IN MANY AREAS of government policy, the fingerprints of the prime minister are clearly visible. When we consider the highest-profile issues of the John Howard years-foreign policy, immigration, federalism and the culture wars, just to name a few-the influence of senior Coalition ministers on the government's policies are obvious.
However, this is not necessarily the case when we look at regulation, changes in the regulatory burden, or developments in the structure of economic management. Certainly, individual regulatory reforms can be identified and attributed to individual policy actors. The Howard government oversaw a vast array of regulatory changes, as well as the extensive inquiries and reports which accompany them.
But it is less interesting to debate who initiated what regulatory inquiry than to step back from the policy minutiae and consider how the federal government interacts with the economy, and how it has changed over the last decade.
This approach allows us to properly attribute blame or credit where it is due. After all, assessing the Howard government's record in the field of regulation poses slightly counter-intuitive challenges. For instance, we have to decide how much influence we are willing to grant the government over the operation of its own bureaucracy. We have to ask how inevitable regulatory increases are and how much the pattern of regulatory growth is a function of the historical circumstances faced by individual governments.
LIBERALISATION and privatisation have been a feature of almost all Western democracies since the early 1980s. Australia's reform movement had been one of the more ambitious projects around the world, joining the United Kingdom and New Zealand as the most extensive. By 1996, the Australian state which John Howard inherited had undergone more than a decade of nearly continuous economic reform.
The contemporary Australian state is a radically different beast from Australia's mid-century welfare state. W.K. Hancock's "vast public utility" is no more, having shed its own vast state enterprises. State and Commonwealth governments have systematically privatised a list of small and large scale enterprises traditionally operated by government -- banks, airports, telecommunications and energy utilities, laboratories, even radio stations. Labour market reform, in a general direction of liberalisation, has been a recurrent feature of the last two decades.
In Australia, to the extent that this ambitious program of liberalisation and privatisation has been carried out, it has been largely successful in reversing the slow economic decline of the second half of the twentieth century. But contrary to the belief held by many on both the left and right of the political spectrum, this dramatic change in systems of political economy has not been as didactic as a shift from the welfare state to a liberal -- or "neo-liberal" -- model of the political economy. Leviathan has certainly not faded away-instead, amongst the reforms, liberalisations and privatisations of the last few decades, government has increased its expenditure and taxation.
But for our purposes, the most striking attribute of the last few decades is how Australian governments have matched privatisations and liberalisations with regulatory expansion, rather than retreat. Governments have shifted away from the direct provision of services, to the regulation of those services.
When public utilities have been sold to the private sector, they have been placed under the jurisdiction of specialised statutory authorities whose role it is to direct and regulate those industries for public, rather than private, purposes. Often these measures have been matched by the development of regulatory mechanisms designed to introduce competition into industries where the cost of entry is seen to be prohibitively high -- the mandatory third-party access provisions of the Trade Practices Act and allied legislation allow firms to access the infrastructure of their competitor. Part of the reason that newly privatised enterprises have been highly regulated is the political controversy which accompanies privatisations. When supporters of public ownership complain that the "social benefits" of public ownership are not possible in the private sector, governments respond by forcing those benefits by regulatory design. Retail price controls in telecommunications, which have limited pricing flexibility, are an example of how this occurs.
The old protectionist or "infant industry" legal structures which applied to specific sectors of the economy, such as monopoly marketing boards and government cartelisation, have now yielded to economy-wide competition regulation. Indeed, competition regulation has developed into its modem form parallel to the reform period.
A great deal of the growth in regulation under the modern regulatory state is social, rather than economic. Environmental regulation has a long history -- Solon the Great proposed in the sixth century that Greek agriculture be banned from steep slopes to prevent soil erosion -- but its marked rise from the early 1970s was encouraged by the 1972 Stockholm Conference on the Human Environment. This resulted in the establishment of national environmental agencies in many developed nations, including Australia. During the Howard years, environmental regulation was an area of particular growth, despite the solemn pronouncements of the Coalition's green critics. The Natural Heritage Trust, the Australian Greenhouse Office and the Environmental Protection and Biodiversity Conservation Act all represent significant increases in government intervention for environmental purposes. Consumer product safety, particularly in the transport sector, and occupational health and safety regulations have also seen significant increases.
