
That doesn’t include all the subordinate legislation – thousands more pages of spiralling rules and regulations governing what businesses must do before they can expand and employ.
Nor does it include all the state legislation its subordinate legislation. Or the local government bylaws and requirements. Or what political scientists call quasi-regulation: the codes of practice, standards, and requirements that are imposed by industry bodies on the government’s behalf.
This sheer volume of legislative activity is itself damaging.
The constant revision of rules and regulations means businesses have to dedicate resources to monitoring and interpreting the whims of parliament and a growing number of regulatory agencies.
By our count there are 497 bureaucratic bodies involved in the design, implementation and enforcement of red tape at the Commonwealth level alone.
Businesses are used to the uncertainty of market competition – the shifting winds of the global economy, changing exchange rates, the preferences of consumers – but we are increasingly asking them to be political soothsayers as well – to monitor and predict the whims of the political class.
We should not underestimate the uncertainty this brings about.
Economic certainty and the rule of law, thought Fredrich Hayek, was the bedrock of Western economic growth.
Uncertainty about current or future red tape makes it risky to invest, employ and to grow.
The consequences of red tape and uncertainty are being felt across the economy.
For all the enormous innovation and technology that drives our living standards forward, on a number of traditional indicators the Australian economy is less dynamic than it has been in the past.
Fewer new businesses are being created now than they were ten years ago.
The Australian Bureau of Statistics says the number of new businesses that enter the economy each year has plummeted from 17.4 per cent of all businesses to 13.4 per cent of all businesses between 2003 and 2015.
How many potential firms have we lost in the last decade because Australia’s red tape has been seen as unattractively burdensome, or the future regulatory environment to unstable or uncertain?
The Commonwealth government estimates that red tape imposed by the federal government costs the Australian economy $65 billion a year.
Commonwealth public servants use a range of techniques to come to that estimate, such as surveying regulated firms to find out how much time they spend on complying with paperwork and bureaucracy.
But the amount of time filling out forms is only a tiny sliver of the burden of red tape.
Red tape does more than impose paperwork – it slows and reduces investment, it distracts businesses from more profitable endeavours.
Earlier this year the Institute of Public Affairs came to a new calculation of the burden of red tape on the Australian economy.
We did so by looking at the relationship between the World Bank’s “regulatory quality index” and real GDP per capita using a method developed by two American economists in 2014.
We find that red tape costs a massive $176 billion to the Australian economy.
Let’s just pause for a moment and look at what that means.
It means that the government’s best estimate has underestimated the burden of red tape by more than $100 billion.
It means that the red tape burden constitutes 11 per cent of Australia’s GDP.
It means that the red tape burden is larger than any other Australian industry.
It means that red tape costs each Australian household on average $19,300 a year.
And, fundamentally, it means that red tape is the single largest burden on the Australian economy.
While Australia tends to do very well in many global comparisons of government stability and corruption, the World Economic Forum has found that we are in the bottom half of the world when it comes to business perceptions of the burden of government regulation.
This means that Australia has a heavier perceived burden of regulation than Singapore, China, Canada, the United States, and New Zealand – that is, those countries with which we compete.
Each individual permit, licence, or government approval looks trivial and minor when it is first introduced, but they add up.
The Australian Business Licence Register lists more than 30,000 licences across the country.
The Roy Hill iron ore mine required more than 4,000 separate licences, approvals and permits in its pre-construction phase alone. Many more have been required for production and operation.
A recent Deloitte report suggested nearly 10 per cent of the mining workforce is dedicated solely to regulatory compliance.
The Consolidated Pastoral Company has estimated that it is required to comply with more than 300 pieces of legislation, regulations and codes.
But red tape hurts small businesses even more than large businesses.
The Australian Chamber of Commerce and Industry has found that 47 per cent of small and medium businesses in Australia were prevented from making changes to grow their business from the weight of red tape.
