Deregulation in Australia
Justin Douglas
Australian governments have been pursuing deregulation agendas for four decades, with varying success. Where deregulation has been successful, it has increased economic freedom, opened up new markets, increased competition and enhanced the flexibility and dynamism of the Australian economy.
Nevertheless, opportunities to enhance productivity through deregulation remain. Competition and economic efficiency are still constrained by regulation in some parts of the economy. More generally, regulatory compliance costs have continued to grow, despite efforts to constrain them.
In this paper, the various areas where deregulation has, or may, deliver productivity benefits are examined. The direct compliance cost impact of regulation across the Australian economy could be equivalent to more than 5 per cent of GDP each year. Indirect and efficiency costs mean that the total economic cost of regulation is likely to be even greater. To ensure that inappropriate, excessive or unnecessary regulatory costs are not imposed, the author outlines the importance of ensuring that the cost of regulatory cures (compliance costs) are not worse than the disease (the problem that policy makers are trying to solve using regulation). A number of recent policy changes have been designed to support this outcome. Finally, some potential policy areas where deregulatory efforts could be prioritised to deliver productivity and living standards benefits are identified and discussed.

Introduction
Australian Governments have sought to reduce the burden of regulation since the early 1970s. Where these efforts have been successful, they have reduced regulatory constraints on economic freedom and removed barriers to competition. However, competition and economic efficiency are still constrained by regulation in some parts of the economy and, more generally, regulatory compliance costs have continued to grow, despite efforts to constrain them. Part 1 of this paper considers the economic context for modern deregulation efforts in Australia. Part 2 describes some deregulation success stories and some future opportunities to improve Australia’s living standards through continuing the deregulation story. Part 3 discusses issues relating to the regulatory compliance costs (or ‘paper burden’) aspect of deregulation. Australia, like most other developed countries, has found this aspect particularly challenging.
While well‑designed regulation can assist productivity and enhance the well‑being of Australians, regulation that is poorly designed or administered inefficiently can impose unnecessary costs. In extreme cases, if regulation is ineffective or misguided, these costs could even outweigh the benefits that the regulation is intended to achieve. In Part 4 of the paper, issues relating to measuring the direct cost of regulatory compliance are considered. This analysis finds that, on an economy wide basis, regulatory compliance costs may be equivalent to more than 5 per cent of annual GDP. Avoidable compliance costs may represent about 20 per cent of this. 
The economic benefits of deregulation are examined in Part 5, which finds that reducing unnecessary or excessive compliance costs has the potential to lift Australia’s productivity performance, helping to offset the negative effects of Australia’s ageing population and a declining terms of trade on per capita living standards. Some key aspects of the Government’s deregulation policies to reinvigorate deregulation efforts and drive success where past policies have failed are discussed in Part 6. Part 7 identifies a range of policy areas where significant deregulation and productivity gains are likely to be found. Finally, in Part 8, key conclusions are summarised.
1. Context for the modern deregulation push
During the post‑World War II era, much of the Australian economy was tightly regulated. Some of this regulation, such as high tariffs and import controls, represented the remnants of attempts to protect Australian industries during the Great Depression in the 1930s. Other regulation, such as price regulations and the various agricultural boards, reflected wartime controls of the economy that had not been removed. Consequently, many industries faced regulatory and institutional restrictions on competition in the domestic market.
High levels of regulation created inefficiencies across the economy and constrained Australia’s productivity potential. Not only did this regulation impose costs on domestic users and consumers, feeding into inflation, it also reduced the international competitiveness of the traded goods sector and created economic rigidities that limited Australia’s ability to adapt to changing international economic circumstances.
As a result, notwithstanding the popular impression that the post‑WWII period was a ‘golden era’ for the Australian economy, output growth slowed, inflation and unemployment rose, and living standards declined relative to many other developed countries (Productivity Commission (PC), 2005, p. 1). 
Two areas where the negative impact of excessive regulation was most obvious were the financial system and international trade. In the financial sector, lending and borrowing activities by Australian banks were strictly regulated. This constrained the ability of the banking sector to provide consumers with savings products that could maintain the real value of their deposits and made monetary policy largely ineffective (Wallis, Beerworth, Carmichael, Harper and Nicholls 1997, Chapter 14).
Like the financial sector, international trade was also highly regulated by the early 1970s. Effective tariff rates for some manufactures were as high as 120 per cent and local content regulations forced Australian producers to use expensive local components rather than imports. In 1973, the economy was operating at close to capacity, and retailers were reporting shortages of a wide range of goods. With regulation (including tariffs) constraining the ability of consumers and secondary industries to meet their needs via imports, the risk of an inflation outbreak was heightened. These risks were amplified during the mid‑ and late‑1970s, which saw increases in local content regulation for the automotive sector and complex arrangements for tariffs, bounties and import quotas for textiles, clothing and footwear (Emmery, 1999).
2. Deregulation successes
As the economic impact of excessive regulation became clear, successive Australian governments have pursued deregulatory objectives. The earliest deregulation efforts related to the financial sector and international trade, with reform in both areas commencing in the early 1970s. 
Financial deregulation commenced in 1973 when regulatory controls over the interest rates that trading banks could pay on wholesale deposits were removed. Battellino (2007) notes that this ‘modest, cautious step to allow banks a degree of freedom to compete’ had far‑reaching consequences with a ‘sequence of changes, each one begetting the next, until 13 years later virtually all controls on banks had been removed, foreign banks had been allowed to enter the market and the exchange rate had been floated’. In 1973, the Government appreciated the Australian dollar and reduced regulation by cutting tariffs across the board by 25 per cent (Lloyd, 2007). While the 1973 tariff cuts kick‑started the process of deregulating Australia’s international trade, the process over subsequent decades was more erratic than for financial deregulation. However, the overall trend over the decades that followed has still clearly been towards reducing the impact of trade regulation.
