Crisis? What crisis?

By now, we've all read the story, dozens of times.  It goes like this:  the financial crisis has brought down the Potemkin village of consumerism.  The recession has exposed the internal contradictions and long-term impossibility of the neo-liberal order.

In a thousand community centres across Australia, in homes and kitchens and op shops, people are changing how they live their lives.  People are cooking at home instead of eating out.  Restaurants are responding by replacing gourmet with "home-inspired" meals.  Friends are sharing clothes.  Op shops are in fashion, a claim shown by talking to the fashion designer who picked up a pair of leather pants for (just!) $120 from the Salvos.  Indeed, the Salvos have rebranded their stores as "Fashion with a Conscience", making the leap from evangelical Christians with a focus on charity, to "urban recyclers" with celebrity endorsements describing the shops as a "new shopping hot spot".

Sewing is back -- here two youngish mothers are sewing pants for their children and have started a home-made homewares club that plans to meet every fortnight in a Brunswick community hall.  Fashionistas are now recessionistas;  "recession chic" has replaced all-my-pants-are made-out-of-Peruvian-diamonds chic.  You get the idea.

But is consumerism really on its deathbed?  I mean, we're not even technically in a recession yet.

This narrative about the consequences of the economic crisis is just a little too cute to be true -- it's like prudence and thrift as seen through the glossy eyes of an upmarket women's magazine.  These are the kind of savings found by people whose share portfolio has dipped, not the financial savings that people who have been suddenly kicked out of work have to find.

If conspicuous consumption has really gone, perhaps we've replaced it with conspicuous frugality.  It's sometimes hard to tell the difference.  Are expensive ripped jeans, popular long before credit began to crunch, meant to symbolise poverty or wealth?  The developed world's press -- tabloids and broadsheets alike -- have managed an apparently seamless transition from stories about "why the economy is growing but we're all really sad" to stories about "starving in style".

An unemployment rate of 4 per cent apparently makes us concerned about working too hard, and economic growth makes us depressed.  But an unemployment rate just over 5 per cent evidently encourages people to discover their inner artisan and make their own hats out of felt.

Certainly, the retail sector has sputtered in the past few months.  In February, retail sales fell 2 per cent.  In March, sales increased more than 2 per cent, and April's figures show a barely discernible increase of just 0.3 per cent.  But, despite the ups and downs of the retail sector since the downturn began, I found in my study released this month, that retail sales figures were sticking closely to their long-term trend -- and that trend is, even in these dark economic times, moving inexorably upwards.

Sure, this could be due to the $900 gifts that most people received a month or two back, although the economists pointed out that a mostly steady trend suggests this is unlikely.  Nonetheless, if consumerism is really sinking, then the seawater hasn't shown up in the retail sector quite yet.

Obviously, rejecting consumer capitalism for political reasons isn't a new phenomenon.  Back in 2006 The Australia Institute, a left-wing think tank, claimed that dumpster-diving was gaining in popularity.  Skip-dippers are conscientious objectors to consumerism who aren't forced by adverse circumstances to dig through other people's rubbish, but do so as a political statement about sustainability and capitalism.  And, according to the Australia Institute, skip-dippers aren't just people who enjoy reupholstering furniture, but more affluent hobbyists shoving their hands in supermarket dumpsters until they touch the coagulating bin-juice at the bottom.

And people were sewing clothes as a hobby well before Lehman Brothers went bankrupt.  Indeed, in 2001, the satirists at The Onion wrote a piece titled "Gruelling Household Tasks of 19th Century Enjoyed By Suburban Woman", pointing out that churning butter and making candles by hand are very strange ways to spend your free time.

Nevertheless, one somewhat more serious article in the British industry magazine Marketing Week claimed that the financial crisis comes at a moment in history when we are shifting away from consumerism anyway -- the magazine described the future as a "premodern age".  According to this view, we're seeing a new emphasis on social, rather than individual, production and we're buying things less for instant gratification, and with social goals in mind.  We're thinking of the environmental impact of our purchases and the ethical questions they raise, and so on.

There is something to this.  In 2009, there's scarcely a product imported from the Third World that doesn't have a fair trade equivalent.  And environmental sustainability is now held as a goal not just for committed greenies, but for otherwise non-political types.  After all, skip-dipping student communes can't afford to install solar panels on their sharehouses, these basic but expensive home improvements are being taken up by largely middle-class buyers.

Rightly so.  Psychologists and economists refer to a "hierarchy of needs" -- once individuals have sorted out basic things like food and shelter, safety, and love, they start concerning themselves with ethical or moral questions.  If you're rich enough to afford imported cheese, you've also got more energy to think about where your food comes from, or what impact you might be making on the wider world.

But how seriously should we take the idea that the financial crisis is the final straw that will suddenly push us into glorious premodernity?  Marketing Week pointed to the popularity of Lily Allen, whose pop music has an anti-consumerist tinge.  Indeed, in the lead single of Allen's latest album she mockingly sings:  "I am a weapon of massive consumption, and it's not my fault, it's how I'm programmed to function."  Do you like her message?  Have you already bought her CD?  You might also want to buy the video from iTunes for $3.39.  And ringtones of her songs are available from the Lily Allen Mobile Store, ensuring you can continue to collect Lily Allen memorabilia on the go.  She does appreciate your support -- The New York Times reported that Allen spent $143,000 on clothes and jewellery just last year.  Hey, there's nothing wrong with any of that.  It would be a stupid pop singer who didn't offer her fans every kind of merchandising possible.  And for a musician, multiple revenue streams are essential in an age of widespread music piracy.

But a celebrity's failure to practise the ascetic lifestyle they preach does nothing to assuage that nagging suspicion that political views about conspicuous consumption can be as much a fashion as any brand-name T-shirt.

Even the popular anti-advertising culture-jamming outfit Adbusters puts out an overproduced magazine designed more for the coffee table than the barricades.  Yet, the publisher of Adbusters decries our lazy consumerism:  "We watch nature shows instead of venturing into nature.  We laugh at sitcom jokes but not at our spouse's.  We spend more evenings enjoying video sex than making love ourselves."

Does that description hold true for anyone you know personally?  We speak of other people seeking out "status goods" -- things purchased primarily to signal to others that they could afford them -- and "conspicuous consumption", but we are apparently never guilty of such irrationality ourselves.  Soulless consumerism is easy to identify in others, not so easy to identify at home.

Just a few years ago, social critics were claiming that people bought iPods in part to show off their distinctive white earbuds.  But as Apple reduced its prices and introduced new, cheaper models, it undermined the "status" value of its products by making them available to even more people.  The presumed exclusivity of the iPod range was totally shattered.  Yet since then, sales of iPods have increased exponentially.

I don't know about you, but I buy things because I think they might make my life better in some way.  Sometimes we all get it wrong -- a book isn't as good as we hoped, a piece of technology doesn't integrate into our lives as smoothly as we would like, or we bought too many mushrooms to put in the risotto.  Most of the time, we get it right.

So what is so "consumerist" about that?  Is it really conspicuous consumption if the enjoyment we derive from stuff comes from when we use them, not just simply from purchasing them?  And if it is, then what's the problem?  I suspect that the vast literature on consumerism and consumption can be reduced to one banal observation:  life is getting better.  We have more ways to raise our living standards, and some of those ways involve buying stuff.

There's a funny thing about recessions:  if -- a pretty important "if" -- you don't lose your job, recessions aren't really that bad a time to be alive.  Interest rates tend to go down and panicky retailers aggressively discount their goods to try to draw customers back and clear stock.  If you like your designer fashion or just no-brand accessories, they will be going on sale earlier and at prices lower than when the economy was booming.  So, except for shrinking superannuation savings, there really isn't too much to panic about.  For better or worse, a recession needn't precipitate any major changes to the way we live our lives.  If you haven't done anything stupid, like max out your credit card, or taken out a mortgage you couldn't even pay off in a booming economy, then everything should be fine.

Of course, for the minority that lose their jobs, recessions can be very traumatic.  Sure, the unemployed may be spared the consequences of "affluenza" -- the crippling emotional emptiness of consumerism -- but losing a job is widely considered a big risk factor for mental illness, poorer physical health and relationship problems.

As always, our historical linchpin for economic downturns is the Great Depression.  We all know of parents or grandparents who acquired a distinct frugality during the 1930s.  But it's not like consumerism took a holiday during the Great Depression.  The 1930s was a formative period in the development of the advertising industry, when marketers started to focus on marketing directly to the vanity of individuals.

Beauty products are famously counter-cyclical -- that is, as the economy goes down, sales of lipstick and foundation go up -- as people spend money on cheaper forms of self-improvement and satisfaction.  This held just as true for the 1930s as it has for the recessions that followed.  Yet this focus on the individual during an economic downturn doesn't quite fit our idea of the communal, co-operative and fundamentally anti-consumerist culture in the period.

And, of course, we have to remember that, whatever cultural changes did occur during the Depression, that period was followed by a long postwar boom.  The golden age of advertising built on the foundations developed during the 1930s and 1940s -- two decades of apparent selflessness.

Economic downturns always end.  Broad shifts in culture aren't just brought about from an economic crisis.  They take time.  Maybe there are big changes afoot in society.  But the activists and trend-spotters who treat the financial crisis as the harbinger of a global anti-consumer sustainability revolution are reading just a little too much into a few anecdotes about sewing and vegie patches.

Anyway, a green economy will require a little more than "reduce, reuse and recycle" -- going green takes greenbacks.  Energy produced by wind power costs much more than energy produced by brown coal;  the cheapest electric car is far more expensive than the cheapest gas-guzzler.  Whatever consumer preferences are shifting towards green products is only possible because of our historically unprecedented wealth.  We'll all need to buy our way into a cleaner future -- energy-saving devices don't buy themselves.  The same is true for almost all other social and ethical causes.  Concerned about global poverty?  Producers in the Third World would appreciate our continued demand for their goods.

If before the crisis hit you were a reckless spender and debt-accumulator, then I'm glad a recession could come along to shock you out of your idiotic ways.  And if you refused to share your clothes with your friends, but now that your investments have tanked you've been able to find just that little bit of residual neighbourliness deep within you, then that's marvellous.

Nevertheless, for the vast majority of Australians, life will continue as before, largely unaffected by the economic downturn.  The global financial crisis is a big deal.  But it's not that big a deal.

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Profligate policies put us back in the firing line

World share markets took another nosedive this week triggered by the World Bank's publication of downbeat growth forecasts.

For 2009, the World Bank sees US real income falling by 3 per cent, with Europe and Japan down by 4.5 per cent and 6.8 per cent respectively.

The World Bank is even gloomier about 2009 industrial production.  Output is forecast down 18 per cent for the US, 12 per cent for Japan and an incredible 34 per cent for Germany.

Although India and China continue to grow, this is insufficient to offset losses elsewhere.

The World Bank projects a mild improvement for 2010 but this may be optimistic in view of the massive but unsustainable government spending world economies have seen.

By contrast, Australia appears to be an island of tranquillity.  Unemployment stands at under 6 per cent, compared to levels approaching 10 per cent in Europe and the US, while retail and housing data remains buoyant.

Australian state and Commonwealth budgets foresee us continuing to weather the storm.  They take comfort from an apparent return to positive national growth in the March quarter of 2009.  But within the overall picture investment plummeted and the growth was boosted by Canberra's unrepeatable spending splurges.

The Commonwealth budget envisaged Australia's GDP being 1 per cent lower in 2009-10.  This was based on world output falling 1 per cent but that's only half the decline the World Bank forecasts.

The Victorian Government is preening itself on a budget cash deficit that, in relative terms, is lower than in all states except Western Australia.

Spring Street also prides itself on a tax take lower than in New South Wales.  That's setting a pretty low bar.

Moreover, Victoria's budget figures are fragile.  The projected budget deficit depends on the economy, and therefore tax revenue, experiencing faster growth than in any developed world country.

This is all the more worrisome in view of the Brumby Government's breakneck 8.4 per cent growth in spending.

That spending increase includes an additional $7 billion on "infrastructure".  But this is mainly for schools, hospitals, social housing and public transport.  Whatever the merits of such outlays, they do little to boost the state's productive capabilities.

And outside of these areas, the Government remains committed to wasteful capital expenditure in the proposed desalination plant, water from which will cost five times it would from a new dam.

All this comes on top of the carbon tax and renewable energy regulations by the Commonwealth and State governments.  If they go ahead, these measures will undermine the productivity of Victoria's magnificent electricity generation facilities imposing costs on industry and consumers alike.