Financial regulation has followed an uneven path, but here too recent decades have seen significant regulatory expansion. The "four revolutions" of financial deregulation in the early I980s-the end of official control of the exchange rate, and of exchange control over capital flows, the entry of foreign banks, and interest rate deregulation-precipitated the broader reform movement in Australia, and resulted in far greater Australian participation in global financial markets. Certainly, these reforms rapidly changed Australia's banking sector from one of the most regulated in the world to one of the least. But this deregulation was closely followed by an increase in financial and securities regulation after a number of corporate failures, loans crises and much public criticism of the perceived excesses of the "corporate cowboys" of the time.
In the late 1990s, the Wallis Inquiry into the financial system increased the regulatory burden across many sectors, and a number of prominent corporate collapses in the first years of the twenty-first century provided the impetus for more again. Furthermore, participation in global financial markets has been accompanied by participation in global regulatory regimes, such as the GIO's Basel II Framework.
It is perhaps not too much of a stretch to say that, at least for those industries which before the reform period were relatively free of government intervention, many of the developments under the aegis of the regulatory state consist of an encroachment of government into the private sphere, rather than the other way around. Writing about the parallel developments in the United Kingdom in regulation and privatisation, the regulatory analyst Michael Moran has characterised the last two decades as a period of "hyper-innovation". This characterisation is just as apt for Australia. The institutional certainty of Australia's mid-twentieth-century political economy has been replaced by a continuous process of regulatory and legislative reform.
As we could expect, this remarkable increase in government regulation has had a significant impact on the efficiency of the Australian economy and general levels of prosperity. However, the focus on the economic and social impact of regulation masks its full significance: there has been a fundamental shift in the relationship between government and society; in the mechanisms by which policy is conducted; and the institutions where political power resides. As we shall see, during the Howard era regulatory agencies expanded and consolidated to match this enormous regulatory growth. The power these independent agencies have over the Australian economy warrants their considerable scrutiny; and to a large degree their growth is attributable to economic reforms under the Howard government.
Indeed, this is the central story of regulation under the Coalition.
THE COALITION GOVERNMENT may not have initiated the growth of the regulatory state, but the period in which it governed saw the largest regulatory expansion in history. For our purposes, regulation is the attempt to define the boundaries of economic activity for economic, social or environmental reasons. Regulation is designed to modify or limit economic behaviour, but not to outlaw it. It can be produced by explicit legislation, by subordinate legislation, by a wide variety of class orders, instruments, codes of conduct or guidelines. Where the government restricts economic or social activity, regulation can be found.
Legislation is wider in scope and content than regulation, but it can serve as a useful proxy. The growth in Commonwealth legislation since Federation, measured by the number of pages of Acts of Parliament passed per year, clearly illustrates a dramatic increase in legislative activity over the past few decades. For instance, if we mark the year 1980 as the beginning of the reform period in Australia, through to 2006, there was more than five times the number of pages of legislation passed than there had been in the eight decades before this period.
It is striking how little legislative activity was required at the time of Federation to unify the country -- 358 pages, spread over two years -- compared with how much it took to manage the Commonwealth in 2006 -- a massive 6786 pages. Certainly, the changing nature of Australia's federal structure has expanded the jurisdiction of the Commonwealth legislature, but there have been similar increases in state legislative activity -- not decreases, as would be expected if there had simply been a shift in responsibility from the states to the federal government. Indeed, state legislation has been marked by significant growth.