Following the floating of the Australian dollar and removal of controls on foreign capital flows in the early 1980s, deregulation gained momentum and was extended to many other parts of the economy. For example, controls on airfares were removed in 1987 and restrictions on entry to the domestic aviation market were lifted in 1990. Also, a range of sectors that had previously been dominated by government entities were deregulated by removing prohibitions on new entry (such as telecommunications) or by contracting out to private providers (such as legal services and training for job seekers). In other instances, government‑owned enterprises were freed from quasi‑regulation through corporatisation or privatisation (Borland 2001).
Deregulation of Australia’s rigid and highly centralised labour market arrangements also began during this period. For example, award restructuring and simplification, and the shift from centralised wage fixing to enterprise bargaining that began in the late 1980s were deregulatory. This trend was continued following the change of government in 1996, with further award simplification and introduction of individual employment contracts (PC 2005, p. 37). In 2005, Access Economics estimated that these reforms are likely to have added at least 1.7 per cent to GDP (PC 2006, p. 155).
The National Competition Policy (NCP) established a framework for extending the benefits of deregulation to a range of other industries. It built on earlier product market deregulation and sought to remove regulatory barriers to competition, reflecting that competitive forces in markets can generally provide stronger and more effective incentives for suppliers to operate efficiently, be price competitive and pursue innovation. Under the overarching NCP banner, sector specific reforms were pursued in electricity, gas, road transport and water. One of the most far reaching elements of NCP was the Legislation Review Program, which aimed to assess whether regulatory restrictions on competition were in the public interest. The legislation covered by the program spanned a wide range of areas, including: the professions and occupational licencing; statutory marketing of agricultural products; fishing and forestry; retail trading; transport; communications; insurance and superannuation; child care; gambling; and planning and development services (PC 2005, p. XV).
The deregulatory efforts listed above are widely considered to have been successful. Australia’s GDP per capita had fallen from 5th highest in 1950 (of the group of pre‑1994 OECD countries for which comparable data is available), to 9th in 1973 and 15th in 1990. However, by 2001, following several decades of sustained deregulation, Australia’s ranking had recovered to 7th. Parham (2002) notes that it is widely accepted that the microeconomic reform aspects of deregulation played a major role in this turnaround. In 2005, the Productivity Commission concluded that a subset of the NCP reforms had increased Australia’s GDP by 2.5 per cent even before the ‘dynamic’ efficiency gains of more competitive markets are taken into account (PC 2005, p. XVIII).
Despite the effectiveness of deregulation efforts such as NCP, not all deregulation efforts have been successful. For example, a number of NCP and related reforms remain incomplete (Banks 2012 and Harris 2014). In 2008, COAG sought to revitalise the NCP agenda by merging outstanding NCP reforms with other COAG productivity related reforms to create the National Reform Agenda (NRA). Harris (2014) notes, however, that unlike deregulatory reform efforts over the preceding three decades, the NRA ‘did not really take off’. 
Another area where deregulation efforts have been less successful relates to regulatory compliance costs. These costs are often referred to as the ‘paper burden’ of regulation or, more disparagingly, as ‘red tape’.
3. The paper burden of regulation
In the same way that the deregulation efforts discussed in Part 2 date back to the 1970s, efforts to reduce the paper burden of regulation in Australia also date back to the 1970s. However, whereas the deregulation efforts discussed in Part 2 relate to the removal of barriers to competition or restrictions on innovation, paper burden costs relate to the cost of complying with regulation. As suggested by the name, ‘paper burden’ costs include the time and money spent completing government paperwork and associated record keeping. It also includes other compliance costs such as the time that people spend learning about (changes in) regulations and substantive costs such as installing new fire extinguishers to meet changed building standards. 
Some compliance costs are an unavoidable consequence of regulations that have a clear social benefit. For example, most Australians accept the need for road rules aimed at improving road safety, even if giving way or not speeding might delay their current journey. However, regulatory costs can also be higher than necessary to achieve a particular outcome if the regulation is poorly designed or misguided. In the most extreme cases, regulation can impose significant compliance costs and be ineffective or counter‑productive. For example, the Productivity Commission has found that blanket prohibitions on the removal of native vegetation can prevent farmers from adopting modern farming practices that would enhance both farm output and long‑term environmental sustainability (PC 2004).
The growth of compliance costs
Like concerns about the impact of regulation on competition and economic efficiency, concerns about compliance costs also date back to the 1970s. In 1978, the then‑Minister for Industry and Commerce commissioned an interdepartmental working group ‘to conduct an inquiry into the extent of unnecessary paperwork imposed by government in Australia on small business’ (Lynch 1978). As part of this inquiry, the Australian Bureau of Statistics (ABS) conducted one of the first significant attempts to estimate paperwork costs in Australia (ABS 1979). Many of the proposals that came out of the 1978 working group remain relevant today:
•	The use of sample based surveys rather than full enumeration in censuses for statistical purposes.
•	Pre‑printing of tax forms (group and sales tax returns).
•	Sharing of data between government agencies.
The effort to reduce regulatory compliance costs has been continued by all governments since then. Box 1 contains a timeline setting out many of the significant attempts to reinvigorate the compliance costs element of the deregulation agenda. In 1985 the then government established a Business Regulation Review Unit to examine ‘all forms of regulation whether in the form of laws, … subordinate legislation and executive orders which impact on business’ (Moran 1986). At the same time, regulation impact statements (RISs) were mandated for all proposals with significant business regulatory implications. These statements were intended to contain an analysis of the benefits and costs of regulatory proposals to ensure that the medicine wasn’t worse than the disease that the regulation sought to cure. Commonwealth departments were also instructed to review eleven priority areas of existing regulation to reduce costs on business. 