A survey by the Australian Chamber of Commerce and Industry estimates the additional costs from proposed energy regulations will require businesses to reduce their wages bills by 4-8 per cent.  At best, and providing Julia Gillard's new workplace laws don't gut the Howard Government's wage flexibility reforms, that means lower wages.  At worst it means an additional boost to unemployment.

The world recession continues.  Australian workers and businesses are yet to see the worst of it and are being badly served by government policies.

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The real OzCar scandal

In a short book published in 1944 and titled Bureaucracy, one of the godfathers of "neo-liberalism", the Austrian economist Ludwig von Mises, summed up one of the problems with government bail-outs -- it gives the government "unlimited power to ruin every enterprise or to lavish favours upon it".

So it has been that this week's media headlines have been dominated by whether Prime Minister Kevin Rudd and Treasurer Wayne Swan did or did not lavish favours upon a political donor seeking access to government funds.  And the travails of Opposition Leader Malcolm Turnbull and Treasury official Godwin Grech have added the necessary air of intrigue and mystery to the affair.

One of the things we've learnt this week is that often it's the little things that get all the attention while the big things go unnoticed.  So it is with "Utegate".  The claim is that a used-car salesman who lent the Prime Minister a 13-year-old, $5000 ute and who attended a fund-raising dinner received special treatment to get finance from the government's OzCar scheme.  Whether the used-car salesman received preferential attention is as yet not known -- and may never be known.  But the mere suggestion that federal ministers have provided political favours in return for gifts was enough to provoke widespread (and justified) consternation.

But when the trade union movement provided $30 million of advertising against the coalition at the last federal election and the Labor Party government then rewrote the country's industrial relations laws to suit the ACTU, few bothered even to raise an eyebrow.

It seems the bigger the political favour the more willing we are to accept it.  In the course of our history there have been few bigger political favours than the regime of tariffs and centralised wage fixation.  For a century Australians put up with it as a fact of life.  We're now about to put up with an emissions trading scheme that will allow for the distribution of preferment on a scale not seen since the end of tariff protection.

It's not surprising that a scheme like OzCar is engulfed with controversy.  Controversy is the inevitable result of governments handing out money to some people but not others.  At a supposed cost of $450 million, OzCar is a fraction the size of the $4 billion "RuddBank" program, which was going to bail out property developers.  In a way the government should be thankful that the legislation to establish RuddBank was defeated.  Property developers give more money to the Labor Party than do used-car salesmen.  RuddBank being bigger than OzCar had the potential to cause many more problems.  And OzCar hasn't even started yet.

The PM might baulk at attempting to regulate the whole of the economy, but he hasn't displayed any reluctance at regulating and re-regulating large swathes of it.  His reach has lately extended past anything that emits carbon dioxide to now include anything from the provision of consumer credit to the size of executive remuneration.

In Bureaucracy, von Mises says the biggest problem with government regulation is it distorts the mechanisms by which consumers signal their preferences for what they want.  The OzCar scheme and RuddBank were not designed to operate at a profit.  They were created to rectify a perceived market failure.  As von Mises put it;  "In taking the profit motive as a guide, free enterprise adjusts its activities to the desires of the public.  The profit motive pushes every entrepreneur to accomplish those services that the consumers deem the most urgent ... But if a public enterprise is to be operated without regard to profits, the behaviour of the public no longer provides a criterion of its usefulness."  Precisely.  The criterion of the usefulness of OzCar and RuddBank has been determined by politicians, not the public.

In any case the "market failure" OzCar was to rectify was nowhere near as big as first anticipated by Treasury.

Von Mises identified that, in addition to the manipulation of the market that comes with bail-outs, there is another consequence as well.  Inevitably the entrepreneur must resort to either diplomacy and bribery.  Thankfully in this country at least diplomacy remains the preferred option of business.  Because of OzCar, car salesmen will spend their time telephoning the office of their local MP, lobbying for cash handouts instead of selling cars to customers.

The scandal of OzCar is not about the question of who leaked what to who.  The scandal is that such a scheme as OzCar can even exist.

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Australian authors on Clown Street over book prices

Tim Winton is the master of fiction.  But his latest tirades prove he doesn't understand when reality kicks in.

Last week Winton won a fourth Miles Franklin Award for his book, Breath.  And to celebrate he used his moment in the spotlight to attack the Productivity Commission's review to scrap protection for Australia's book industry.

Parallel import restrictions require books sold in Australia to be produced in Australia.  It's an idea so bad the New South Wales government could have thought of it.

The PC is releasing its final report at the end of the month.  The draft recommended partial-liberalisation, because exposing Australia's book industry to competition is a bridge-too-far.

And even that recommendation has caused alarm bells.  Fellow author, Peter Carey, has attacked liberalisation as a form of "cultural self-suicide".  And Winton has previously slammed liberalisation arguing it will result in "great bitterness" amongst Australia's authors.

Authors been deceitfully whipped into a lather by the publishing and printing industries who want to ensure books are more expensive than they need be, delivering profits to line their pockets.

The publishers and printers argue that import restrictions stop competition that would crush the industry, while guaranteeing jobs stay in Australia;  and the minimal extra cost is added to the price tag of a paperback that can be significantly cheaper overseas.

And in arguing their case, they've convinced authors that liberalisation will also diminish their copyright.  They clearly don't understand the nature of copyright.

In a book there are two property rights.  The first is the physical book -- the paper, binding and printing ink.  The second is the copyright, which is basically the idea expressed through the arrangement of the letters printed on the pages.

Without the copyrighted text a book is just something to jot notes onto.

Import restrictions exist to protect the physical book, not the copyright.  So long as the book is produced in a country where Australian copyright is respected and royalties are paid, Winton's copyright is safe.  And if it doesn't, the book's a fake in the Australian market and can be pulped.

Similarly the authors claim the industry will stop seeding new talent with cross-subsidies of the profits from existing authors.

But the evidence doesn't support them.  In my recent study, Unbinding Book Barriers, industry data is analysed to assess the impact of removing import restrictions in 1998 on copyrighted sound recordings, read CDs.

The results are clear.  The total funds distributed are up.  The total number of recipients of royalties is up.  And the wholesale price of CD albums is down by 32 per cent.

Winton's real beef is that authors get paid diddly-squat.  And he's right.  But most earn diddly-squat because they write things people don't want to read.

And Winton knows it.  In his submission to the Productivity Commission's review he says he has "enjoyed considerable critical and commercial success".  He does so because he produces fiction that people want.  Not because of any import restrictions.  They just go toward beefing-up the salaries of publishing executives.

But the greatest irony of Winton's criticism is that in his own submission he uses evidence of the failings of import restrictions to justify their perpetuity.  Winton argues that when he first started being published Aussie authors could be "edited and published in Australia and forego a British readership entirely, or to have work originate from London and have Australian(s buy) imports".

He's right.  That was because of market segmentation through import restrictions that were partially liberalised in the early 1990s.

Australian authors, publishers and printing companies will do well when they adhere to the simple principle of "supplying" what consumers "demand" -- and that's an interesting read.

In the meantime authors seem happy to enjoy protection that author, Di Bates, hails as essential to stop Australia being "flooded with cheaper book(s)".  Because the income streams of our less-talented of authors is a higher national priority than making tools for education more affordable.

Automotive welfare

Just what is it about governments and cars?

The political fallout from the OzCar affair continues unabated.  The opposition has raised questions about the treatment given to Ipswich-based car dealer John Grant by fellow Queenslander and Treasurer Wayne Swan.

Nobody has seemed to escape what has turned out to be the political equivalent of a custard cream pie throwing contest.

Key questions remain to be answered by the Treasurer about the extent of special treatment to Grant, and whether he misled the Parliament on the matter.

The opposition has not escaped the fall-out from this affair either.  It accused Rudd of misleading Parliament on the basis of an email that the AFP confirms to be a fake.

The spotlight has also been trained upon the public service, with a growing debate about how far officials should go to implement government policies.

Was it reasonable for public servants to refer Grant's situation to Ford Credit, which was at the time seeking a $500 million government guarantee?

On what basis did the Treasury nominate the Australian National University -- with the chair of its finance committee also happening to be executive director of the Motor Trades Association and former Hawke government staffer -- as the nominated beneficiary of profits from the OzCar financing trust?

While some may dismiss the affair as part of the momentary cut and thrust of politics, there is something deeper to the whole story that has been given insufficient attention.

The reality is that the OzCar scheme, designed to fill the wholesale floorplan financing gap for car dealers affected by the withdrawal of GE Money and GMAC from the market, is a continuation of the love affair between governments and the car industry.

It arguably all started with former Prime Minister Ben Chifley, who launched Australia's first Holden model in 1948 with the cry of "she's a beauty!"

During the 1950s and 1960s, a hand-in-glove relationship emerged between governments and car manufacturers.  Governments erected tariff barriers to shield domestic manufacturers against cheaper imports, which built up a heavily unionised workforce.

In return, political parties would receive donations, and, in the case of the Labor Party, a ready source of parliamentarians drawn from car-making union representatives.

This cosy arrangement started to change in 1973 when Gough Whitlam made the surprise move to cut tariffs across the board by 25 per cent.  To ease concerns about structural adjustment in the car industry, governments substituted more explicit handouts for tariffs thus keeping the government-car bond alive.

The Button car plan of the mid-1980s, for example, gave subsidies to car makers to make them do what an efficient, market-oriented industry would undertake as a matter of course -- export more of their wares overseas.  The Howard government also doled out taxpayer funds to the industry, often in response to threats of manufacturer closure.

Since 2007, the level of assistance has been ramped up yet again with interventionist industry minister Kim Carr presiding over a $1.3 billion "green car" fund, an Automotive Competitiveness and Investment Scheme, an Automotive Industry Structural Adjustment Program, as well as tariffs still in place.

The OzCar scheme simply extends the branch of corporate welfare out to car dealers.

The big question that has not been asked to date is whether this massive $550 million credit facility, that has already caused so much political trouble by exposing its own susceptibility to shady political deals, is really necessary in the first place?

The first thing that should be said is that if a finance company exits the market then there is likely to be competitor financiers willing to step into the breach, if the line of business is inherently profitable.

The Rudd government has effectively co-opted the major banks in providing liquidity to eligible car dealerships, but affected dealers could have turned to the same banks or other lenders for credit anyway if the OzCar scheme was not in place.  Either that, or they would have reduced the vehicles in their showrooms, an outcome neither disastrous for them nor the manufacturers.

When governments decide to play banker once again, deciding who and who shouldn't get a loan, at best we diverge from commercial decision-making and at worst we open up the prospect for shady deals and outright corruption.  The certain loser from this process remains the taxpayer.

The government has run up budget deficits and debt as it succumbs to demands from rent-seekers for a feed from the corporate welfare trough.  Of no comfort to taxpayers is that there is some semblance of a queue to the trough, with car makers joined by dealers near the front of the line.  This much is clear when government ministers present speeches to the car industry with title sub-headings such as "Labor Party connection".

As has been shown this past week, corporate welfare is about as helpful as an old rusted jalopy with no suspension.  Until the government is prepared to roll back its heavy-handed intervention in markets, there will be more bumpy rides like OzCar in future.

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Local councils become instrument of nanny state

There is something intensely irritating about many modern-day local councils.

Once upon a time citizens looked to the local council to provide a few basic local services such as ensuring the maintenance of local roads, the collection of the garbage, the operation of a library and provision of a maternal and child health service.

This had begun to change by the 1980s when a few left-wing councils decided to make the odd feel-good meaningless gesture such as declaring themselves a "nuclear free zone", but other than stinging ratepayers for the cost of a few signs this did not really do too much practical damage.

However, in recent years councils have more and more chosen to use their planning powers and ability to set rates to impose their personal world view on the rest of us.

Take poker machines.  Earlier this year several councillors of the Logan City Council in south-east Queensland put forward a plan to outlaw any new development including poker machines within the municipality and to also prohibit any existing venue increasing its number of machines.

Not to be outdone, the mayor of Moreland Council in the northern suburbs of Melbourne, Cr Lambros Tapinos, has recently proposed doubling the rates paid by gaming venues in his municipality.  The discriminatory nature of this rate hike is astounding, especially when one considers that other businesses who will continue to pay rates at the standard level in Moreland will include brothels, tattoo parlours, tobacconists, pawn shops, and so on, all of whom at least some citizens might consider to be as socially damaging as the local RSL or footy club.