Large firms can dedicate the resources to monitoring and complying with regulation. They can hire lawyers and economists and consulting firms.
A small business with less than 20 people typically has to rely on its owner-manager to do this work. Not only will this person lack the training and specialised knowledge required, but every moment spent on regulatory compliance is a moment not spent on innovating, adapting and adjusting to the demands of the market and clients.
A 2013 survey by the Australian Institute of Company Directors found that red tape and workplace relations regulation were second only to general economic conditions as barriers to productivity growth.
But the 2016 election was the first election in recent memory that neither party offered a significant red tape reduction plan.
In 1996 John Howard promised to halve the red tape enveloping small business.
In 2007 Kevin Rudd declared that red tape was eating away at the enterprising spirit of small business. The Rudd government established the Commonwealth’s first minister of deregulation.
In 2013 Tony Abbott promised to cut $1 billion worth of red and green tape a year.
But in 2016 the only notable mention of red tape was buried in page 19 of the Coalition government’s National Economic Plan, with a promise not of reducing red tape but of spending $5.6 million to “systematically review regulatory regimes”.
The Abbott-era red tape reduction programs – like the special parliamentary sitting days dedicated to repealing legislation – were quietly cancelled earlier this year.
This is, to be fair, not due to any lack of political will.
Many of the red tape reduction policies were stymied by the Senate. For example, the government was unable to reform – not abolish – the government’s workplace gender reporting requirements.
The requirements are the definition of red tape. The require firms with 100 employees or more to report to the government the gender composition of their staff, pay rates for men and women, and flexible working arrangements.
The government does nothing more than collect this information – it imposes no obligation on firms to do anything differently.
Gender reporting requirements are both intrusive and pointless.
But the government withdrew the changes when it learned how much of a backlash awaited it.
Likewise, modest changes to the regulation of financial advisors to avoid some of the perverse and unintended consequences of increased regulation under the Labor government, were rejected by the Senate.
Politics is not the only barrier to red tape reform.
As the Abbott government found, the public service itself has an obvious interest in maintaining its grip over the Australian economy.
In July this year the Canberra Times reported that the Coalition’s policy to link senior public servant bonuses to red tape reductions – effectively a pay for performance measure for deregulation – had been ignored and refused by those public servants who were supposed to implement it.
Last month the Productivity Commission released its draft report into the regulation of agriculture. The commission’s found that agriculture was subject to a “vast and complex array” of regulation and red tape, that affects every part of the supply chain.
That red tape emanates from state, local and federal governments and frequently duplicates regulation imposed by other levels of government.
Red tape delays the construction of dams, delays innovative new uses of land, and delays the introduction of new technologies like drones.
I’d like to briefly focus on one of the commission’s recommendations that illustrates clearly the opportunities and challenges for red tape reduction.
The PC found that native vegetation controls harm productivity, are complex and costly, and duplicated across state and federal governments.
Rigorously adhering to the requirements of state legislation is no guarantee that the federal government will not override that compliance and impose new costs and controls on a landholder.
These native vegetation rules extort landholders and users on the basis of often vexatious claims about biodiversity.
The commission recommended that state and Commonwealth governments adopt more market-based approaches to protecting native vegetation.
To understand why markets would be better for the environment its worth briefly describing the perverse incentives created by native vegetation regulations.
Economists describe property rights as a “bundle of rights” – that is, a bundle of rights to use, exploit, inhabit and sell land.
When the government imposes control on the use and exploitation of privately held land they are effectively seizing part of the property rights without compensation to the landowners.
From the government’s perspective, it costs nothing to prohibit people from clearing land for their use.
They have every incentive to prohibit more and more – particularly if they are driven, as many environmental bureaucrats are, by a deep ideological hostility towards our primary resources sector.
The Australian Conservation Foundation’s Andrew Piccone last month described “big cattle, big agriculture and big mining” as “the marginal and unimaginative industries of last century” and a threat to prosperity.