Australia was an early adopter of formal mandatory regulation impact assessment and other mechanisms to improve the quality of regulation making and minimise compliance burden of regulation on the economy (OECD 2010a). However, despite these efforts, the amount of regulation and the rate of regulatory change have continued to grow. 
Part of the reason for the failure of past efforts to stem the increase in regulation may be that Australia, like other developed countries, has experienced changing societal expectations. In relation to the United Kingdom, Blair (2005) noted that ‘In my view, we are in danger of having a wholly disproportionate attitude to the risks we should expect to run as a normal part of life. This is putting pressure on policymaking, not just in government but in regulatory bodies, on local government, public services, in Europe and across parts of the private sector — to act to eliminate risk in a way that is out of all proportion to the potential damage. The result is a plethora of rules, guidelines, responses to ‘scandals’ of one nature or another that ends up having utterly perverse consequences’.
The OECD has suggested that another reason why governments across many countries have struggled to reverse the trend towards increased regulation and rising compliance costs is that ‘bad regulation … will generally face less political resistance, especially where certain groups can benefit at the cost of the wider community [and] is often rewarded with public acclaim, as tangible evidence that government is “doing something”’ (OECD 2010b, p. 4).

Box 1: Commonwealth Government deregulation milestones
	
•	1978 — Inquiry into Unnecessary Paperwork (Lynch, 1978)
•	1980 — Comprehensive Review of Paperwork by all Commonwealth Departments and authorities (Department of Industry and Commerce, 1980)
•	1985 — Business Regulation Review Unit established and Regulation Impact Statements (RISs) first mandated
•	1994 — Legislative Instruments Bill 1994 introduced — would have mandated RISs and automatic sunsetting of legislative instruments after five years
•	1996 — Time for Business (Small Business Deregulation Task Force 1996) recommended that regulatory gate keeping be strengthened
•	1997 — More time for business (Howard 1996) mandated RISs and sunsetting of subordinate legislation
•	2003 — Legislative Instruments Act 2003 — mandated registration and sunsetting of Commonwealth delegated legislation, typically after 10 years
•	2006 — Rethinking Regulation report (Regulation Taskforce 2006) — 178 specific recommendations, including stronger RIS requirements, regulator performance measurement and sunsetting of subordinate legislation after five years
•	2010 — Regulatory Impact Assessment framework strengthened and new Best Practice Regulation Handbook published
•	2012 — Independent Review of the Australian Government’s Regulatory Impact Analysis Process (Borthwick and Milliner, 2012)
•	2103 — Mandatory RISs for all Cabinet submissions, regulatory costings and offsets, $1 billion annual deregulation target
•	2014 — Semi‑annual Parliamentary Repeal Days, regulatory audit, updated regulator performance measurement and reporting (Abbott 2014)	

4. Measuring regulation (and deregulation)
Measuring the amount of regulation is fraught with challenges. One common measure is the aggregate quantity of legislation and statutory rules. As a measure of compliance costs imposed on individuals and businesses, such measures are imperfect as they include legislation that is entirely internal to government, such as the Public Service Act 1999, which provides a statutory basis for the employment of government employees. In addition, obsolete and unused rules are also captured, even though they impose no direct regulatory burden apart from making the law more voluminous than it needs to be. However, pages of legislation can still serve as a useful proxy for measuring overall trends in regulation (Berg 2008).
Page counts
The Productivity Commission found that in June 2007 there were 100,000 pages of Commonwealth legislation and 90,000 pages of statutory rules (regulations, determinations etc.) (PC 2008, p. 32). This does not include regulation by state and local governments or the many pages of guidance, rulings and other quasi‑regulation that individuals and businesses are expected to understand and comply with. The Rethinking Regulation report found that ‘there are also literally millions of pages of rulings, explanatory memoranda, advisory notes and so on, plus a number of self‑regulatory regimes, sometimes introduced to ward off the “threat” of government regulation’. Over the last 10 years, the number of different licences for businesses and occupations appears to have grown from around 24,000 to almost 32,000 (Regulation Taskforce 2006 and Australian Business Licence and Information Service 2014).
As well as the amount of regulation, it is also important to consider the rate at which it is changing. The rate of change is important because individuals and businesses must not only educate themselves about regulations that may apply to them, but must also monitor for any changes. As the amount of regulation that people are expected to comply with has grown, so has the amount of new regulation each year. Chart 1 shows the number of pages of Commonwealth legislation passed by Parliament each year since Federation. Between 1901 and 1970, the amount of legislation passed each year rose only slowly, from an average of about 130 pages per year in the first decade, to an average of around 750 pages per year during the 1960s. However, the rate of legislative change has accelerated since 1970. So far during the 2010s, there have been more 6,500 pages of legislation on average each year. The dip in 2013 most likely reflects the reduced number of sitting days in 2013 caused by the timing of the election.
While page counts are one way of measuring the amount of regulation, they are only a proxy for the cost of regulatory compliance. What ultimately matters is the number of regulatory burdens and the cost associated with satisfying each of these relative to the benefits stemming from these regulations.
Chart 1: Pages of Commonwealth legislation passed per year

Source: Institute of Public Affairs, trends calculated by Treasury.
Part of the growth in the number of regulations and number of pages of regulation over the last four decades reflects the competition‑increasing deregulation process that has been underway since the early 1970s. An example of where deregulation led to an increase in the number of pages of regulation is telecommunications. Prior to deregulation, there was a prohibition on the supply of telecommunications services by anyone apart from Telecom Australia. When this prohibition was removed, it was necessary to introduce a range of new regulations to ensure effective competition in the new market. Some of these new regulations included were to ensure that Optus and other new entrants could access Telecom’s monopoly infrastructure, to ensure that customers with different providers could call each other, to ensure the orderly and efficient allocation of telephone numbers and to ensure that basic telecommunications services are available across Australia. Overall, these reforms increased economic freedom by allowing competitors to enter the market, gave consumers choice and drove productivity improvements and lower prices through increased competition. Therefore it is clear that the overall effect was deregulatory notwithstanding the increase in the volume of regulations required to give effect to it.
