‘Soft law’ reduces economic output by $176 billion each year

By Shannon Jenkins

Wednesday June 12, 2019

An “inherently undemocratic” form of red tape is harming Australia’s economy, according to a new report from the Institute of Public Affairs.

The report analyses and develops a methodology for measuring ‘Regulatory dark matter’ (RDM) — a category of red tape that has previously been ignored, the IPA said.

RDM — also known as ‘soft law’ — are publications by government agencies that seek to influence the behaviour of regulated actors.

These publications lack accountability, “subvert democracy” and lead to a greater red tape burden faced by individuals and businesses.

“Red tape is the single biggest barrier to economic prosperity and opportunity in Australia,” the report said.

“While regulation passed by parliament is subject to a transparent democratic process, regulatory dark matter is being imposed by the regulatory state with little democratic oversight.”

The report looks at five government agencies in the banking and finance sector: Australian Security Investment Commission (ASIC), the Australian Prudential Regulation Authority (APRA), the Australian Competition and Consumer Commission (ACCC), the Australian Accounting Standards Board (AASB), and the Auditing and Assurance Standards Board (AUASB).

Examining RDM for agencies that affect the banking and financial sectors sheds light on how RDM is classified as well as the practices of agencies which increase the red tape burden.

The report centres on this sector because it has grown rapidly over the past two decades, is the largest in the developed world as a percentage of GDP, and has been subject to various government inquiries, the most recent being from the Banking Royal Commission.

There are two main categories of RDM in Australia: legislative instruments and quasi-regulation.

The IPA found “a concerning aspect of the red tape burden”: for every page of enabling legislation passed by parliament, there are another eight pages of regulation imposed on the Australian economy by the regulatory state.

Key findings of the report include:

  • RDM is eight times larger than the original enabling legislation for these agencies passed by parliament.
  • There are 75,976 pages of RDM currently in place out of the five sampled agencies.
  • ACCC imposed the largest amount, with 44,160 pages currently in place.
  • RDM allows agencies to impose conditions on business with little to no parliamentary oversight.
  • RDM reduces economic output by $176 billion each year.
  • Red tape is the key reason why business investment is just 11.5% of GDP. This contributes significantly to sluggish productivity growth and slow wages growth.
  • RDM stunts competition. Smaller businesses are less able to keep up with the growing body of regulatory activity, hindering their ability to compete with larger incumbent businesses.

The IPA recommended that governments and agencies take responsibility to tackle the red tape “burden”. They also proposed that:

  • The Commonwealth government should take a one-in-two-out approach to regulation. Had the Coalition government implemented such a policy when it came to office in September 2013, there would have been 107,885 fewer pages of primary and secondary regulation by May 2017, according to the IPA. Cutting the red tape requires a rethinking of government intervention that begins with legislation.
  • Improve the quality of regulation. Lack of clarity in preceding levels of regulation leads to a need for further regulation. Parliament should take responsibility for regulation “rather than delegating to agencies and watering down democratic accountability of rule makers and enforcers in the process”.
  • Hold regulators accountable. Regulators should not be free from scrutiny and governments need to prioritise red tape reduction. Agencies should clearly present information on their websites. The problems surrounding guidance material and quasi-regulation need to be acknowledged and included in any government’s deregulation agenda.

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