Cr Tapinos maintains that it is the role of the council to discourage gambling.  Nonsense.  First, if there is a role for a level of government to regulate gambling, it is clearly the resposibility of state government.  More fundamentally, the decision on whether to gamble, on horses at the TAB, on pokies, or on officially illegal card games in the back of one of Moreland's many ethnic cafes is a matter far better left to the individual choice of adult citizens.

Compounding the problem of meddling councillors is the even more insidious practice of local bureaucrats weighing into the debate.  Somehow these unelected local officials believe that they have a right to impose their world view on the citizenry.  When the Moreland mayor proposed his plan it was welcomed by Philip Moran, the chief executive of Moreland Community Health.

"Anything that could try to reduce the impact of the scourge of gaming machines on our community is a good thing," Mr Moran said.  "There are too many venues and too many machines in this community."

As far as I know Mr Moran has not specified how many machines is the correct number to ensure the maintenace of community health in Moreland, but he does know that it is fewer than the current number.

What is ironic about the rates increase proposal is that for years pokies critics have attacked state governments for relying too heavily on gambling taxes.  Now the same charge will be able to be levelled at local governments.

While poker machines seem to the greatest bête noire of meddling local government councillors and bureaucrats, they also have other targets.  Sydney's Kogarah Council and Gosford Council on the Central Coast became the first councils in New South Wales to ban the use of trans fats.  Both councils amended local development control plans, banning cafes and restaurants from using the controversial fats and forcing businesses to use healthier oils.

Not content with imposing her dietary choices on her own local community Gosford's Greens Councillor Terri Latella next began pushing for a state-wide ban.  Cr Latella said.  "It's something we can regulate."  We can, so we will.

Then, of course, there is the most traditional target of these meddlers -- alcohol.  A councillor from the City of Casey, in outer south-eastern Melbourne has called for tighter planning controls to curb the number of packaged liquor outlets in one of the municipality's major centres, Cranbourne.  Cr Kevin Bradford claimed Cranbourne had become the bottle shop capital of Casey, with 14 bottle shops servicing an area with a 10km radius.

"Fourteen is a ridiculous number of packaged liquor outlets for a town this size," Cr Bradford said, without specifying which smaller number he believed would be appropriate for his local community.  He wants planning laws to be changed to give councils power to determine that number, whatever it is, but does not explain why he favours a law which would provide significant economic benefit to incumbent operators at the expense of potential competitiors.  Ultimately, the sort of changes he is proposing will do nothing to address the problems of alcohol abuse which concern him, but will stifle economic development.

Now, it is true that for decades there have been local government areas in parts of Melbourne that were dry areas, but the ability to vote that an area become dry had been allowed by state government legislation.  What is new is having so many councils believing that their remit includes attempting to control so much of what happens within their boundaries.  No aspect of federal or state policy, or personal activity is seen as beyond their potential meddling.

Ironically, local councils all seem to have extensive diversity programs.  Unfortunately, their tolerance of diversity fails to extend to those local residents who get enjoyment from playing the pokies, eating the foods of their choice or having a range of locations from which to buy alcohol.

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Stimulus (n): a huge sum of money spent on any old crap

What doesn't count as economic stimulus?  Or, if we are to use the more formal term, is there any spending Prime Minister Kevin Rudd wouldn't consider to be Nation Building for Recovery?

The Commonwealth Government is planning to spend $1.4 million helping a recreation hall in the ACT install iPod docking stations, among other things.  Children these days apparently won't go anywhere if they can't plug in their MP3 players.  And the global economy needs -- really, really desperately needs -- a couple more iPod docks.

Just like it really, really needs the renovation of the Guildford community hall's interior linings, the upgrade of the Harry Trott reserve car park in Kennington, and the new BMX track in Gardiner Reserve, Gisborne.  And the credit crunch really needs the old tourist welcome sign in Tenterfield, NSW, to be replaced.  (That one will cost us $30,000, but I'm sure Tenterfield deserves only the best in welcome sign technology.)

All of these recession-busters are contained in the Federal Government's community infrastructure program as part of the stimulus package.  There's a quarter of a billion dollars being spent on these sorts of "community" projects, which apparently differ from normal infrastructure because of the occurrence of group hugs or Kumbaya singalongs.

Don't get me wrong.  Community is lovely and heart-warming and sharing-tastic.  But reading the list of community projects makes it seem as though the Rudd Government is giving the whole country a full body massage, except the ending will only be happy if you're into eucalyptus distillery museums and really big budget deficits.

It would be interesting to find out what proposals the Government thought were bad value for money, if any.  If the iPod docking stations got through, what wouldn't have?

Admittedly, if you are going to try to flood the economy with borrowed cash, you have to buy something -- you might as well build a shed for Warrnambool's Holiday Actors theatre group or give a Glenroy toilet block a once-over.

The purpose behind the stimulus plan seems to be just getting people to do stuff.  But why this particular stuff?  Why not build a super-fast underground railway from Perth to Hobart?  At least that'd be exciting.  Or what about investing in a giant computer to figure out the meaning of life?  We've always wanted to be a knowledge nation;  that would finally clinch it.

It's hard to believe the future of the Australian economy depends on the mass upgrade of toilet facilities.  In fact, it's hard to believe that the Government can do anything about the world economic downturn that got us into this mess.

The old rule about government is that everything it builds costs at least twice as much.  In the past few days, a Queensland school has received $250,000 for a shed that is only worth $29,000.  So when we see the Commonwealth paying $38,000 for chain-wire fencing around a junior oval in Carisbrook, it seems a bit steep -- unless the fence is made out of titanium and hand-chained by vestal virgins with PhDs.

I'm no expert, obviously, but Tumby Bay on the Eyre Peninsula is managing to fence a full-sized oval, and rehydrate some drought-stricken trees, for just $25,000.

If the Government called you and insisted it pay for you to build an extra wing on your modest home, you'd be an idiot not to budget generously.

At the 2007 election, the Liberal Party handed out maps of its electorates pointing out all the cool stuff it was able to scrounge from the Government:  a traffic light upgrade, a new carpet for the local school, a microwave for a CFA station in Kooweerup.  These maps helped inculcate the belief that the sole task of federal politicians is to snatch as much money out of the common pool of taxation as they can.  Every electorate for itself until the next budget.

The community infrastructure program reproduces this principle on an industrial scale.  Government MPs will dine out for years on the photographs of them wearing safety hats while observing the construction of sheds and toilets in every corner of their electorate.  And that may be the whole point.

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Red tape excess holds back State's progress

The Western Australian economy might be reeling from the impact of the global financial crisis and retreating commodities boom, but not everything is out of the government's hands.  One sure-fire method by which the Barnett government could shore up the WA economy would be to tackle the state's massive red tape and over-regulation problem.

Every year, the Western Australian parliamentarians and bureaucrats add more and more economic, social, and environmental burdens upon businesses and individuals.

In the 1960s, the Western Australian government was passing an average 750 pages of legislation every year.  This decade, that average has increased to 2,500 pages.

This dramatic increase in legislative activity is not totally unique.  All states have passed an unprecedented volume of legislation since the turn of the century.  But Western Australia has increased the most -- state politicians are passing an average of 157 pages more per year than the year before.

That's a lot of rules.  The sheer volume of regulation WA businesses have to monitor and comply with is one of the state's largest problems.

For example, the average farm -- from small family‑owned farms to large corporate behemoths -- has to comply with at least 30 pieces of state legislation and 86 separate pieces of subordinate legislation.  And that's before we account for all the federal and local government laws.

Unfortunately, it's no surprise that the state has developed a certain reputation for regulatory excess.

In survey done of resource executives around the world, Western Australia was rated as the most risky investment destination in Australia.  Given the choice, resource firms would prefer to invest their money in other states -- hardly the sort of situation you'd want your state to be in as the economy plummets.

The Western Australian Chamber of Commerce and Industry has estimated that regulation costs the state economy the $2.1 billion a year -- the equivalent of 2 per cent of gross state product.

Over-regulation doesn't only have financial costs.  Shop trading hours restrictions don't just cost the WA economy, they reduce quality of life -- holding Perth's social and retail scene back from its otherwise abundant potential.  Red tape surrounding the 2006 reforms to liquor licensing have stifled the development of Perth's nightlife, which has only been further stifled by the restrictive taxi licensing that makes it almost impossible to catch a cab home.

So what can be done about WA's over-regulation problem?  There is a broad consensus on both sides of politics that the state needs to cut back on red tape, and the Barnett government's announcement earlier this of much needed regulatory reform is welcome.  From now on, every new regulation proposed will have to be assessed to see whether it is excessively costly or could have significant unintended consequences.

These reforms are a good start, but cutting back the dense thickets of regulation will require somewhat more.  An advantage of lagging behind much of the wave of regulatory reform over the last decade is that, by now, we have a fairly good idea at what works to reduce regulation -- and what doesn't.  WA needs an independent, dedicated agency to monitor to progress of regulatory reform, benchmark government outcomes and undertake inquiries into regulatory issues, like the Victorian Competition and Efficiency Commission, or the Dutch Advisory Board on Administrative Burdens, two models of independent agencies which Western Australia could emulate.

But the biggest change will have to be cultural.  Too many of the regulations holding back Western Australia's economy support vested interests at the expense of consumers.  The hairdresser's licencing board even states on its website that the compulsory hairdressers licence is intended to prevent "unqualified people from opening a salon next to you and practising as a hairdresser in an attempt to impact on your established clientele".  Protecting hairdressers from competitive pressure keeps prices high and availability low.

Regulations should benefit, not punish consumers.  If Western Australia is going to come out of the financial crisis stronger, the Barnett government will have to tackle the state's over-regulation problem.

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Infrastructure spending unlikely to steer us out of doldrums

Over the past few weeks, federal government ministers have congregated in front of a selection of 35,000 construction sites around the country.  Looking out of place with suits and ill-fitting hard hats, they extolled to anyone who cared to listen the virtues of infrastructure pump priming for growth and jobs.

With a number of the government's "nation building" projects about to move into top gear, it is timely to ask what might be the economic impact of infrastructure spending?

Will it boost sufficient jobs and growth to steer us out of economic difficulties?  Is it likely that the projects will deliver a reasonable return for taxpayers, boosting our productive capacity?

There are grounds for concern that the public infrastructure boom, financed largely by the Federal Government and mainly delivered by state and local governments, will have a limited impact in stimulating the economy.

It must be borne in mind that not all infrastructure projects are created equal.  An examination of projects under the Rudd national building plan shows a clear hierarchy of spending in terms of its value-added attributes.

About 5 per cent of the total $42 billion economic stimulus is to be allocated to road and rail projects.  Most economists would argue that infrastructure developments that allow goods to be delivered more quickly and traffic congestion to be eased would improve our economic functioning.

Even so, it is troubling that there has been precious little information, if any at all, released by governments about the expected returns from these projects.

Next in line comes the wave of projects that are unlikely to create additional productive value in our economy to repay the initial expenses.  These include up to $26 billion for subsidised pink batt installation, new perimeter fencing, electronic whiteboards, cricket nets, canteens and plumbing under the National School Pride program, and toilet blocks under the Primary Schools for the 21st Century initiative.

Even school sector representatives who would normally welcome more money are questioning the merits of the government's stimulus package for schools.

Some of the biggest infrastructure boondoggles are reserved for the $800 million program for local governments.  This includes federally borrowed money for skate parks, iPod docking stations, athletics jump pits, garden beds, car parks, kitchens, retaining walls, reshaped creek banks and, aptly, a new home for a circus troupe.

The proponents of the big infrastructure spend might insist that the composition of infrastructure does not matter as much as their employment impacts.

Governments, unions and other vested interests are likely to see public infrastructure works as akin to a giant jobs creation machine.  According to this view, the sooner governments arrange for shovels to start digging the sooner that new jobs can flood into the economy.

ABS labour market statistics show that over 42,000 jobs in the finance, insurance, real estate and professional sectors have been lost since the middle of last year.  It is most unlikely that these accountants, finance brokers, real estate agents and supervisors will seamlessly move into jobs such as laying down bitumen for new roads or installing pink batts in houses.

The idea that labour are a homogenous service that can be prodded and moulded into whatever shape a central stimulus planner wants simply does not ring true in the real world.  This means that the capacity of the Rudd infrastructure stimulus to create tens of thousands of new, permanent jobs for those living in Australia is nothing short of fanciful.

The limited jobs potential of its nation building stimulus could well explain the significant increase in the number of 457 visas granted for the construction industry in recent months.