And what data is available indicates that subordinate legislation -- which is commonly described as "regulation" -- is growing at a similar pace as legislation. Subordinate legislation in the Commonwealth and the states parallels the increase in total legislation over the last four decades. Changes in government have little effect on the relative increase in legislative activity. As a consequence, John Howard's government was the highest legislating government in Australia's history. Based on his performance so far, it is not hard to guess that Kevin Rudd's government might be even more active.
A similar analysis is possible by looking at the data on regulation: the Howard government oversaw the largest regulatory expansion since Federation. Certainly, simply counting the pages of regulation and legislation is a highly imperfect method of assessing total regulatory burden, but in the absence of a superior alternative it has been widely recognised as the most effective. Other factors can increase the number of pages without increasing the regulatory burden. For instance, one potential cause of the increase in pages of legislation is the move during the 1980s to plain English drafting-as opposed to the traditional legislative language inherited from England in the nineteenth century-as well as the use of double-spacing. Formatting changes can also alter the words-to-page ratio.
Nevertheless, there is little to suggest that the plain English drafting reform or formatting changes are the sole, or even primary, cause of increasing pages of legislation -- page increases both preceded these changes and continued after they had filtered through the various tiers of government. Technical changes in the manner in which legislation is drafted cannot explain modem legislative and regulatory excess.
For the firms and individuals affected by regulatory and legislative increases, the impact is cumulative. Individuals not only have to act in accordance with the legislation and subordinate legislation passed in any given year-they also have to contend with the entire body of law as amended. Some of this legislation and regulation replaces existent law; but it is clear that it is growing -- if not at the same heady pace that legislation and regulation in general is being passed.
And anecdotal evidence supports the empirical evidence for the growth in regulation. The 2006 taskforce on Reducing the Regulatory Burden on Business noted that a particularly striking example of the level of regulation was the 24,000 different types of licences administered by three levels of government. Telstra notes that the amount of regulatory instruments applicable to its business has grown since 1997 from twenty to 348, and that the number of reports required by the Australian Competition and Consumer Commission has been increasing by two or three per year. This is particularly striking because the regulatory framework governing telecommunications has been relatively stable during that time.
MUCH OF THE INCREASED regulatory burden is not sector-specific, but is related to workplace law. The Australian Construction Industry Forum has argued that the Howard government's changes to industrial relations and changes to state and federal occupational health and safety law are a significant addition to the regulation facing their industry, as well as taxation changes. Indeed, the Income Tax Assessment Act, often used as a barometer of legislative and regulatory growth, has grown from 120 pages in 1936 to a bookshelf-crushing 7000 pages.
The Insurance Council of Australia attempted to describe the level of regulation affecting its industry by noting its effects on business structure and practice. Regulatory compliance now compromises between 10 and 25 per cent of board and senior management workload. One large insurer estimated a much higher work load, at least 40 per cent of senior executive time, and up to 60 per cent of board time. One small insurer estimated that this had grown five times above the amount five years ago, and ten times over the last decade. Another insurer estimated that compliance expenses as a percentage of operating income had more than doubled in the last five years. Another estimated that the staff numbers in regulatory compliance committees had grown 20 to 30 per cent in the two years up to 2005. A PricewaterhouseCoopers analyst has noted that for the insurance industry over the last five years the cost of complying with the prudential regulatory framework has increased significantly.
The Credit Union Industry Association notes that the burden on both their credit union membership and other banks and building societies has increased since the Wallis Inquiry in 1997, and attributes this to the mandatory implementation of Basel II, recent financial services reforms, changes to prudential standards, and the adoption of international accounting standards. A practical example of this increase is provided by the Business Council of Australia: a total of 227 pages of documentation needs to be given to a customer before they can open a simple cheque account with an overdraft limit and a home loan, roughly five times the amount in 1985. The Australian Bankers Association reports that one bank has doubled its annual compliance expenditure levels every five years since 1994-95, with a similar growth in staff dedicated to regulatory compliance.
