The future of freedom in Australia was dealt a blow at the start of the year with Senator David Leyonhjelm’s announcement that he will be resigning from federal politics to have a tilt at the state level in New South Wales.
The Liberal Democrat Senator from NSW was one of precious few voices in Canberra who could be relied upon to advocate for the freedoms of all Australians.
Whether it was lower taxes, freedom of speech, or reducing crony capitalism, Leyonhjelm was front and centre. And while he may yet do great work in the NSW Parliament, the nation as a while will miss his voice in Canberra.
Amongst all of his achievements the one that will perhaps have the longest lasting legacy is the Senate Red Tape Committee which Leyonhjelm established and chaired.
The Committee investigated the effect of red tape in Australia across a range of industries, from health services to liquor licensing to the resources sector.
All told the Committee handed down nine separate inquiries, with a total of 57 recommendations for how governments around the country can cut red tape. The quality of analysis in the inquires puts the Treasury and the Productivity Commission to shame.
The inquiries by the Committee reveal that red tape is by far the single biggest impediment to economic opportunity in Australia.
At the macroeconomic level, red tape reduces economic output by $176 billion each year, which is the equivalent to 10 per cent of GDP. This cost isn’t just financial. It represents forgone human potential: all of the businesses that are never started, the jobs never created, and the dreams never fulfilled as a result of red tape.
This red tape is supported by an intimidating array of unelected, yet well-funded and powerful regulators. Research by the Institute of Public Affairs estimated that as of 2016 the commonwealth government maintained some 1,181 entities, bodies, and administrative relationships all of which operate behind the curtain of Canberra’s power politics and out of sight of the voters. Of those bodies, some 497 are involved in policy design or enforcement of the federal regulatory system. And that doesn’t include all of the bodies that exist at the state or local level.
These costs are being felt at the coalface by working families.
The Senate Committee’s findings make clear that red tape is holding back new private sector business investment, which currently sits at just 11.7 per cent of GDP. This is only just above the rate that prevailed during the recession of the early 1990s and is lower than during the economically hostile Whitlam years.
Lower business investment stunts capital formation, depriving the next generation of Australians economic opportunity and the inherent dignity entailed in an honest day’s work.
Low capital formation also reduces the demand for workers which holds back employment and wages growth. This is why wages growth in the private sector have barely kept pace with inflation over the past three years.
Of equal concern is the disproportionate impact that red tape has on smaller businesses. Small businesses are not just smaller versions of big businesses. They do not have the human resource departments, the IT systems, or the in house legal, accounting, or tax expertise of their larger counterparts. This means the marginal cost of extra red tape is far higher for smaller than larger businesses.
This is a key reason why larger businesses often advocate for more regulation. It helps impose disproportionate costs on their smaller competitors, causing some to exit the market and stopping others from entering.
What the Committee highlights is that urgent work is needed to reduce red tape to unleash prosperity and expand opportunity. This means introducing broad-based, systemic approaches to delivering sustainable reductions to red tape.
Initiatives such as a one-in-two-out approach, where two pieces of regulation (or “regulatory restrictiveness clauses”) are repealed for each new piece introduced is an approach that has great promise.
Yes, such an approach is simple. But it has delivered great success. The Canadian province of British Columbia, for example, achieved a 41 per cent reduction to red tape from 2001 to 2015 utilising such an approach. During this time, the province went from being one of the poorest-performing economies in Canada to among the best.
More recently, in 2017 the Trump Administration in the United States set a goal of repealing two new regulations for every new one introduced. So far Trump has dramatically exceeded that goal, cutting six regulations for each new one introduced, fuelling economic and employment growth.
Australia, too, can experience such an economic renaissance with an ambitious red tape reduction agenda.
Senator Leyonhjelm will be remembered for his good humour, sharp arguments, and for the enduring contribution he made to the future of freedom in Australia. To honour that legacy, state and commonwealth governments should heed the advice of the Senate Red Tape Committee and slash away at Australia’s overbearing red tape problem.
Daniel Wild is the Director of Economics at the Institute of Public Affairs.
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