The outcomes of public infrastructure stimulus policies overseas also raise some concerns about the government's arguments.  Despite several attempts to pump prime its economy through infrastructure spending, Japan has only averaged economic growth of 0.6 per cent each year since the early 1990s.

According to Australian historian and East Asian analyst Gavan McCormack, Japan degenerated into a low-growth "concrete kingdom" that was vacuuming in the country's wealth, and using it inefficiently to produce debt, social and environmental devastation.

In the Depression-era United States, President Roosevelt went on a spending frenzy, including new capital works, yet the unemployment rate by the end of the 1930s remained over 17 per cent.  As the US Treasury Secretary Henry Morgenthau stated in 1939, "We are spending more money than we have ever spent before, and it does not work."

There is no question that federal, state and local governments are hoping that the seen outcomes of its infrastructure spending spike, such as the hastily laid construction sites and the feelgood political photo opportunities, will amount to something that delivers our way out of the economic doldrums.

However, it is more likely that the unseen misallocation of resources and destruction of economic value from wasteful capital spending will render more harm than good to the interests of current and future generations.

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Budget built on a loose foundation of beach sand

The past 12 months have been a time of Budget pain for Queenslanders, and the 2009-10 Budget continues the bad fiscal run.

A year ago the Bligh Government predicted it would have a $540 million Budget surplus in 2009-10.  That was based on the state economy growing by 4.5 per cent backed by a strong commodities boom.

How quickly things can change.  The wave of the global financial crisis hit our shores, and the State Government's finances were shown to be built on a loose foundation of beach sand.

Just before the election, the Government drastically revised its Budget bottom line from surplus to a whopping deficit.  Now the latest state Budget confirms an expected deficit of $2 billion this coming financial year and a sea of deficits stretching over eight years.

During the past few months Premier Anna Bligh and her Treasurer Andrew Fraser have been trying to point out that the GFC wave was in fact a revenue hit.  It is true revenue went backwards last financial year, and some revenues such as stamp duties and royalties will decline again.

However, the Budget shows a rebound in revenues expected this coming financial year from $35.9 billion to $37.2 billion.  Some of this increase is attributable to a federal bailout on infrastructure programs.  So much for the revenue hit.

The reality is that the current fiscal trouble afflicting the Government is the product of many years of excess spending.  About the beginning of this decade, spending grew at a moderate 3 per cent.  However, as the years wore on, the scale of spending growth increased to an unsustainable 12 per cent.  With the commodity boom significantly improving the private incomes of most Queenslanders, it could be argued that government did not need to grow so quickly.  But, unable to scratch its spending itch, the Bligh Government then decided to create a debt bubble of the like never before seen.  The state's rich fiscal inheritance of no general government debt is set to be overturned by 2011-12.

Total non-financial public sector net debt will expand from $14 billion in 2008-09 to $51 billion by 2012-13.

Putting such a massive mortgage on the future, of course, led to a downgrade of the state credit rating earlier this year leading to higher interest costs on the debt.

To its credit, the Bligh Government has made some decisions to try to put the Budget back on the road to surplus.  It is the least it can do, given that this Government created the Budget mess in the first place.

The major savings measures in this Budget include the much-publicised abolition of the 8 a litre fuel subsidy, privatisation of a number of key assets and a possible limit on future wage increases.

From an economic perspective, these are the right kinds of decisions to help ensure that Queensland once again lives within its means.  But there is more to do in future years to trim the fat of the state bureaucracy.

For a Government with a clear historical record of fiscal profligacy, however, it is an open question as to whether it will deliver on its savings commitments.

As academic John Wanna stated in a report Bligh commissioned before the election, multiple year savings measures tend to taper off quickly as governments lose their commitments to make hard decisions, and new policy and spending measures gather pace.

The politics of these announced expenditure savings are something else altogether.  This is because the Bligh Government was elected on a program of not reducing funds from the Budget, as stated in many of Labor's election media releases.

The Premier even undertook a jobs-not-cuts tour of regional Queensland to spruik her Government's election commitments.

From pre-election Budget savings attack to post-election Budget savings acceptance, the Bligh Government has done nothing but increase electoral cynicism about future fiscal reforms needed.

South of the border, New South Wales released its Budget on the same day, revealing a deficit of $990 million.  When Queensland's State of Origin rivals are able to deliver a better Budget outcome, but starting back from a worse economic position, this Queensland Budget's lack of effort becomes crystal clear.

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How excessive regulation and legislation is holding back Western Australia

EXECUTIVE SUMMARY

• The global financial crisis and economic downturn makes a review of Western Australia's regulatory burden urgent.
• Over the past decade, the amount of new legislation has increased by an average of 158 pages per year.  This increase is substantially faster in Western Australia than in any other state, even after controlling for economic growth and population.

Figure 1:  Average yearly increase in pages of new legislation, 1998-2008

Source:  Author

• Western Australia has developed an international reputation as the most overregulated Australian state.
• Over-regulation has significant financial, social and indirect costs to Western Australians.  There are also substantial hidden costs.
• On average, the compliance cost of regulation in Western Australia is the equivalent of 2 per cent of gross state product, or $2.1 billion a year.
• Poor regulation often exacerbates the social and economic problems it was enacted to solve, and it can also become entrenched as deregulation harms businesses that have based their business plans and structure around regulations which shelter them from competition.
• Western Australia has lagged behind other Australian states on reforming its regulatory process and institutions.  As a consequence, Western Australia has neglected to make the changes necessary to reduce red tape and regulation.
• The Western Australian government is to be commended for undertaking new reforms to combat red tape, however, its model is by no means "best practice."

South Australia -- most exploration and mining approvals are dealt with in time frames that are meaningful in the commodity cycle, unlike WA [Western Australia] where processes and applications are bogged down in endless green, red, and black tape.

-- Manager of a mining consulting company ⁽¹⁾

The biggest problem in WA is (getting) access to the ground.  The procedures you've got to go through to get out there are just enormous and when people find that out they think, "Well, bloody hell, this is too hard".

-- Sean Ashcroft, Amalgamated Prospectors and Leaseholders Association ⁽²⁾

1.0 THE NEED FOR REGULATORY REFORM

1.1 ECONOMIC GROWTH AT RISK

When we released A reform agenda for Western Australia in August, 2008, we argued that the Western Australian government had, at the time, been:

living off the economic prosperity caused by the mining boom without committing to the low tax rates and low regulatory burdens that are the prerequisite for independent long term growth.  Without broad based reform, Western Australia is vulnerable to economic downturn.  It is our view that Western Australia needs to reform in the good times, rather than wait to be compelled to do so either by slowing economic growth or federal interference.

That assessment was prescient.  In the second half of 2008, signs were emerging in the domestic and international economy of a future downturn.  There were some worrying indicators for the Western Australian economy.  For example, labor productivity was declining, yet being matched by increasing wage pressure.

But now in 2009, the global financial crisis has hit Western Australia hard.  Western Australian treasury expects GSP to contract by 1.25% in the 2009-2010 financial year.  The mining boom, which disproportionally supported the state's economy to its benefit, looks to have dissipated.  While Western Australia will contract slightly less than the global economy -- the IMF predicts a global contraction of 1.3% -- the state is particularly exposed to the international downturn.

While the IMF predicts a return to growth in Western Australia's key export markets in 2010, the Western Australian treasury is cautious, pointing out that if the global downturn is longer or deeper than estimated, the consequences for Western Australia could be severe.

As the Treasury writes:  "the risks to the economic outlook for Western Australia are more significant than has been experienced in many decades."  Commodity prices have sharply declined in the 2008-09 financial year, and if they continue this precipitous decline, this will have knock-on effects for the Western Australian economy.  (See Figure 2.)

Figure 2:  Commody Prices

Even before the global financial crisis, it has been easy to assume that because Western Australia is well endowed with productive export sectors it has no need to compete with other regulatory environments.  However, Western Australia competes both domestically and internationally for foreign investment.

Along with taxation and infrastructure, regulation is one of the most important areas by which state governments can impact economic growth.  And although the Western Australian economy has in the past performed well, the state is constrained by poor regulatory process and burdensome regulation.

On the international scene, Australia has a competitive regulatory framework.  ResourceStocks 2008 World Risk Survey, which surveys 3000 mining, oil and gas executives for their views on the regulatory environment of different mining jurisdictions, ranked Australia the fourth least risky country for resources development.  (Figure 3) However Western Australia was ranked the most risky investment destination in Australia.

Figure 3:  World Risk Survey

As the Association of Mining and Exploration Companies chief executive, Justin Walawaski, points out:  "The explosion of red and green tape combined with difficult indigenous affairs in WA has seen its former reputation as Australia's mining capital collapse to become the most risky jurisdiction in the country".

Western Australia's poor showing on the World Risk Survey is supported by a yearly survey which monitors the reputation of a wide range of jurisdictions for mining regulatory policy, produced by the Canadian think tank The Fraser Institute.  As the Fraser Institute's survey reveals, relative to other Australian states, Western Australia has declined in reputation amongst resource firms for its policy settings covering metal mining and exploration.  (See Figure 4)

Figure 4:  The Fraser Institute "Room to Improve" Policy Ranking 2007/2008 (WA, QLD, SA & NT)

Source:  Adapted from The Association of Mining and Exploration Companies Inc. Briefing Paper:  Resource Exploration Acceleration Plan, 2008;  Fraser Institute Annual Survey of Mining Companies, 2008/2009, Fraser Institute, 2009

2.0 WESTERN AUSTRALIA'S REGULATORY
BURDEN IS HEAVY AND INCREASING

"The increasing volume, complexity and opaqueness of much modern regulation far outstrips the capacities of most businesses and citizens to understand their obligations". ⁽³⁾

Western Australia has fully participated in broad changes of governance and regulation that have been a major part of the last two decades of Australian government.  As with governments across the nation, the Western Australian government has been imposing an increasing legislative and regulatory burden upon the economy and society.

2.1 A GROWING BURDEN

One way we can detect changes in the regulatory burden over time is by looking at a standard proxy for regulation -- the yearly record of pages of legislation passed.  As Figure 5 shows, we can see a marked increase in legislation passed over the last half century in Western Australia.

Figure 5:  Pages of Western Australian legislation per year, 1959-2009

Source:  Author

Pages of legislation is, certainly, a highly imperfect proxy measure.  (For discussion about the benefits and pitfalls of this measure, see Richard J. Wood, The Growth of Australia's Regulatory State, p10-17).  Furthermore, unlike most other states, the Western Australian government does not publish its subordinate legislation in a consolidated form, which prevents us from measuring that slightly more direct proxy.

Since 1959 the Parliament of Western Australia has passed 75,505 pages of new legislation, an average of 1510 new pages a year.  Since 1998, the number of new pages of legislation passed per year has increased on average by 158 pages each year, this is significantly higher than all other states including NSW (-158 pages), SA (-49 pages), VIC (14 pages), TAS (-92) ⁽⁴⁾, and QLD (-50 pages).  This means that during the last ten years, the pages of new legislation passed by Western Australian parliament, was, on average, 158 pages higher than the previous year.

Figure 6:  Average yearly increase in pages of new legislation, 1998-2008

Source:  Author

To take into account population change, the data was converted into "new pages of legislation per 1,000 capita" using ABS estimates of state population for each year since 1998. ⁽⁵⁾  In this way the effect of differential population growth between states is eliminated.  This revealed that since 1998, pages of new legislation per 1,000 capita has grown on average by 5.66 pages per year compared to NSW (-3 pages), SA (-4 pages), VIC (-1 pages) and QLD (-4 pages).

To also take into account differences in economic growth between states, the data was standardised to new pages of legislation per $1 billion Gross State Product. ⁽⁶⁾  Western Australia is the only state in which pages of new legislation per $1 billion is growing.  Since 1998, pages of new legislation per $1 billion GSP increased on average by 0.15 pages per year compared to NSW (-1 pages), SA (-1 pages), VIC (-1 pages) and QLD (-2 pages)

While pages of new legislation is an imperfect measure of regulatory burden, the data presents a consistent picture in which Western Australia continues to outstrip QLD, NSW, SA and VIC in the area of regulatory and legislative growth.

A 2006 survey by the Chamber of Commerce and Industry of Western Australia of its members shows how significantly the state's regulatory burden weighs on business. ⁽⁷⁾  The survey found that for Western Australian firms the most concerning aspect of regulation was the number of applicable regulations (See Figure 7), an observation which is consistent with similar surveys in other states and supported by the raw data on pages of legislation passed per year.