There has been little quantification of the extent of local government regulatory activity, but, there are indications that it is increasing. The Australian Chamber of Commerce and Industry writes that there was a marked upswing of local government regulation as a constraint to investment between 2003 and 2005.
MANY ANECDOTAL IMPRESSIONS of the regulatory burden understate the economic impact of regulation by focusing inordinately on-the paper-burden cost rather than the total regulatory cost. The paper-burden cost includes the cost of employees dedicated to regulatory compliance, and external legal, economic and financial consultants, and they typically constitute one-third of the total cost of regulation.
Thus, the contemporary political focus on "red tape" presents the problem of over-regulation in a narrow light. The structure of regulation is so central to the business models and profitability of some firms that regulatory governance and compliance is an "all-of-firm" question. For these firms, it is not necessarily possible to separate regulatory compliance costs from business costs. The anecdotal estimates above, which focus predominantly on easily measured paper-burden costs, are, for many industries, likely to be dramatic underestimations.
The full cost of regulation is much greater than the visible cost of compliance. Certainly, the distribution of costs caused by regulation varies by industry. In the food sector, the primary cost of regulation is a paperburden cost. But for much of the economy, the paperburden cost is dwarfed by the restrictions imposed by the regulations. For instance, the "chilling effect" of access regulation dwarfs the paper-burden cost of those regulations by holding back infrastructure investment.
As Gary Banks has argued, "regulations not only create paperwork, they can distort decisions about inputs, stifle entrepreneurship and innovation, divert managers from their core business, prolong decisionmaking and reduce flexibility". These effects are, on average, far more significant than the red tape which is required by regulators to assess compliance. Focusing only on paper-burden costs is like focusing on the time spent filling out a tax return rather than the amount of tax paid. Political platitudes to lower the red-tape burden offer little promise if they are not part of a general push to decrease overall regulatory intervention in the economy. And like its predecessor, this is a point that seems unfortunately lost on the new Labor government.
Firms now operate in a much more uncertain regulatory environment than before the reform period. This is particularly concerning because investment decisions are contingent not only on the regulatory environment in which they are made, but also on an estimate of the regulatory environment of the future. If that future environment is plagued by uncertainty -- investors do not know what "reform" their industry can look forward to in the future -- it will be factored into the decision to invest or not.
Firms can delay investments and, through political activity, try to influence future regulatory frameworks in which that investment might be more profitable. Where investments are irreversible, investors face two options: invest now, or defer investment until the uncertainty is resolved.
This is not merely a consequence of uncertainty about what actions legislators may take in the future -- it can also be because of uncertainty about the actions of regulators. For instance, ambiguous statements about the manner in which, or extent to which, regulations will be applied can exacerbate this uncertainty.
A 2001 study into the relationship between American anti-trust law and investment found strong links between levels of regulatory uncertainty and lower levels of investment-the much-cited measures of "business confidence" may be partly proxies for regulatory certainty. A local example was recently given by the CEO of Pipe Networks, a telecommunications backhaul provider, when he argued in April 2007 that regulatory uncertainty in the telecommunications industry meant that investment in backhaul had been, at least for the moment, effectively shut down. Indeed, many submissions to the Howard government's Taskforce on Reducing the Regulatory Burden on Business cited uncertainty about future regulations-and uncertainty about how recently-imposed laws and regulations would be interpreted by the judiciary as a major impediment to business operation.
Political regimes which have broad uncertainty about potential government intervention across the economy experience concrete effects. And uncertainty scales with dramatic effect. The historian Robert Higgs has found that "regime uncertainty" -- of which uncertainty about possible future regulatory decisions was a key part -- was the major factor in prolonging the Great Depression in the USA. The anti-business rhetoric of President Roosevelt and his supporters concerned investors enough to withhold investment, even when the actual investment climate was not particularly punitive.