More generally, trends in page counts need to be interpreted with some caution, for several reasons. First, as noted above, it is difficult to know what fraction of all legislation is regulatory in nature (as opposed to being internal to government, for example) or whether this fraction has remained constant over time. Second, the volume of regulations may not provide an accurate guide to the burden associated with those regulations. Third, it is possible that there is substitution between different types of regulations where, for example, legislation replaces subordinate regulatory instruments, or vice versa. Fourth, it is possible that the apparent volume of legislation may have been influenced by the progressive introduction of new drafting or formatting protocols. Finally, the level of litigation and subsequent court decisions may be relevant because governments may introduce new legislation to clarify the implications of court decisions (for example, legislation responding to the Mabo and Wik decisions). In some cases, such legislation may effectively reverse a court decision that had an unintended effect, so that there is no net regulatory change. In other cases it may build on a court decision.
Compliance costs
Another approach to estimating the cost of regulation is to measure how much time and money businesses and individuals spend on complying with regulations. Some early attempts to do this in Australia on an economy‑wide basis include Eric White Associates (1978), ABS (1979) and Confederation of Australian Industry (CAI) (1980). These estimates were based on surveys of how much it costs businesses to comply with regulatory obligations. They include the time spent by business owners and their employees to complete paperwork and other regulatory obligations. More recently, the Commonwealth and some state governments have adopted similar approaches for estimating the compliance costs associated with individual regulatory proposals. One example of a tool to do this is the Commonwealth’s ‘Business Cost Calculator’ (see Department of the Prime Minister and Cabinet (PM&C), 2013).
In 2006, the Productivity Commission reviewed a wide range of academic and other studies and concluded that the compliance costs of business regulation are significant and could be as high as 4 per cent of GDP per annum. Business organisations report that compliance costs have continued to grow since then and recent studies of compliance costs associated with the tax system are consistent with this conclusion. Table 1 summarises the outcomes of the major studies of regulatory compliance costs for Australia over recent years.
One challenge when attempting to estimate economy‑wide compliance costs is that previous studies have generally focussed on costs for business. In 2006, the Productivity Commission concluded that compliance costs faced by business ‘could be as high as 4 per cent of GDP per annum’ (PC 2006, p. 133). However, businesses are not the only ones affected by regulation. Individuals and the not‑for‑profit or community sector must also deal with regulation. Therefore, to derive a true, economy‑wide estimate of regulatory compliance costs, it is necessary to combine estimates of business compliance costs with an estimate of compliance costs incurred by individuals and not‑for‑profit organisations. 
One study that examined compliance costs for individuals is Tran‑Nam, Evans and Lignier (2014). They estimated that tax compliance costs for individuals are equivalent to about 0.6 per cent of GDP. This is significantly higher than Evans, Ritchie, Tran‑Nam and Walpole (1997), who estimated that it was equivalent to just 0.3 per cent of GDP in 1995‑95. In addition to taxes, individuals must also comply with a variety of licencing requirements (for example, driving licences) or obtain permits (such as permits for domestic renovations). Individuals must also contend with quasi‑regulation when interacting with government, including such things as time spent learning about requirements for government programs, time spent completing application forms to access welfare programs, or time spent queuing for Medicare refunds. While there have not been any formal studies that have quantified these non‑tax related compliance costs for individuals, if tax related compliance costs are equivalent to 0.6 per cent of GDP, then it seems reasonable to assume that total compliance costs for individuals could be equivalent to 1 per cent or more of GDP.
Table 1: Summary of recent compliance cost studies and estimates

(a)	Productivity Commission estimate based on OECD (2001).
(b)	Evans, Ritchie, Tran‑Nam and Walpole (1997, p. ix).
(c)	Productivity Commission (2006).
(d)	Tran‑Nam, Evans and Lignier (2014), Lignier, Evans and Tran‑Nam (2014) and Treasury calculations.
(e)	Unpublished ATO internal estimates and Treasury calculations.
(f)	Includes some ATO related non‑tax superannuation compliance costs.
(g)	Not for Profit organisations.
(h)	Employment and environmental regulation only.
(i)	Partial coverage of micro‑businesses.
Combining the Productivity Commission’s estimate of business compliance costs in 2006 of 4 per cent of GDP with an assumed compliance costs for individuals of 1 per cent of GDP suggests that total economy‑wide compliance costs are equivalent to around 5 per cent of GDP. Further, compliance costs could be even higher if business compliance costs have risen since 2006 or if costs incurred by not‑for‑profit organisations or delay costs are taken into account.
Regulatory change
In terms of compliance costs, it is not only the amount of regulation that matters, but also the rate of change. From Chart 1, it can be seen that the number of pages of new legislation has increased dramatically over the last few decades. Therefore, regulatory compliance costs include not only the obligations contained in the stock of existing regulation, but also the costs associated with monitoring changes in regulation. These changes are being made by all three levels of government. 
When assessing compliance costs associated with regulatory change, it is important to recognise that change costs do not only occur when legislation or a statutory instrument is formally changed. Costs can also occur if a regulator changes how they administer a regulation, if they change a form (so that businesses or individuals must familiarise themselves with the new paperwork), or if they seek to ‘clarify’ a regulatory requirement that many people have interpreted differently, particularly if they have operated on the basis of the alternative interpretation for some time.