The number of regulations a firm has to comply with varies by size, and accordingly large businesses rated the number of regulations as a higher concern than did their small business counterparts.  About 93% of large businesses and 83% of medium business responded that the number of regulations was high or very high.  Those small business who did so was less (75%), but even in this category, concern with the number of regulations still exceeded other possible concerns.

This is because while large businesses are more exposed to a range of regulations than small businesses, the universal nature of the vast majority of Western Australia's and the Commonwealth's regulatory burden applies to all businesses no matter the size.

Figure 7:  Most concerning aspects of regulation

Source:  Regulation and Compliance:  A Discussion Paper, Business Leader Series,
Chamber of Commerce and Industry of Western Australia, November 2006

Small businesses are, however, disproportionately affected by over-regulation.  Small business lacks the resources to invest in regulatory expertise.  Large firms can employ regulatory specialists on staff.  However, even when the regulatory burden is proportionally equivalent between large and small business, small business can often only afford to dedicate a few hours a week to regulatory compliance issues.  The rapid change in regulation seen over the last few decades has contributed greatly to this problem.

Furthermore, small businesses are unlikely to be able to exert any influence over the regulatory policy process.  Lacking the substantial regulatory affairs resources of larger firms, small business are underrepresented in debate of policy change;  this is most clearly manifested in debates over industrial relations changes, which are dominated by large firms and unions, regardless of the impact changes may have on the small business sector.  Studies in the United States have found that costs of regulation are significantly higher for small businesses, measured by the incidence of regulatory burden per employee. ⁽⁸⁾

The Western Australian Farmers Federation has shown that farmers -- from small, family-held farms, to large corporate farms -- in 2007 had to comply with 30 state Acts and no less than 86 state regulations, on top of its federal and local government regulatory requirements. ⁽⁹⁾

2.2 INCREASING REGULATORY COMPLEXITY

As Figure 7 demonstrates, nearly 70% of CCIWA respondents cited regulatory complexity as a high or very high concern.  Regardless of the content or purpose of regulation, regulatory complexity creates its own problems, often reducing or nullifying the possible benefits of the regulation itself.  Regulatory compliance depends on the knowledge of the regulated entity about their requirements.  But regulators or legislators assume that the mere publication of rules or regulatory changes is sufficient to ensure understanding and, subsequently, demand compliance.  As the OECD has pointed out, "this is increasingly unlikely to be the case in an environment of regulatory inflation, in which the number and complexity of regulations, as well as their rate of change, continually increase." ⁽¹⁰⁾  Between 60 to 80% of small and medium businesses across the OECD reported problems understanding regulations and responding to unpredictable regulatory change. ⁽¹¹⁾

Regulatory complexity is not merely a reflection of the number of regulations a firm has to comply with.  The bureaucratic hoops which firms have to navigate in order to be compliant with regulation can be a major drain on economic activity.  There is evidence to suggest that in many areas, particularly in the realm of environment and planning, the complexity of compliance procedures is increasing in significance for Western Australian businesses.  As the Urban Development Institute of Australia of Western Australia (UIDA) has pointed out, Western Australian planning approval processes have dramatically increased in procedural complexity over the last few decades.  In the early 1990s, planning approvals and environmental approvals were separately administered.  (See Figure 8) But the merging between environment and planning processes has, contrary to the original intention of the reform, added cost, complexity and time to approvals.  The resulting, highly convoluted process can be seen in Figure 9.

Figure 8:  Regulatory Complexity:  Planning and
Environmental Approval Process in the early 1990s

Source:  UIDA WA 2007

High levels of complexity can greatly add to individual and business investment uncertainty.  Confusing and complicated processes leave individuals and firms uncertain as to whether their activities are compliant with the full body of regulation.  Further uncertainty can emanate from the role of bureaucratic discretion in assessing compliance -- in other words, the bureaucratic assessment by which firm are considered compliant or non-compliant -- or from uncertainty about future regulations to be imposed.  Given the fact that the profitability of enterprises is dependent not just on contemporary, but also on future regulatory frameworks, the possibility of legislative or regulatory changes can be a significant dampener on investment.

In many cases, where this uncertainty is significant, those firms or individuals will avoid action that may be beneficial to the economy or society.  Economists have tracked the negative consequences of uncertainty, including economy-wide lower levels of investment. ⁽¹²⁾

Figure 9:  Regulatory Complexity:  Planning and Environmental Approval Process in 2007

Source:  UIDA WA 2007

2.3 INCREASING COSTS

Regulation imposes costs on a number of levels.

Regulation imposes direct costs in the form of administration and compliance.  Regulation requires administration on the side of both firms and government.  Governments need to manage regulatory processes -- develop standards and processes and provide ongoing support for those standards and processes -- as well as monitor compliance, and if necessary, act to punish firms for non-compliance.

But estimating the cost of regulatory administration on the government side is surprisingly challenging.  Western Australia does not have a body comparable to the Victorian Competition and Efficiency Commission which monitors the regulatory sector in a manner similar to the Federal Productivity Commission.  In Victoria, the state's sixty-nine regulatory bodies employ 34,000 people and have a combined budget of over $1billion. ⁽¹³⁾  It is a reflection of Western Australia's lagging regulatory oversight that there is no comparable estimate available.  Despite this, there is no good reason to suggest that Western Australian administration is substantially dissimilar.

For firms, the administrative costs can be significant.  Given the large volume regulation and rapid pace at which it is altered, simply identifying regulations relevant to an individual business is a substantial task.  Staff time has to be devoted to regulation issues, and senior management are often diverted to regulatory and government administration.

The CCIWA study found that on average, Western Australian businesses spent 5.6 hours simply researching and monitoring changes to the regulatory environment. ⁽¹⁴⁾  This figure parses out at 4.1 hours per week for small businesses, and 6.1 hours and 11.1 hours for medium and large businesses respectively.  Adjusting processes and internal systems to fit those changes was also a significant time drain, taking small businesses 4.1 hours per week, medium sized businesses 5.2 hours per week and large firms around 16 hours per week.  Of course, the largest proportion of time taken is on regulatory compliance issues.  Large firms spent an average of 43.1 hours per week complying with existing regulations.  Medium firms spent an average of 15.1 hours, and small businesses spent 10.3 hours per week on regulatory compliance.

The CCIWA study estimated that the total cost of regulatory compliance for Western Australian firms was $2.1 billion, or 2 per cent of total gross state product.

The cost of compliance is a well-recognised one.  Compliance costs such as these -- popularly known as "red tape" -- are a regular feature of debate over regulation and over-regulation in Australia.  But of particular interest from the CCIWA study is the time firms spent on regulation research and monitoring.  This has been of particular importance in recent years, as the reform to industrial relations has been subject to political whims.  As one small business reported to the CCIWA in 2006,

My biggest bugbear has been the introduction of Workplace Agreements followed by their abolition, followed by the huge workload and short introduction of Work Choices, and now the threat of their removal if the Federal Government changes again.

Many assessments of regulatory costs are likely to be significantly understated when the cost of regulation is borne across the entire firm.  A 2001 study in Accounting Review looked at the case of environmental regulation, and found that for every $1 in visible compliance and regulatory costs, there was an identifiable $9.68 extra of "hidden" costs. ⁽¹⁵⁾  While the visible $1 cost was accurately reported in the firm's accounts, the extra $9.68 was not, leading to an under-reporting of the cost of environmental regulation to government and in debate over environmental regulation.  The 2001 study specifically looked at the case of steel mills, and found hidden costs in changes in production processes and materials used, and increased use of energy.  The study also found that regulatory administration was typically not reported as a cost of environmental regulation, as the cost of obtaining permits, licenses and similar tasks was classed as general and administrative costs.  Given how pervasive regulatory issues can be to a firm's decision making and production structure, these results are not surprising -- parsing out what is a "regulatory" cost has little meaning if regulation is a dominant part of a firm's business.

A 1997 Canadian study by the Fraser Institute attempted to quantify compliance costs to household level.  (Figure 10) Canada has a roughly analogous legislative and regulatory framework to Australia.  The Fraser Institute study found that embedded regulatory compliance costs could be considered the third highest household expenditure, being only surpassed by the cost of shelter and taxation. ⁽¹⁶⁾

Figure 10:  Average expenditures per household, Canada, 1997

Source:  Laura Jones & Stephen Graf, "Canada's Regulatory Burden:
How Many Regulations?  At What Cost?", Fraser Institute, 2001

Embedded regulatory compliance costs are regulatory costs incurred by producers which are passed onto consumers in the form of higher prices.  This finding from the Fraser Institute emphasises that regulatory costs should be seen as a quantifiable cost of government on individuals, in the same manner we can identify the government's tax take relative to our income.  The Fraser Institute also makes the important point that resources dedicated to lobbying for preferential regulatory treatment are also a direct cost of a nation's regulatory environment -- the "gamesmanship", or "cat-and-mouse" game between regulator and regulated entity imposes its own costs. ⁽¹⁷⁾

These are however only the direct costs of regulation.  Gary Banks, chairman of the Productivity Commission, has pointed out that "regulations 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."  The indirect costs of regulation are, in many sectors, much more significant than the compliance costs.  Strict and regressive licence schemes prevent entrepreneurs from entering markets, preventing the benefits that those entrepreneurs could bring to the sector and to consumers.  Excessive regulation can prevent investment or innovation, as one CCIWA member reported in 2006:

Trying to be issued with a building licence for our new premises was a debacle.  The council has made this process difficult and frustrating to the point that we were not going to proceed.

These costs can be difficult to estimate.  However, for certain industries, we can assess delays caused by regulatory processes.  Many Western Australia industries have complained about seemingly excessive delays from poor bureaucratic procedures.  Some developers have complained of delays of up to five years for planning approvals, exacerbated by the complexity of planning and environmental regulation seen in Figure 9, as well as the interaction with heritage approval laws. ⁽¹⁸⁾  As the WA Business News reported in October 2008:

Edge Group hotel developer, Jon Jessop, said the industry critically needed new and updated accommodation.  He said current developments were being stalled by over-regulation and restrictions on the use of strata-titled properties, while finding suitable development sites was also an issue.  Mr Jessop said a group of 24 developers in WA had calculated that about $3 billion worth of tourism developments were stalled because of these issues.

"All of these issues and more result in developments never getting off the ground, developers being delayed and frustrated with lack of government understanding, and purchasers of strata apartments finding it difficult to get funding for their investments because of complicated and restricted uses," he said.  "Developers, in the end, have lack of, or nil profit, and leave the tourism accommodation development industry to move into residential or commercial developments." ⁽¹⁹⁾

The UDIA(WA) has quantified the cost of planning delays on average home lots.  Their study found that a six month delay increased the price of an average lot by 13 per cent, and a four year delay increased the price by 68 per cent.  (Figure 11) These sorts of delays are being reported widely throughout the state.  Developers have reported delays of up to five years in gaining approvals to use land.

Figure 11:  Effect of Approval Delays on Average Lot Price

UDIA (WA) Submission to the Senate Select Committee on Land and Housing Affordability.

Planning delays do not only negatively effect the property sector.  As one agricultural firm told the CCIWA:

Planning approvals and building licences require speedy reform -- approval processes are currently too ... slow.  Approval processes for dangerous goods licences are also too slow.

As a state government administered program, planning policies allow us to look at concrete example of how indirect regulatory costs manifest themselves.

2.3.1 Indirect costs:  house and land regulation ⁽²⁰⁾

Western Australia governments administer a complex and highly restrictive system of land-use regulation.  Unlike other Australian states, the Western Australian planning scheme is highly centralised. ⁽²¹⁾

The "Network City" strategic framework for planning decisions is designed to direct growth for Perth and Peel in a structured direction to "to meet the challenges of climate change, water, oil and resource depletion, at the same time catering for the demands of rapid population growth driven by a strong economy and increased affluence." ⁽²²⁾  To do so, the Network City plan aims to limit urban sprawl, which according to former Planning Minister Alannah MacTiernan, impacts the state government's finances and has environmental consequences.

With a growing city, the demand for land is increasing.  However, policies designed to restrain sprawl, such as the implicit urban growth boundary, and protect environmental regions, such as the "Bush Forever" plan for the Swan Coastal Plan area in Perth, restrict the supply of new land.  When the demand for land is increasing, but the supply is artificially restricted by land regulation, the consequences are predictable -- the cost of land to homebuyers increases dramatically.

