Agency heads allowing regulations to wilt ‘until failure’, warn Treasury insiders

By Verona Burgess

Monday August 20, 2018

Treasury building
Treasury building

Two senior Treasury officers have tackled the hot-button $65-billion annual impost of regulation in a personal submission to the review of the Australian Public Service, saying department heads should be legally required to clean up their stocks of red tape.

Writing in their own names, the head of the corporate and international tax division, David McCullough, and a chief adviser in the Law Design Office, Tom Reid, say Australia should adopt the New Zealand government’s model of regulatory reform.

Under this model, secretaries and agency chief executives are required by statute to exercise “regulatory stewardship” of their portfolio responsibilities.

If adopted in Australia, this would lay the foundations for a continuous improvement model of imposing and reforming regulation.

In their covering letter, the pair point to the APS’s role in designing, maintaining and administering regulatory frameworks. Many, they said, had been built over considerable time and represented major investments of public resources and important, albeit intangible, public assets.

“Day-to-day pressures often meant that all available resources were devoted to immediate priorities, until a crisis triggered a major review.”

Prime examples of high-value regulatory infrastructure were the bodies of rules supporting the financial system, tax collection, competition, consumer protection and corporate law.

“It stands to reason that, having invested heavily in establishing these important assets, the nation should insist that they are properly serviced and maintained, so as to stay in good running order.”

However, day-to-day pressures often meant that all available resources were devoted to immediate priorities, until a crisis triggered a major review.

“This approach of ‘running until failure’ is costly and wasteful.”

A better approach would be to ensure departments and agencies invested appropriately to keep their stock of regulatory assets functioning well, while pursuing the current minister’s policy agenda.

“In an environment of constrained resources this aspiration presents a challenge of leadership and will.”

Adopting a model similar to that in New Zealand would help shore up the commitment of agency heads, who may be tempted to focus purely on short term deliverables.

Aggregate cost of red tape ‘a staggering number’

In their submission, the pair say that in the past it has been convenient for advocates of regulatory proposals to downplay their additional burden by either pointing to the overwhelming net benefit or dismissing the additional cost as “second order”.

However, in recent years, studies had shown the aggregate cost of complying with regulation was significant.

“In 2013 the stock of Commonwealth regulation was calculated to impose compliance costs of around $65 billion per year on the Australian economy. This calculation was based on estimates and survey data, and is not a true market calculation (in the sense that it includes costs of private citizens not typically included in GDP calculations), but it is nevertheless a staggering number.”

The Treasury portfolio had by far the largest set of regulatory responsibilities, imposing on the community an estimated annual compliance cost of around $47 billion through tax, financial system, corporations, competition and consumer laws and regulations.

Of this figure, tax compliance was by far the largest component, comprising around $40 billion.

“The Treasury is responsible for over 51,000 pieces of regulation: an enormous body of regulatory material when one considers the … Income Tax Assessment Act 1997 is counted in this figure as merely one regulation, and it alone comprises many thousands of pages.”

Most major sub-elements of that act were tremendously complicated.

“There are, for example, over 800 pages of tax law solely devoted to the seemingly straightforward matter of taxing, or relieving from tax, gains arising from the sale of assets.”

Despite the red tape reductions of the past few years, the community and business still saw the accumulation of regulatory burden as a major pain point.

While even the best designed system would impose some cost, the sheer size of the current compliance cost burden suggests it was very far from best practice.

“If it were possible to reduce the present impost by even 10% — a reduction of around $6-7 billion per annum — the benefit to business and the community would be as large as those hoped for from many of the ambitious economic reforms pursued in recent decades.”

Don’t give a free pass to existing regulation

The pair say that while Australia’s system of vetting new regulation compares favourably with international best practice, the focus on new rather than existing regulations missed half the problem.

“Most of the attention in the history of regulatory reform in Australia has been on managing the flow of new regulations, but very little on ensuring the quality and efficacy of the stock of existing regulations. To use an old analogy, reducing the flow of pollutants coming into the lake from a tainted river without also taking action to clean the lake itself means the water stays dirty for a very long time.”

“To get a sense of the relative importance of the flow and the stock of regulatory burden: the absolute value of the reported flow (increases and decreases added together) of new regulation in the 18 months between 1 January 2016 and 30 June 2017 was $1.1 billion. This compares with the annualised cost of the stock being around $65 billion.”

The pair say poorly functioning regulatory frameworks impose unnecessary costs that reduce productivity.

“These costs inevitably flow through to the community more widely, even when their initial impact is on a single business. Unnecessary costs reduce the national income and detract from the viability of domestic businesses, especially when they are exposed to overseas competition. Well-functioning regulatory frameworks provide markets with the catalyst to flourish and businesses with the confidence to invest.”

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