Treasury’s discussions with businesses have also uncovered situations where frequent changes in regulation have undermined the underlying intent of some regulation. For example, one manufacturer identified 22 different changes to regulations relating to product specifications and the energy performance of their products between 2007 and 2013. The aim of these regulatory changes was to improve environmental outcomes by improving the energy efficiency of the products. The manufacturer also revealed that they have identified innovative ways of substantially changing their products to make them significantly more energy efficient but that this would require substantial changes to their production processes that could take up to six months to implement. However, frequent regulatory change and a steady stream of regulatory reviews have meant that they have not had certainty about what regulations would apply more than a few months in advance. Therefore, rather than taking the risk that by the time they changed their production systems their new product might need further modifications before it is compliant with unexpected regulation changes, they have been limited to making only make minor, incremental changes to their designs. As a result, the benefits to consumers of more efficient appliances and to the environment from step changes in technology remain unrealised. 
The potential for reducing compliance costs
As noted in Part 3, some regulatory compliance costs are unavoidable or clearly outweighed by the benefits that the regulation brings. Therefore, it is appropriate that deregulation is directed at removing unnecessary costs and reforming regulations where the costs outweigh the benefits. 
Without assessing the benefits and costs of regulations individually, it is difficult to assess the extent to which compliance costs are avoidable, or relate to regulations that do not deliver a net social benefit. As an alternative to directly estimating what proportion of compliance costs might be unnecessary or avoidable, the Productivity Commission considered the deregulation targets being pursued in a number of other countries and by some States and found that these targets have generally ranged between 15 and 25 per cent (PC 2006, p. 151). If Australia were to achieve the mid‑point of this range by reducing compliance costs by 20 per cent, this would translate into direct compliance cost savings for businesses, individuals and community organisations equivalent to around 1 per cent of GDP. 
Only a portion of the regulatory burden is under the direct control of the Australian Government as state, territory and local governments are also responsible for significant amounts of regulation. In the absence of better information, it could be supposed that the Australian Government regulation accounts for around half of the avoidable economy‑wide compliance burden. If this assumption is approximately correct, then the Australian Government might be able to reduce compliance costs by around ½ per cent of GDP per year or approximately $8 billion. In this context, the Government’s target of at least $1 billion per year (Abbott 2014) will allow a significant proportion of this potential to be realised in just a few years, while recognising that if regulations are changed too quickly, then that, in itself, can impose a compliance burden on the economy.
5. Economic benefits of deregulation
The economy‑wide benefits of deregulation are potentially much greater than the savings from reducing compliance costs, as regulation can impose a range of other costs in addition to the direct compliance burden. ‘[R]egulations not only create paperwork, they can distort decisions about inputs, stifle entrepreneurship and innovation, divert managers from their core business, prolong decision‑making and reduce flexibility’ (Banks 2003b). While these costs are not explicit, as they are not “paid for” directly, they reduce the efficiency of the economy and are therefore known as “efficiency costs” (PC 2006, p. 154). Berg (2008, p. 19) argues that “for much of the economy, the paperburden cost is dwarfed by [efficiency costs]”’.
As noted above, a great deal of reform to reduce efficiency costs has already been implemented. However other opportunities for regulatory reform aimed at reducing efficiency costs remain. The Productivity Commission has conservatively estimated that the direct economic benefit of deregulation in the areas such as retail trading hours, coastal shipping, rail freight, foreign investment and water trading could be worth around $6 billion per annum (Harris 2014). The total potential benefit from deregulation in these areas is likely to be much more if innovation and dynamic efficiency gains are taken into account.
Banks (2012) set out a broader list of areas where deregulatory reform might deliver substantial reductions in efficiency costs and deliver improvements in GDP. This list included deregulation opportunities in sectors such as pharmacy ownership, taxi licences, coastal shipping, book imports, professional services, electricity, water, native vegetation and heritage, development and planning, and chemicals regulation. Many of these areas are covered by the Terms of Reference for the Competition Policy Review announced by the Minister for Small Business on 27 March 2014. A key focus of this review will be to ‘identify regulations and other impediments across the economy that restrict competition and reduce productivity, which are not in the broader public interest’ (Billson 2014). 
Estimating the productivity and GDP effects of deregulatory measures that reduce efficiency costs is not straightforward. Such reforms may have only a small direct compliance cost impact, but deliver substantial indirect benefits to the economy. For example, prior to the deregulation of the telecommunications sector, competitors to Telecom Australia did not exist and hence did not incur any paper burden. However, the benefits of deregulation to the economy and society from lower telecommunications prices, a wider variety of services and increased innovation have been substantial. Estimating the benefits, and any offsetting costs, of such reforms typically requires complex economic modelling and requires careful analysis on a case by case basis.
Estimating the economic benefits of reducing compliance costs is also more complex than simply measuring the direct compliance cost impact using a standard costing model. In many instances, the economic benefit of a deregulatory reform will be greater than the measured compliance cost saving because standard costing tools typically only measure the direct impact. However, in other cases, offsetting influences may mean that the economic impact is less than the direct compliance cost impact.
One type of cost that is sometimes excluded from standard compliance cost models is government administration costs. These costs could relate to educating people about a regulation, verifying compliance, receiving and processing applications, licences or forms and potentially costs associated with prosecuting people that don’t comply. Often, these administration costs are passed back to the regulated population in the form of cost recovery fees and levies and may be viewed by business as ‘adding insult to injury by imposing a regulatory burden on them and then charging for the privilege’ (Banks 2003a, p. 12). The Productivity Commission has previously recommended that regulators’ administration costs should be included in compliance cost calculations (PC 2011, p. XVIII). While this is particularly the case when administration costs are passed on in the form of fees and charges, it can also be argued that government administration costs should be captured regardless of how they are funded as they are still a cost to the community and ultimately borne by taxpayers (PC 2011, p. 12).
Another reason why standard estimates of the paper burden may differ from the economic impact is that reducing paper burden can free up staff and resources within a business that may be reallocated to other, more productive uses. However, in other cases, the time and resources freed up could be allocated to leisure or uses that are not captured by measured GDP (but still improve societal well‑being).