Planning delays and urban growth boundaries are not the only regulations which add indirectly to the cost of housing in Western Australia.  Across Australia, energy efficiency requirements are being incorporated into minimum building standards.  In 2007, the Western Australian government mandated a 5 Star Plus energy rating for new homes.  This requirement, according to the Property Council, adds $3,500 to each new home built in the state.  Local governments impose their own requirements, covering both aesthetic criteria -- such as height restrictions, and room and balcony size requirements -- as well as additional energy efficiency requirements, which, according to some studies, could add another 14% to home building costs.  We have concluded that these regulations, as well as excessive and inefficient land and infrastructure taxes, add 38% to the cost of an average new home. ⁽²³⁾

2.4 REGULATORY PROCESS

Western Australia has a legacy of poor performance in regulatory process.  A 2007 report by the Business Council of Australia (BCA) rated Western Australia the worst jurisdiction for red tape.  On three of the four measures used Western Australia was rated the worst in Australia.  Of note was a lack of transparency in the consultation process and lack of an independent assessment agency.  Other concerns were the lack of sunset clauses in Western Australian regulations which increase the risk of regulation becoming outdated.  The BCA was also critical of Western Australia's lack of a prescribed consultation period in which firms could comment on regulatory impact statements.

2.4.1 Recent Reform

In January 2009, Western Australian Treasurer, Troy Buswell, announced a government initiative to cut red tape.  The plan involves

• a Red Tape Reduction Group.
• a system for ministers to refer specific regulations for review by the department of Treasury and Finance.
• a gate keeping unit within the Department of Treasury and Finance to screen all new regulations. ⁽²⁴⁾

The Red Tape Reduction Group (RTRG) was created to reform the existing stock of regulation by consulting with small business whereas the Department of Treasury and Finance will minimise the regulatory burden of new regulations.  The RTRG has completed a round of consultations with small businesses across Western Australia and is in the process of accepting written submissions from small business operators.

The RTRG is being led by Ken Baston MLC and Liza Harvey MLA who will prepare a report for the Treasurer and the Economic and Expenditure Reform Committee.

While the Western Australian Government is to be commended on the formation of the Red Tape Reduction Group it appears to be adopting a very narrow approach to calculating the cost of regulation;  paperwork and delays to small business are only some of the costs regulation has on the Western Australian economy.

The new Regulatory Gatekeeping Unit (RGU) takes a slightly broader view, assessing the impact of new regulations and amendments on business, consumers and the economy.  The RGU administers a Regulatory Impact Assessment Process, whereby all regulatory changes undergo a Preliminary Impact Assessment (PIA).  If the PIA reveals significant adverse impact, a Regulatory Impact Statement (RIS) is required.  The RIS consists of a Consultation RIS, which is released inviting submissions and public comment, and a subsequent Decision RIS for presentation to the decision maker. ⁽²⁵⁾

3.0 CASE STUDIES:  REGULATION AND ITS CONSEQUENCES

3.1 HEAVY VEHICLE REGULATION

"This economy runs on wheels and the industry that transports produce to market is what keeps this State ticking."

-Western Australian Transport Minister Simon O'Brien ⁽²⁶⁾

The over-regulation of the transport industry can be particularly troublesome;  the compliance costs of transport regulations are passed on to other industries relying on freight services.

Over the last few years, the West Australian road freight industry has raised a number of concerns over changes to the Road Traffic (Vehicle Standards) Regulations 2002.  The Australian Livestock Transporter Association and the Country Bulk Carriers Association are particularly concerned by the introduction of new load height restrictions and axle-spacing requirements on class 2/3 restricted access vehicle (RAV) period permits. ⁽²⁷⁾

The responsible regulator, Main Roads Western Australia, proposed the changes following a study which found that some vehicles with a high centre of gravity and a short wheel base were more likely to roll under certain braking and cornering conditions.  As such the transport industry was given until 1 October 2008 to comply with new axle spacing requirements.

In May 2008 Main Roads abandoned the October deadline and declared the implementation period was under review in response to industry concern the deadline was too onerous.  Grant Robins, president of both the Australian Livestock Transporter and the County Bulk Carriers Associations said the overall cost of compliance with the new regulations could run into hundreds of millions of dollars across WA. ⁽²⁸⁾

The existing fleet of class 2 and 3 vehicles includes road trains, b-double, livestock carriers but excludes agricultural machinery.  Under the proposed change, they would require axle relocation of up to 1.2m in some circumstances or complete replacement where axle relocation is not possible.

Regardless of the merits of these regulations, the implementation process has been extremely poor.  There appears to be a lack of industry consultation and an underestimation of the compliance burden.  Regulations are easy to change on paper but the regulatory impact on heavy vehicle operators is huge when they are told they must relocate the wheels of their vehicles.

The cancelation of the implementation plan creates even more uncertainty;  operators will avoid purchasing new rigs or modifying their current equipment until they know whether their purchase will be compliant.  In a regulatory environment where a statewide fleet of a class of heavy vehicle can be made unroadworthy by a single regulatory change, fleet operators will be reluctant to invest to expand services.

3.1.1 Federal Regulation of freight

A National framework for the Regulation, Registration and Licensing of Heavy Vehicles has been proposed by the Australian Transport Council.  In their joint submission, Main Roads Western Australia and the Department for planning and Infrastructure WA expressed concerns that a national framework would not be in Western Australia's best interests.  Reasons included the loss of stamp duty revenue, the loss of sovereignty over WA roads, and the necessity of adopting other national road safety objectives. ⁽²⁹⁾

Their most credible argument is the necessary adoption of stricter regulation, which disallows certain highly productive heavy vehicle combinations to operate which are not allowed in other states.  While the National Framework RIS refers to the introduction of Local Productivity Variations there is no guarantee these will reduce the red tape of a national framework on WA operators.

There are considerable benefits of a National Framework, the current regulatory system makes interstate road freight a regulatory nightmare.  Several submissions highlighted the regulatory hassle of cross border freight.  Oversized heavy vehicles require both police and small vehicle escort in some states, arranging escort changeovers at state borders is particularly burdensome while regulatory variations mean the convoy must be arranged differently in each territory crossed.

While there are likely to be considerable benefits for interstate operators, this uniformity should not come at the cost of an increased regulatory burden for intrastate operators.  Main Roads Western Australia estimates in their submission that as little as 1.5% of the Western Australian heavy vehicle fleet engages in interstate transport.  Imposing the same regulations on agricultural, mining, recreational and short range road freight as their long range counterparts would impose unnecessary red tape.

To ameliorate this problem, the Department for Infrastructure and Planning WA, recommended increasing the definition of a heavy vehicle for purposes of the National Framework to only include vehicles with a carrying capacity of 12 tonnes or more to only capture large interstate freight trucks.  While this approach is tempting in theory, it fractures the law, creating too regulatory regimes whereby it has the potential to distort the freight market towards uneconomical consequences.  The size of transporter used should correlate to the load carried not which set of regulations are most favorable.

While it may not be in Western Australia's best interest to adopt the national framework in its current form this is no excuse for complacency regarding its own regulatory system.  Heavy vehicle regulation in Western Australia is by no means best practice.  The attempt to change axle location requirements is an excellent example of a lack of transparency and consultation.  A lack of consultation left several industry associations unable to contribute to the process, while the failure to make public the report which triggered the new regulations invited criticism of transparency.

3.2 WHEAT:  AFTER THE SINGLE DESK

How regulation can develop consequences unintended by their designers has been illustrated by a recent Western Australian example.  Following the national deregulation of wheat marketing by the federal government, Cooperative Bulk Handling Limited (CBH) applied for, and was granted, an exclusive dealing notification by the Australian Competition and Consumer Commission (ACCC).  This arrangement gave CBH exclusive control over grain storage and handling between local silos and ports.

In granting CBH their monopoly, the Chairman of the ACCC claimed that "there are likely to be significant efficiency benefits under Grain Express as a result of the central coordination of grain storage, handling and transportation in Western Australia", arguing that the potential increase of accredited exporters seeking to make their own storage and handling arrangements could create great inefficiencies and add to industry costs. ⁽³⁰⁾  CBH argued that efficiencies would be found in both the usage of the rail network, and Western Australian ports as a consequence of their monopoly control over the wheat logistics.

As we argued at the time, such justification for monopoly is unwarranted.  Markets function best when entry and exit are unrestricted by the state;  the pressure created by existent or possible competitors disciplines firms to improve and maintain their products or services.  In the case of Western Australian grain, any possible efficiencies created by industry consolidation would be vastly outweighed by the negative consequences of protecting CBH from competitive pressure.

Regulation may be well intended -- the aim of the ACCC was to increase efficiency, not reduce it -- but the result of the CBH arrangement has been significantly adverse.  As the Australian Financial Review noted in April, the CBH arrangement has forced all Western Australian grain onto an outmoded and increasingly uncompetitive rail network.  As a consequence, exports to international wheat buyers have been substantially delayed at port.  As we have written:

Had there been normal competition, instead of a single operator trying to second guess future volumes, more grain would have gone by road straight to port, and rail limitations would have been far less critical.

CBH has proved itself incapable of running the monopoly it convinced the ACCC to grant it. ...  A direct result of the removal of competition in the WA supply chain was significant delays at ports, to the extent that the shipping stem was suspended for a month to clear the backlog.  This led to the real risk of crippling demurrage charges that could severely test the financial viability of some exporters.

Reports also suggest the WA shipping stem has been altered to advantage some buyers.  If this is proven, there is a risk of long-term damage to our export reputation, loss of custom to Canada and other exporters, and adverse renegotiation of current contracts. ⁽³¹⁾

The problems caused by CBH's monopoly also illustrate another important aspect of the regulatory burden.  Often many policy problems in Australia -- from social issues, to market inefficiencies, to infrastructure -- have, as root causes, regulatory origins.  The superficial cause of the problems in wheat logistics in Western Australia is an outmoded rail network, and if our analysis was left here, the appropriate political response would be infrastructure spending to upgrade the network.  However, as we have seen, the actual cause of the problem is the incentives faced by the monopoly provider, and the inability for wheat exporters to take their business elsewhere.

The regulatory origin of many policy problems is readily observable across many areas, including water, energy, telecommunication and infrastructure, but is vastly understated in public and political debate.

3.3 RETAIL TRADE RESTRICTIONS

A discussion about regulation in Western Australia would not be complete without considering retail trading hour restrictions.

Western Australia and South Australia are the last states to cling to strict regulatory restrictions governing when stores can and can't open their doors to the public.  While other states have deregulated retail trading hours, Western Australia has made little progress.  Though reform appears to be back on the agenda after WA Premier, Colin Barnett, announced he would pursue extended weekday trading, but not Sunday trading, in the near future. ⁽³²⁾

Currently the Retail Trading Hours Act 1987 distinguishes shops by four categories;  special retail shops, small retail shops, service stations and general retail shops.  General retail shops may only trade from 8am until 6pm on weekdays, but may trade until 9pm on Thursdays, 8am to 5pm on Saturdays and must be closed on Sundays and all public holidays.  Small retail shops must hold a certificate from the Department of Consumer Employment Protection in order to trade seven days a week.  Service stations are also free from the regulations though there are strict regulations on what they may and may not sell.  Special retail shops may trade between 6am and 11:30pm, seven days a week if they hold a certificate from the Department of Consumer and Employment Protection.

The Act does not apply north of the 26th parallel of south latitude.  The Minister for Consumer and Employment Protection may publish an exemption in the Government Gazette;  tourist precincts in Perth and Fremantle are exempt in such way.

The two most cited reasons for retaining trade hour restrictions are to shelter small businesses from large chains and to preserve work life balance, Sunday being a time for families and religion.  In regard to small businesses, there is a belief that if deregulated, smaller businesses will not be able to compete with the larger chains, smaller proprietors will have to deal with the additional stress of longer hours, hire more staff and no longer benefit from exemptions that allow them to remain open when the larger chains are closed.  Larger chains will hence become more competitive and profits will flow out of the state to global and national shareholders while the local battlers will suffer and be forced to close their shops.

This view, though commonly held, is not supported by evidence.  Evidence from other states indicates that small business growth increases over periods of deregulation.  Kiel and Haberkern ⁽³³⁾ found that the number of small traders increases with extended trading hours.  As we have pointed out, "It is no accident that the states with the greatest growth in small retail numbers are those with the most liberal shop trading hours." ⁽³⁴⁾

Figure 12:  Increase in small retailers, WA and other states

The exemptions for small retail shops may have the undesired consequence of actually preventing the expansion of successful small businesses.  To qualify as a small retail shop, a business may be owned by no more than 6 people who operate more than six shops where in any shop no more than ten employees work at one time.  This exemption creates a disincentive to hire casual staff or expand operations while limiting capital to only six owners discourages investment and entrepreneurship.