Market based approaches to native vegetation protection are designed to fix this incentive problem.
Governments should have to pay for the land they lock up – to compensate landowners for the property rights which have been taken and to fund the upkeep of that now undevelopable land.
If the Australian community wants to prohibit development it should be asked to pay for the cost of that prohibition – not to fob responsibility onto landowners who suddenly find themselves poorer.
But market based alternatives to red tape are a hard sell because so much red tape is designed not to control economic activity but to prevent it.
The complexity and cost of so much red tape is no accident – it is driven by political opposition to the primary industries that have underpinned our prosperity.
To understand that much red tape is in fact designed to prevent economic activity is to understand why reducing it is so challenging – the special interests who oppose development and growth do not see red tape as merely consisting in form filling or compliance activity, but a tool to stop economic activity.
The government’s demand that it approve development is, clearly, the government’s insistence of the right to deny development.
With this in mind, how can we reduce red tape?
There is an enormous political interest in red tape reduction, and a growing recognition that red tape is the single largest constraint on Australia’s prosperity.
But we have surprisingly little information about exactly how much red tape there is on the books.
All the political goodwill in the world is not enough – governments which promise to reduce red tape need to be held accountable. Ministers who want their departments to reduce red tape need to know that the job is being done, not evaded.
The In most successful red tape reduction in recent history was done by the Canadian province of British Columbia, which has managed to shrink its red tape burden by nearly 50 per cent between 2001 and 2015.
British Columbia’s economic performance relative to other Canadian provinces jumped from one of the lowest performing to one of the best.
The key to the British Columbia success was verifiability. In recent decades bureaucracies have been encouraged to calculate a total cost of the burden of individual regulations on business. But these calculations are crude and can be easily gamed by bureaucracies and self-interested politicians.
Instead the government of British Columbia counted the number of “regulatory requirements” imposed by law – the commands from government that forms need to be filled out, permits need to be obtained, committees need to be formed, and so forth.
In 2001 British Columbia had 330,812 of these requirements. As of March 2016, the regulatory requirement count was down to 173,419.
Under their rules, no new regulation can be introduced without removing an old one. At one stage the government imposed a one-in, five-out rule.
This is the “trust, but verify” approach. We need to be able to see red tape being reduced.
Clear and unambiguous reductions in red tape boost business confidence and the willingness of firms to invest in Australia.
But the real lesson I want you to take from this is the simple fact that red tape can be reduced. It is easy to be cynical about red tape reduction, considering we have had two decades of underwhelming attempts to do so. But other countries and jurisdictions have managed to cut red tape, cut it deeply, and are better off as a result.
It requires a political willingness to commit – and to be seen to commit – to genuine reform, underpinning by a deep understanding of the harm that red tape is causing to the Australian economy, to Australian jobs, and to Australian prosperity.
We are in a point in history where alternatives to regulation and the old way of doing business are thriving – changes caused by technology, by education, and a highly specialised and open market.
To fully exploit these changes into higher living standards we need to cut the red tape that was designed for earlier eras, and prevent governments from adding more.
But I’d like to finish with a brief reflection on the deeper harm that red tape does to us as a society and as individuals.
That is, the moral consequences of red tape.
When the government imposes red tape on our economic activities, on the businesses we create, on the people we seek to employ, on the goods and services we deliver to the community, it is asserting a control that is deeply paternalistic and disempowering.
It is a claim that governments know better than their citizens about how to care for the environment, how to develop a safe and effective workforce, how to run machinery, how to move goods between two points on a map, what employment conditions are more fair, who should be able to practice a profession.
It elevates the preferences of bureaucrats over the people they are supposed to work for.
And it does so at the expense of the economic growth Australia’s economy desperately needs.
It is no exaggeration to say that red tape is the most fundamental challenge that faces the Australian economy. We believe that the public understands this. But our job now is to convince the political class to do something about it – to cut red tape and unleash Australian prosperity.