How standard costing tools are used can also affect whether the measured reduction in compliance costs is more or less than the overall economic benefit from a deregulatory reform. For example, the Productivity Commission has previously cautioned that estimates based on these calculators are often overstated if they are ‘based on proposed changes in regulatory requirements, and reflect “gross” rather than “net” savings’ (PC 2011). This may be one reason why, in countries where governments have claimed to have reduced compliance costs substantially, surveys show that businesses perceive little impact (op cit, p. XVI).
6. Australia’s policy framework for reducing the regulatory paper burden
As noted above, successive Governments have been attempting to reduce regulatory compliance costs since the 1970s, but these attempts have generally been unsuccessful in counteracting rapid growth in the amount of regulation in the economy and the associated paper burden. By themselves, efforts to reduce costs associated with existing regulation are unlikely to be effective in reducing the overall regulatory burden unless the flow of new regulation is also stemmed. It is in this context that the Government has committed to measures aimed at addressing both the stock and flows aspects of the deregulation challenge.
Addressing the flow of regulation
It is preferable that unnecessary, poorly designed or excessively burdensome regulation is identified and either prevented or redesigned before it is implemented. If regulation is revised after it has already been implemented, then this will cause businesses and individuals to incur unnecessary compliance and additional adjustment costs. It has also been claimed that ‘it is “five times harder” to remove poor regulation than to introduce it’ (Banks 2010).
To improve the quality of regulation going forward, in March 2014, the Government launched the Australian Government Guide to Regulation (PM&C 2014). The Guide sets out processes that policy makers (and their advisers) must follow when considering regulatory proposals. These processes are based around a set of ten principles, which are reproduced in Box 2.
An important aspect of the new principles is that now Regulation Impact Statements (RISs) must always recommend the option with the greatest net benefit (Principle 1). Further, Principle 2 requires that regulation only be imposed if there is an overall net benefit. This is intended to address the problem that sometimes in the past regulation may have been imposed because it is the most effective way to resolve a policy problem, but there was not sufficient consideration as to whether the ‘medicine’ might be worse than the ‘disease’.
Box 2: Principles for Australian Government policy makers
1.	Regulation should not be the default option for policy makers: the policy option offering the greatest net benefit should always be the recommended option.
2.	Regulation should be imposed only when it can be shown to offer an overall net benefit.
3.	The cost burden of new regulation must be fully offset by reductions in existing regulatory burden.
4.	Every substantive regulatory policy change must be the subject of a Regulation Impact Statement.
5.	Policy makers should consult in a genuine and timely way with affected businesses, community organisations and individuals.
6.	Policy makers must consult with each other to avoid creating cumulative or overlapping regulatory burdens.
7.	The information upon which policy makers base their decisions must be published at the earliest opportunity.
8.	Regulators must implement regulation with common sense, empathy and respect.
9.	All regulation must be periodically reviewed to test its continuing relevance.
10.	Policy makers must work closely with their portfolio Deregulation Units throughout the policy making process.	
Source: PM&C (2014).
Other aspects of the Guide are designed to improve the quality of analysis that is used to inform regulatory decisions. Borthwick and Milliner (2012) found that many agencies claimed to lack the skills and resources to undertake regulatory analysis, while the Productivity Commission found three quarters of the time that consultants are engaged to complete a RIS it is because of a lack of skills in cost‑benefit analysis within the agency (PC 2012, p. 318). The Guide seeks to address these capability problems by stepping policy makers through the key stages of cost‑benefit analysis. Some specific elements of the Guide that should improve the quality and transparency of regulatory decision making include requirements to quantitatively estimate the compliance cost impact of changes in regulation, the need to consider how regulators will implement and enforce a regulation and the need to consider whether regulations should be tailored to different groups.
Explicit consideration of compliance costs
The Regulation Taskforce found that in the past, policy makers have often paid too little attention to compliance costs, and consequently recommended the use of compliance cost quantification tools as a mechanism to address this failing. Despite the availability of tools to facilitate these costings, prior to the introduction of the new policy, very few RISs contained even rough quantitative analysis of compliance impacts (PC 2012). The new Guide overcomes this problem by mandating quantification and, if a proposal increases regulation, requiring that offsetting reductions in compliance cost are identified (PM&C 2014, pp. 34, 37).
Implementation and regulatory approach
In relation to regulatory compliance costs, the way that regulations are implemented is often as important as the content of the formal written regulations themselves (PC 2013). A regulator can administer well designed regulation in ways that ‘discourage compliance, squander government resources or add to business costs and delays. Alternatively, a regulator might take an unwieldy accumulation of regulation and, by choosing what, when and how to enforce, deliver the desired regulatory outcomes in an efficient manner’.
To ensure that regulators implement regulations in a manner that minimises unnecessary compliance costs, a framework to measure how regulators engage and interact with those being regulated is being developed (Frydenberg 2014 and PC 2014). This framework will focus on measuring those aspects of regulator behaviour that contribute to the Productivity Commission’s finding that ‘businesses continue to report that a high share of what they perceive as unnecessary compliance costs are the result of the way regulators interpret and enforce the regulation’ (PC 2011, p. 56).
While regulator behaviour is clearly important, the scope for regulators to reduce compliance costs may be constrained by their legislative framework or other governance arrangements (PC 2011, p. 56). Therefore, it is critical that implementation issues are fully considered when regulation is being developed. 
Regulations may, in the past, have been developed and given effect without sufficient consideration of how it would be administered, interpreted or enforced. For example, a 40‑page RIS that was published in recent years allocated less than four lines to ‘Implementation’. It simply noted that ‘This reform will be implemented through legislation to be passed during [year], as part of [a related set of legislative reforms]. This reform will be effected through amendments to the [relevant] Act which will mean that [the relevant regulatory body] will be responsible for administering and monitoring compliance’.