As Milton Cockburn, executive director of the Shopping Centre Council of Australia, has said "The Retail Trading Hours Act is a law that actually forces small retailers to stay small.  It is therefore an anti-growth law in a state that prides itself of promoting economic development." ⁽³⁵⁾

The small businesses that are likely to suffer are those that have built their entire business plan upon the existence of the restrictions.  Service stations and small retail shops that charge consumers a premium to purchase goods outside regular trading hours will lose this regulatory advantage.

Consumer surveys show that while residents are reluctant to deregulate, once retail restrictions are removed consumers quickly take advantage of longer trading hours. ⁽³⁶⁾  As we argued, "In every place shop trading hours have been liberalised there would be an outcry and electoral oblivion if major restrictions were reintroduced."

Extended trading hours have gained popularity in other states as changing social conditions generate demand for late night and Sunday trading.  The increase in female labor force participation and double income families have made traditional retail hours impractical.  Australians are also working longer hours.  The standard working week is no longer universal;  the proportions of the population working longer hours and shorter hours have both increased. ⁽³⁷⁾  Archaic Sunday trading restrictions unnecessarily burden double income families, students and single families thereby defeating the work-life balance objectives that retail trade restrictions supposedly embody.

3.4 SMALL BARS

As well as economic costs, red tape can have profound social costs on Western Australian communities.  Liquor licensing reforms introduced to revitalise small bar culture in Perth are being constrained by local council red tape.  Small bar owners are being squeezed by cross-governmental conflict between the Department of Liquor, Racing and Gaming and local councils determined to resist the reforms.

The reforms, introduced by the Carpenter Government in 2006, permitted Sunday trading for liquor stores, allowed restaurants to serve alcohol without a meal, created a new small bar license and introduced a number of other measures to reduce red tape.

Despite these reforms, take-up of the small bar license has been modest.  Only 18 bars having opened as of April 2009. ⁽³⁸⁾  While the small bar license costs $2,025, applicants must undergo a public interest assessment which can prove to be long and expensive.

Applicants must compile a PIA submission and supporting documentation.  This documentation must identify "at risk" groups that may frequent the locality of the proposed bar.  "At risk" groups include families, people from rural communities, aboriginals, miners, low-socioeconomic citizens, migrants, tourists and children.  Bar owners are expected to preserve and contribute to the amenity of the local area and investigate the nature and character of the local community and the quality of life of its residents.  They must consult with local government and highlight the positive recreational, cultural, employment and tourism benefits they will bring to the community.  Applicants must also address the issues of nuisance to neighbors, crime and vandalism, streetscape, noise, public transport, taxi services and parking spaces.

Small bar owners must conduct a letter drop for 200m around the proposed premise and allow 28 days for the community to respond.  They must also serve notice on all hospitals, schools, police stations, childcare centers, aged care facilities and churches in the area.  They are then required to lodge copies of their House Management Policy, Code of Conduct and Management Plan with the Department of Racing, Gaming and Liquor. ⁽³⁹⁾

This process is made more difficult by uncooperative councils.  As Dan Mossenson of the Small Bar Association of WA put it, "some councils are receptive to the introduction of new licenses and others are rather obtrusive and unhelpful."  One applicant, Rosie Small, revealed she had spent over $6000 on different applications to Fremantle council when interviewed by Stateline Western Australia. ⁽⁴⁰⁾  While a small bar license has been created, local council town planning schemes don't differentiate small bars from taverns or pubs, subjecting them all to the same requirements. ⁽⁴¹⁾

Small bars have considerable benefits;  they act as a substitute to louder and busier pubs and attract new customers who would prefer to stay at home than visit a larger establishment.  Small bars do not exert as many adverse consequences on the surrounding community and are much safer.  As is the case in Melbourne, small bars can diversify to cater for different tastes creating benefits for consumers.

3.5 TAXIS

Historically all Australian jurisdictions have heavily regulated taxi services.  Taxi regulation commonly comprises a quota system of taxi plate licenses, fare setting and safety regulations.  Taxi plate licenses act as a barrier to entry limiting the supply of taxis while fair regulation acts as a price ceiling restricting the ability of taxi operators from extracting monopoly profits.  In this way the number of taxis is artificially restricted by the government while prices are kept low.  This induced scarcity is reflected in the appreciation of taxi plate values, as demand expands from growing cities and population growth.  This makes taxi plates an excellent investment;  demand for taxis continues to grow steadily while supply is fixed.

This creates incumbent taxi plate owners who have already invested heavily in taxi plates;  total deregulation would almost completely devalue their investment by removing barriers to entry.  This is why deregulation is heavily resisted by existing taxi plate owners.  Fair setting is also inefficient as it fails to take into account the fluctuating demand for taxis.  Demand fluctuates from hour to hour.  At peak times taxi drivers are unable to keep up with demand whereas when demand is low taxis are left lined up at ranks.  Peak hour charges only partially replicate the price variation of a competitive market.  Additional peak hour licenses can be introduced but these leave productive vehicles lying still during non-peak hours.

Taxi regulation is a sandwich of inefficient regulatory tools thrown together to replicate a working market.  Taxi licenses create a shortage of supply and monopoly profits, fare setting is used to reduce monopoly profits but creates short term shortages and surpluses.  Rather than deregulate, additional layers of regulation are introduced which create their own problems.

Western Australia is suffering all the basic economic symptoms of taxi regulation discussed above.  However Perth is in a significantly better position to deregulate compared to other states, the introduction of new peak hour licenses has partially addressed the undersupply of taxis.  As we have stated "As a result of the Government's measures, between 2003 and 2006 there was a 27 per cent increase in taxi numbers meaning that, as of March 2007, there are 1,398 metropolitan taxis and 447 country taxis."  He continues, "the taxi industry regularly complains about the leasing of plates, but the Minister points out that they have little to complain about as values have continued to increase from $202,796 to $229,936 since leasing was introduced." ⁽⁴²⁾  While leasing arrangements help address the problem of appreciating plate values, they are still a barrier to entry and create further complexity.  For instance, Transport Minister Simon O'Brien, recently cut the number of peak hour plates in half:

Peak period plates that end in an odd digit will only be permitted to operate on those weekday mornings that carry a calendar date, which is an odd number.  Peak period plates that end in even numbers will work on even numbered calendar days. ⁽⁴³⁾

Full deregulation would involve the cancelation of all licences and leasing arrangements with or without compensation.  The only Australian jurisdiction to successfully achieve this is the Northern Territory which deregulated the Darwin taxi market in 1999.  In Victoria, taxi licenses are listed on the stock exchange and are estimated to total over $1 billion in value, fortunately Perth is much better placed to buyback or devalue existing licenses with further plate releases.  Perth's taxi industry is in a state of perpetual regulatory sickness, nothing short of full deregulation will cure it.

4.0 BRINGING REGULATION FORWARD FOR WESTERN AUSTRALIA

Western Australia may lag behind other Australian states in its regulatory design and management, but that lag has its benefits -- the last two decades has seen a significant development of what constitutes regulatory "best practice", and, as a consequence, Western Australia is now in a position to design their regulatory framework optimally.

Most discussion focusing on regulatory burdens and regulatory process focuses on national governments.  Yet, given Australia's federal system and the extensive powers retained by the states to impose regulation, the principles which apply to national governments can be applied to the states.

4.1 TACKLING COMPLIANCE BURDENS:  THE DUTCH MODEL

Like many national governments, the Dutch government has, over the last two decades, embarked on a significant regulatory reform designed to reduce the impact of regulations on business.  The Dutch example is somewhat unique however because of its focus -- in an effort to "depoliticise" the process of regulatory reform, since the induction of the Slechte Committee in 1998, the government has limited its approach to the compliance burden of regulation. ⁽⁴⁴⁾  The Dutch approach bucks the international trend towards broader cost-benefit analysis of proposed and existant regulation, but instead expends its energy on the bi-partisan goal of reducing the cost of red tape.

Despite the narrowness of this approach -- focusing on compliance costs and administrative simplification is, as we have seen, a small portion of the total costs incurred by regulation -- the Dutch government has had remarkable success, and can provide some guidance for Western Australia.  According to the OECD, the Dutch government has achieved an economy-wide 25% net reduction in regulatory burdens.  Having achieved this concrete goal, the Dutch government has set another the target of another 25% reduction in administrative burden by 2011.

The OECD has identified six critical elements of the Dutch government's approach.

Measurement:  A method for measuring the total administrative burden and for mapping the distribution of burdens on individual regulations and ministries has been developed.  This Standard Cost Model (SCM), which has been taken up by a high number of countries and the European Commission, enables a targeting of simplification efforts for the most burdensome regulations and makes it possible to monitor the development of overall administrative burdens.

Quantitative target:  By establishing a quantitative, ambitious and timebound target, and communicating this widely, the government accepted to be held accountable on a highly prioritised policy goal.  The target has been divided among ministries and over years, thus providing a strong instrument for steering and monitoring simplification efforts across the administration.

Strong co-ordinating unit at the centre of government:  The inter-ministerial project team (IPAL), located in the Ministry of Finance, provided a coherent co-ordination of the programme across ministries.  IPAL ensured methodological consistency, common and co-ordinated reporting and use of instruments such as risk assessment to increase the likelihood of successful implementation of the many initiatives to simplify the regulatory framework.

Independent monitoring:  The Advisory Board on Administrative Burdens (Actal) played the role of independent watchdog, monitoring progress towards meeting the reduction target and assessing the initiatives of individual ministries.  Actal assisted in guiding and advising ministries and provided independent and horizontal advice to the Cabinet on ways and means to strengthen the programme.  From the outset, the possibility of abandoning the programme in times of difficulty was removed, or at least made very costly.  This independent body contributed to ensure sustained attention and support for the programme.

Link to the budget cycle:  Reporting to Cabinet and Parliament on plans for and progress on the burden reduction programme has been linked to well-established reporting procedures related to the budget.  This led to unavoidable deadlines for reporting and ensured recurring attention from the Cabinet and Parliament.  It also made clear to ministries that performance on the programme would be of relevance in budget discussions with the Ministry of Finance and its minister.

Political support:  The programme for the reduction of administrative burdens has had clear and sustained political support from the Cabinet, expressed from in the Coalition Agreement and onwards.  The programme enjoyed support of the responsible minister in dealing with colleagues and has also been backed by Parliament and relevant civil society organisations.  This broad and sustained support protected the programme from being politicised or slowed down, e.g. from institutional inertia or unwillingness to change.

Furthermore, the OECD notes that "a change of administrative culture may be a precondition for obtaining a regulatory regime, in which regulation is justified, proportionate and evidencebased." ⁽⁴⁵⁾

The evidence from the Netherlands suggests that inculcating such a cultural change has been at least partly successful.  One major study looked at attitudes towards business regulation and the public servant understanding of the cost such regulation imposed. ⁽⁴⁶⁾  The study found a high correlation between "knowledge" of the impact of the regulatory burden, and "attitude" towards regulation, suggesting that the challenge of inducing a culture within the public sector of regulatory minimisation is less an ideological one than an educational one.  Given the information necessary to assess the impact of their actions on the private sector and individuals, public servants will tend to independently try to reduce unnecessary burdens.

4.2 REGULATORY BEST-PRACTICE

Regulation should be designed and implemented according to international best practice.

Before introducing new regulations, the problem that the regulation is intended to solve needs to be defined clearly.  Its cause needs to be carefully identified.  The opportunity cost of the implementing the regulation needs to be discerned -- how costly would not regulating be, when compared to the cost of regulating?  Regulation needs to be transparent and consultative -- all interested parties need to be aware, informed, and have had an opportunity to inform the policy process.  With the problem clearly defined, the purpose and goal of the regulations need to be clearly defined -- what are the criteria by which the regulation may be judged to have succeeded or failed?  In Figure 13, the OECD provides a guide to regulatory decision making.

Figure 13:  The OECD Reference Checklist for Regulatory Decision-Making Is the problem correctly defined? Is government action justified? Is regulation the best form of government action? Is there a legal basis for regulation? What is the appropriate level (or levels) of government for this action? Do the benefits of regulation justify the costs? Is the distribution of effects across society transparent? Is the regulation clear, consistent, comprehensible and accessible to users? Have all interested parties had the opportunity to present their views? How will compliance be achieved? OECD Reference Checklist for Regulatory Decision-Making [accessed 27 May, 2009]

4.3 REGULATORY IMPACT STATEMENTS

As part of the 2008 reforms to regulatory process, new and amended Western Australian regulations will be subject to a two stage impact assessment process.  All regulatory proposals will be subject to a Preliminary Impact Assessment.  If the results of the initial assessment conclude that the proposal's impact will be "adverse and significant", ⁽⁴⁷⁾ a full Regulatory Impact Assessment is required, which will incorporate the production of a consultation document.

The success of this process will greatly depend on how effective the determination of significance and adversity is during the Preliminary Impact Assessment process.  The reforms to regulatory process are welcome, but subsequent years will likely show that there is much opportunity to improve.  The current reforms will cover new and amended regulation, but the vast stock of current Western Australian regulation will go largely unexamined.  OECD Best Practices urge jurisdictions to apply Regulatory Impact Statements to existing as well as new regulation.  Furthermore, the success of the new processes will also rely on how deeply integrated into the policy-making process the regulatory oversight is, as well the use of government-wide data collection.  On these metrics, the Western Australian reforms are a good start, but will not be sufficient to significantly reduce the growth of regulatory burden in the state.

4.4 INSTITUTIONAL CHANGES TO REGULATORY OVERSIGHT

A critical element in implementing a broad regulatory reduction program is institutional reform.  There is no single model for developing a regulatory oversight agency, but Australian and international examples provide a variety of models.  Individual institutions are tailored to the purposes of regulatory reduction, political necessities, and institutional circumstances.  Here, we look at three models -- two regulatory reform agencies, the Victorian Competition and Efficiency Commission and the more purpose-built Dutch Advisory Board on Administrative Burdens, and a private sector approach to economy-wide regulatory oversight, The Board of Swedish Industry and Commerce for Better Regulation.  Other possible models, including temporary or permanent external committees (such as the Commonwealth Government's 2005 Reducing Regulation Taskforce), and entities contained within ministries, such as the US Small Business Administration, or Western Australia's own Small Business Development Corporation, are canvassed in the OECD document Cutting Red Tape:  National Strategies for Administrative Simplification, 2006.

One model that would greatly enhance regulatory oversight in Western Australia is the Victorian Competition and Efficiency Commission (VCEC).  Established in 2004, the VCEC was designed to remove regulatory oversight functions scattered throughout government departments into a single dedicated body, resourcing the new agency to scrutinise individual RISs, and undertake inquiries into regulatory issues.  The VCEC is able to benchmark regulatory processes against best practices, impose and manage mandatory time limits for those processes, manage mutual recognition, and coordinate the major Victorian regulatory agencies.

The Dutch regulatory oversight agency is the Advisory Board on Administrative Burdens (Actal) which acts as a regulatory watchdog, simplification administrator, and assessor.  It has a relatively small staff of just 13 personnel.  In accordance with the unique Dutch approach to reducing compliance costs, it has a specific goal to affect a cultural shift in the public sector.  Doing so, in the Dutch view, will make regulatory burden reduction self-reinforcing:  "Policy officers should consider the effects for [administrative burden] on their own initiative." ⁽⁴⁸⁾

Private initiatives from the business community can have an impact developing the regulatory process.  Another model of regulatory oversight is provided by a private coalition of Swedish firms, The Board of Swedish Industry and Commerce for Better Regulation (NNR).  An umbrella organisation of 300,000 Swedish companies, and funded entirely by its members, the NNR specifically focuses on how regulation affects the business community, giving it both an economy-wide focus and avoiding the dilution of purpose that industrial peak-bodies have when dealing with government.  The NNR provides private sector oversight of the costs and consequences of Swedish and European regulation, as well as overviews of the regulatory burden as a whole.

The NNR scored a significant victory in 2008 when the Swedish government implemented mandatory regulatory impact statements across all regulatory agencies.  A new government board to oversee regulatory reform, the Swedish Better Regulation Council, provides not just regulatory impact analysis, but aims to assess regulation as it effects business competitiveness with other jurisdictions.

Western Australia has so far chosen to adopt a Regulatory Gatekeeping Unit within Treasury.  While many other jurisdictions have similar organisations, they are most successful when matched with an external oversight agency, like the VCEC or Actal.  If the state wants a best practice regulatory oversight process, it will need a dedicated agency, specialising in oversight and investigation into the efficacy and efficiency of existing regulation.

4.5 FROM PRODUCER-SIDE TO CONSUMER-SIDE

One change in the Western Australian government philosophy towards regulation which could have significant practical benefits can be described as a reorientation of regulations from favoring producers to favouring consumers.

Employed individuals acting in an economy are simultaneously both producers and consumers.

All else being equal, regulations should favour the interests of consumers -- who are interested in lower prices, higher quality goods, and wider availability -- than producers, whose interests in the regulatory sphere are not necessarily aligned with consumers -- for example, protection from competition, and the subsequent maintenance of artificially high prices.  Unfortunately in Western Australia, much regulation is orientated towards producer interest.

One case in point is a Western Australian licence scheme, the mandatory registration of hairdressers.  The website of the Hairdressers Registration Board of Western Australia claims that one of the benefits of its compulsory hairdressing licence is to prevent "unqualified people from opening a salon next to you and practising as a hairdresser in an attempt to impact on your established clientele."  By limiting the amount of competition in the market for hairdressing, this policy artificially raises prices, penalising consumers at the expense of consumers.

Such unbalance is seen in many areas of the Western Australian regulatory framework.  The high cost and low availability of taxi licenses keep Western Australia's taxi service poor, from the perspective of consumers.  Shop trading hours designed to favour the interest of retail employees reduce the availability of retail to consumers.  Removing these regulations -- that is, favouring the interests of consumers over producers -- would have significant welfare-enhancing benefits from both an economic perspective and to reinvigorate Western Australia's social and cultural milieu.

5.0 CONCLUSION:  REDUCING THE BURDEN

There are no easy fixes to over-regulation.  Regulatory reduction requires concerted effort at all levels of government and on both sides of parliament to ensure that regulation, when drafted, is targeted, evidence-based and has minimal unintended consequences.  As we have seen, such an approach will require a significant institutional change.  Some of the required institutional changes have already been announced by the Western Australian government, but there are significant reforms needed.  These include:

• Regulation Impact Assessments need to be rigorous.  Assessments also need to be applied to the stock of existing regulation in order to reduce the existing regulatory burden
• Western Australia needs a separate regulatory oversight institution which can coordinate regulatory reform, assess progress of current reform, conduct inquiries into existing regulation, and collect data.  This institution could be based on a number of Australian and international models, particularly the Victorian model.
• Regulatory focus needs to shift towards favouring producers to favouring consumers.  Policy-makers should ensure that regulations do not result in higher prices or less access for consumers, and that regulations are not skewed away from the interests of consumers.

This is a critical time for the Western Australian economy.  Only by maximising its competitiveness and reducing administrative overload will it be able to ride out the global financial crisis and ensure that it has a strong institutional and regulatory framework to grow its economy in the mining boom and beyond.

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ENDNOTES

1.  Fraser Institute Annual Survey of Mining Companies, 2008/2009, Fraser Institute, 2009

2.  "Gold caught in red tape", Australian Mining, 17 April 2009

3.  Regulatory Policies in OECD Countries:  From Interventionism to Regulatory Governance, OECD, 2002, P67

4.  Tasmanian figures not including 2007-2008 data

5.  "Australian Demographic Statistics:  Estimated Resident Population, States and Territories, Australian Bureau of Statistics, 3101.0.

6.  State Accounts:  Gross State Product -Chain volume measures "Australian National Accounts:  State Accounts" Australian Bureau of Statistics, 5220.0.

7.  Regulation and Compliance:  A Discussion Paper, Business Leader Series, Chamber of Commerce and Industry of Western Australia, November 2006

8.  W. Mark Crain and Thomas D. Hopkins, "The Impact of Regulatory Costs on Small Firms", The Office of Advocacy, U.S. Small Business Administration, RFP No. SBAHQ-00-R-0027

9.  The Western Australian Farmers Federation, Submission to the Productivity Commission, Annual review of Regulatory burdens on business;  Primary Sector, June 2007

10.  Regulatory Policies in OECD Countries:  From Interventionism to Regulatory Governance, OECD, 2002, P67

11.  Ibid, p165

12.  See Wood, The Growth of Australia's Regulatory State, p45

13.  Wood, The Growth of Australia's Regulatory State, p20

14.  "Regulation and Compliance:  A Discussion Paper" Business Leader Series, Chamber of Commerce and Industry Western Australia, November 2006

15.  Satish Joshi, Ranjani Krishnan & Lester Lave, "Estimating the Hidden Costs of Environmental Regulation", Accounting Review, Vol. 76, No. 2 (Apr., 2001)

16.  Laura Jones & Stephen Graf, "Canada's Regulatory Burden:  How Many Regulations?  At What Cost?", Fraser Institute, 2001

17.  See Wood, The Growth of Australia's Regulatory State.

18.  Submission to Productivity Commission Inquiry into Conservation of Historic Heritage Places, WA Division of the Property Council of Australia, August 2005.

19.  Janelle Macri "Call for government action", WA Business News, 16 October 2008

20.  Much of this section is drawn from Richard J. Wood, The great lock out:  The impact of housing and land regulations in Western Australia, April 2009.

21.  Ray Stokes, "The WA Model:  What makes the WA planning system different?", 2006

22.  "Welcome to Network City", Department of Planning and Infrastructure

23.  Richard J. Wood, The great lock out:  The impact of housing and land regulations in Western Australia, April 2009.

24.  http://www.mediastatements.wa.gov.au/Lists/Statements/DispForm.aspx?ID=131233

25.  http://www.dtf.wa.gov.au/cms/content.aspx?id=2171

26.  "O'Brien to take knife to WA transport red tape" Countryman, 23 April 2009.

27.  "Bulk carriers want a say," Countryman, 11 September 2008.

28.  "Truck safety cost carrier," Countryman, 8 May 2008.

29.  "A National Framework for Regulation, Registration and Licensing of Heavy Vehicles Consultation Regulatory Impact Statement April 2009, Submission by Department for Planning and Infrastructure and Main Roads West Australia.

30.  "ACCC decides not to oppose WA grain logistics system", Media Release, 8th September, 2008

31.  Richard J. Wood, "ACCC in dangerous game of monopoly", Australian Financial Review, 22 April 2009.

32.  Joe Spagnolo Extended trading hours back on Govt agenda 14 May 2009 PerthNow

33.  The Impact of the Deregulation of Retail Trading Hours in Australia G Kiel, G Haberkern -- 1994 -- Marketshare, Brisbane

34.  Richard J. Wood, "Case is overwhelming to extend shop hours", The West Australian, 3 October 2008.

35.  Milton Cockburn, The impact of trading hours regulation, Inside Retailing, 1 May 2005

36.  Review of Retail Trading Hours- Public consultation paper, Government of Western Australia, 2003

37.  4102.0 -- Australian Social Trends, 1999 Previous ISSUE Released at 11:30 AM (CANBERRA TIME) 24/06/1999 abs

38.  See Beatrice Thomas, "Small-bar industry gets a new voice to help cut government red tape", The West Australian, 30 April 2009.

39.  See Public Interest Assessment:  Pursuant to section 38 of the Liquor Control Act, Department of Racing, Gaming and Liquor, WA.

40.  [Available at:  http://www.abc.net.au/stateline/wa/content/2006/s2029942.htm]

41.  See Daniel Hatch, "Councils block push for lively small bars", The West Australian, 30 September 2008.

42.  Richard J. Wood, Moving in the right direction:  Transport reform in Western Australia, Occasional Paper, June 2007.

43.  Media Statement, "Fare balance for customers and the taxi industry," Department of Planning and Infrastructure, 31 March 2009.

44.  OECD, Cutting Red Tape Administrative Simplification in the Netherlands, 2007, p17

45.  OECD, Cutting Red Tape Administrative Simplification in the Netherlands, 2007, p17

46.  Zosja Berdowski, Koos van Dijken & Natasha Stroeker, "Internalisation of administrative burdens:  Co-ordinating report", Institute for Research on Public Expenditure, August 2005

47.  Regulatory Gatekeeping

48.  Presentation:  "The Dutch Advisory Board on Administrative Burden (Actal)" March 5 2008, available at www.oecd.org/dataoecd/45/63/40313681.ppt [accessed 29 May 2008]