It is difficult to see how it might be possible to establish that the potential benefits of a regulation outweigh the societal costs without taking into account how it will be administered and enforced, whether the relevant regulator has the skills and resources to implement it efficiently and fairly and the impact that different implementation approaches have on compliance costs.
Consultation can provide a valuable mechanism for gathering information about the impact that different implementation approaches can have compliance costs. If the policy makers that design a regulation are different from the regulator that will administer and enforce it, consultation should include with the regulator, as well as those that will be directly or indirectly subject to the regulation. Consultation with those who be subject to a regulation and those will administer it can identify practical implementation issues that might prevent the regulation from having the desired effect or require the regulator to enforce aspects of the regulation that are unrelated to any community benefit. To address these issues, the Guide requires stakeholder consultation (PM&C 2014, p. 39) and consideration of implementation issues (op cit, p. 49) prior to regulatory decisions.
Quasi‑regulation
In a related policy change, the new Guide expands the previous definition of ‘regulation’ so that regulatory impact analysis will also be required for ‘quasi‑regulation’. This recognises that ‘quasi‑regulation can affect the behaviour of businesses and impose a burden similar to explicit government regulation’ but may be subject to less rigorous analysis and facilitate ‘regulatory creep’, (Commonwealth Interdepartmental Committee on Quasi‑regulation 1997). By expanding the definition of ‘regulation’ to include ‘any rule endorsed by government where there is an expectation of compliance’, policy makers and regulators will now need to consider compliance costs for a broader range of activities than in the past. For example, the new definition would capture the time that people might take to complete a government form, how many people or businesses will need to call a telephone inquiry line and how long they can expect to wait before they get through. While the compliance costs associated with individual transactions of this type are often small, even minor improvements can deliver substantial savings across the economy when multiplied by the large number of businesses or individuals affected.
Customising regulation
A third aspect of the new Guide is that it requires policy makers to consider whether or not regulations should be tailored for different groups to reflect differences in compliance costs and risk, such as small businesses (PM&C 2014, p. 27).
Tackling the stock of regulation
To address the stock of regulation the Government has sought to change the underlying incentives that may be contributing to its growth. For example, the Government has set itself a target of reducing regulatory burden by at least $1 billion each year and created incentive mechanisms for Ministers and officials to reduce regulations over time. 
In the past, if deregulation opportunities have required amendments to legislation, a challenge has been in getting sufficient priority for the proposal in the legislative program to allow for amendments to be drafted or, once they are drafted, introduced. To address this issue, the Government has announced that it will dedicate at least two parliamentary sitting days each year to deal with unnecessary, counter‑productive or redundant legislation and regulations. 
7. Prioritising deregulation opportunities
Taking advantage of the potential productivity benefits offered by deregulation will be important if growth in average living standards is to be sustained over the next decade. Hockey (2014, p. 4‑16) states ‘for annual incomes to grow at their historical average of 2.3 per cent over the period to 2025, annual labour productivity would need to increase to around 3 per cent per year … this is well in excess of what has been achieved in the past 50 years, and more than double what was achieved in the past decade’.
The scope for productivity enhancing deregulation, whether directed at reducing efficiency costs by removing regulatory constraints on economic activity or at reducing compliance costs, is substantial. However, it is not feasible, or desirable, that all of these deregulation opportunities are tackled at once. As discussed in Parts 3 and 4, regulatory reform can, if implemented too quickly or in an ad hoc manner, impose additional costs on businesses and individuals. To ensure that deregulatory benefits are maximised while mitigating possible risks of reform fatigue, it will be important that deregulation opportunities are prioritised and sequenced.
In general, the largest productivity gains from deregulation will come from reforms aimed at realising efficiency benefits — the Productivity Commission found that these are large and possibly ‘many times greater than the benefits from reduced compliance costs’ (PC 2006, p. 154). However, this does not mean that all competition related deregulation is preferable to all deregulation aimed at reducing compliance costs. The analysis presented in Part 4 of this paper shows that the potential benefits from reducing compliance costs are still significant and that, over time, it may be possible to reduce compliance costs imposed by Commonwealth regulation by an amount equivalent to around ½ per cent of GDP. A similar saving might be realised if compliance costs associated with state and local government regulations are also reduced.
A comprehensive deregulation agenda, such as that currently being pursued, recognises that the two types of deregulation are not mutually exclusive and that the best opportunities of each type can be progressed at the same time. Therefore, a list of priority deregulation opportunities will include both reforms that primarily improve economic efficiency and reforms that primarily target compliance costs (see Diagram 1).
Diagram 1: Total Deregulation potential

The Competition Policy Review will provide a mechanism to identify and prioritise deregulation opportunities that can most effectively promote competition and address efficiency costs. The complex relationship between economic benefits and compliance cost savings means that reforms directed at reducing compliance cost need to be considered on a case by case basis. However, to the extent that compliance cost savings and economic benefits are correlated, it is useful to consider which types of deregulatory reform are likely to provide the largest scope for compliance cost savings. Three areas where large compliance cost savings are likely to exist are:
•	deregulation aimed at large populations;
•	deregulation affecting small business; and
•	tax‑related deregulation.
Deregulation directed at large populations
In terms of identifying areas where deregulation can provide the most significant compliance cost savings, it may be noted that, in general, it may be easier to achieve large savings by identifying reforms that benefit a large regulated population. For example, a change to income tax arrangements that saves 10 million taxpayers an average of $50 each, either in time or tax agents’ fees, would save $500 million in total compliance costs. In contrast, a deregulatory proposal that only affects the ten largest companies in Australia would need to save $50 million each to have the same total impact. 

Some areas of regulation that currently affect a large proportion of the population are:
•	taxation;
–	 individuals — in 2011‑12 there was 12.7 million individual taxpayers (Australian Taxation Office 2014);
–	businesses and not‑for‑profit organisations — as at 30 June 2013, 7.5 million entities held an Australian Business Number (Australian Business Register 2013);
•	social welfare — approximately 5 million Australians receive income support (Department of Social Security 2014) and Medicare processes around 350 million claims each year (Department of Human Services 2013);
•	workplace regulation — approximately 11½ million Australians were employed in early 2014 (ABS 2014);
•	company regulation — more than 200,000 new companies were registered during 2013 and there was more than 2 million companies registered as at the end of 2013 (Australian Securities and Investments Commission 2014); and
•	small business — over 95 per cent of Australia’s businesses are small (PC 2013).
Deregulation affecting small business
The large number of small businesses is not the only reason why deregulatory measures aimed at reduced compliance costs for small business can be significant. Small businesses face greater challenges in understanding and fulfilling their compliance obligations than larger businesses (PC 2013). Previous studies have found that ‘SMEs … bear roughly 85 per cent of the aggregate paperwork compliance burden, although their share of economic activity is about one third’ (Lattimore, Madge, Martin and Mills 1998, p. XXIV).
One reason that small businesses may face relatively higher compliance costs than larger businesses is that it is often easier for larger businesses to achieve scale efficiencies. Larger businesses allow for greater specialisation within the business and many large companies have specialist regulatory compliance departments that can specialise in monitoring regulatory change. For example, Lignier et al (2014) found that micro businesses (with turnover below $75,000 per year) incur gross tax compliance costs that are 40 times greater relative to their turnover than mid‑sized businesses (turnover of between $2 million and $100 million per year). Various other studies have confirmed that small businesses bear disproportionate compliance costs in other areas of regulation (PC 2013, p. 72‑76).
By itself, the fact that small businesses face proportionately larger compliance costs suggests that it is more likely that the costs of a regulation applied to a small business will outweigh the benefits of the regulation than is the case for larger businesses. This is even more likely if small businesses represent a proportionately smaller risk in relation to the harm that regulation is seeking to minimise. 
This analysis suggests that significant deregulatory savings may be possible from ‘tiering’ regulations to better reflect both the relative costs of compliance and the risk posed by small business. Two examples of tiering are the use of lighter touch regulatory regimes or outright exemptions (Bickerdyke and Lattimore 1997). Another benefit of a more tailored approach to regulation for small businesses is that regulators can also incur disproportionate costs to procure a small firm’s compliance (PC 2013, p. 77). As argued in Part 5, these administration costs should also be taken into account when assessing the net benefit of regulation.
Tax deregulation
A majority of Australian individuals and businesses must comply with at least some part of the tax system. Some of the major taxes are: income tax and goods and services tax at the Commonwealth level; payroll tax for the States; rates and related changes for local government. The Australia’s Future Tax System Review Panel (2009) identified some 125 different taxes that apply to businesses and individuals and concluded that ‘Australia has too many taxes and too many complicated ways of delivering multiple policy objectives through the tax system. The capacity of the legislative and operating platforms of these systems, and their human users, to deal with the resulting complexity has been overreached’. The review also concluded that ‘Improving the structure of the tax system, by replacing inefficient taxes with a rationalised suite of taxes and streamlining administration, has the potential to increase government accountability, reduce system complexity and business compliance costs, and make the Australian economy more productive’.
It is likely that tax‑related compliance costs represent around 40‑50 per cent of total economy‑wide regulatory compliance costs. Oliver and Bartley (2005) cite various studies suggesting that tax compliance costs are equivalent to around 2 per cent of GDP. The more recent ATAX studies referred to in Part 4 suggest that this may have increased slightly over the last decade, despite the Australian Tax Office’s attempts to reduce compliance costs by encouraging online preparation and lodgement, as well as pre‑filling. 
Two possible explanations for this increase in tax compliance costs could be an increase in the complexity of the tax system, or an increase in the complexity of the economy such that more people and businesses are now interacting with more complex aspects of the tax system. To some extent, growth in the number of individuals and businesses interacting with more complex parts of the tax system reflects voluntary choices. For example, as the proportion of adult Australians that directly own shares has increased, it is likely that more Australians have needed to interact with the capital gains tax system. In other cases, an increase in compliance costs may have been consciously traded off against perceived tax and other benefits when choosing to use a particular business structure. 
While tax‑related compliance appears to account for a large share of the regulatory burden in Australia, historical studies suggest that it is not the fastest growing area of regulation and has therefore been falling as a share of the total regulatory burden over time. An Australian Bureau of Statistics survey found that in 1978, Commonwealth and State Government taxation accounted for around three‑quarters of the total regulatory burden (ABS, 1979). Therefore, if measures to reduce tax related compliance costs are to be effective in reducing the overall regulatory burden in Australia, it will be important that new regulation in other parts of the economy is also stemmed.
8. Conclusion
Australia faces a productivity challenge if it is to sustain growth in living standards over the next decade. In this context, deregulation is a potential driver of productivity growth to offset the negative growth effects of the end of the terms of trade boom and Australia’s ageing population. 
Deregulation can take two substantive forms: deregulation to address economic efficiency costs and deregulation aimed at reducing compliance costs. In general, the former will provide the largest productivity gains, but the two forms of deregulation are not mutually exclusive. 
The largest gains will come from freeing up the economy to reduce efficiency costs and improve competition in remaining markets where it is currently constrained. It is intended that the current Competition Policy Review will provide a mechanism for taking these opportunities forward. 
The benefits of reducing compliance costs are also significant. Therefore, maximising the living standards of Australians will require that unnecessary or inappropriate regulatory compliance costs are also addressed. In this context, recent changes to regulatory policy provide a new opportunity to realise these benefits. To ensure the greatest gains, deregulatory efforts should be prioritised by reducing compliance costs relating to regulations that apply to large numbers of people and businesses, including small business and taxation regulation.

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