Regulatory hyper-innovation, regardless of the character or nature of the regulatory change, can, in and of itself, discourage productive activity. Recognition of this effect should compel caution before pursuing continuous rapid economic reform-particularly if the economic reform in question is of a reregulatory rather than deregulatory nature. Regulatory uncertainty in economy-wide areas like corporate governance has the potential to massively disrupt economic growth. The effect of uncertainty on economic activity is even more concerning when the nature of what is considered proper compliance to those regulations is vague.
THE HOWARD YEARS also saw major expansion in regulatory agencies. This trend is a reflection of the regulatory increase, but it is also a significant change in the structure of government and economic management, indicative of a rise of a sector of government that is both independent and non-democratic. One of the biggest, and yet least appreciated changes to government under the Coalition has been the elevation of regulatory agencies to the centre of the political and economic system. With their new-found role, they have found themselves in possession of a significant amount of political power relative to the executive and legislative branches of government. If we are to understand the Howard government's performance in the regulatory sphere, we have to look at how institutional and legislative reforms have changed the power structure and activities of these regulatory agencies.
There are approximately sixty Commonwealth regulators and national standard-setting bodies. There are a further forty federal ministerial councils setting and administering regulations. While hard to estimate, the federal regulatory agencies employ over 34,000 people, with a combined budget of well over $4.5 billion.
The Victorian Competition and Efficiency Commission identified sixty-nine regulatory bodies in that state, with a combined budget (excluding the Metropolitan Fire Brigade, Country Fire Authority and Parks Victoria) of over one billion, and a staff of 6895. The Productivity Commission extrapolates these figures to come up with an estimation of 600 regulatory agencies across the country. Taking into account government departments with regulatory functions, ministerial councils, inter-governmental bodies, and the range of quasi-official agencies and boards, it is easy to imagine that at the end of the Howard years, at least $10 billion was spent annually on regulating the Australian economy.
Using numbers of staff as a proxy of agency size, many agencies have seen significant recent growth: For instance, the Australian Fisheries Management Authority has nearly doubled in size in the last decade, from a staff of 100 to 186. Food Standards Australia New Zealand has increased from 100 in June 2000 to 146 in 2006. The Australian Pesticides and Veterinary Medicines Authority has increased in that same period from 113 to 133. There is a large variety of regulatory agencies dedicated to regulating specific industries, like the federal Civil Aviation and Safety Authority or the Australian Fisheries Management Authority.
But occupying a central role in Australia's regulatory system are a few key economic regulators with economy-wide scope. Rather than being confined to narrow jurisdictions, these agencies typically do not only regulate a wide variety of industries, but are also multi-dimensional in scope. That is, Australia's major economic regulators regulate for both economic and social outcomes, as well as technical regulation like standards-setting.
These regulators are not built around the institutions that they administer, but are rather built around "functional" lines. The Australian Securities and Investment Commission (ASIC) is responsible for consumer and investor protection, the Australian Prudential Regulatory Authority (APRA) is responsible for prudential regulation, that is, market failure associated with information asymmetries in financial contracts; and the Australian Competition and Consumer Commission (ACCC) is responsible for policing anti-competitive behaviour economy-wide. The financial services sector powerfully illustrates how reform to regulatory institutions under the Howard government has led to significant increases in the regulatory burden.
The 1997 Financial System Inquiry (the Wallis Inquiry) was only the third major inquiry into the Australian financial system since Federation, after the 1936 Royal Commission and the Campbell Inquiry in 1981. After the "four revolutions" which followed the Campbell Inquiry, the financial market and its structure went through a dramatic overhaul, with the introduction of new institutions such as foreign exchange firms, recognised bond dealers and new types of trusts and management funds, as well as entrance into foreign exchange markets and new secondary mortgage markets. In the decade between 1985 and 1995, the number of commercial banks in Australia increased from thirteen to forty-nine.
THE PURPOSE of the Wallis Inquiry was to assess the appropriateness of the regulatory framework which had been constructed during the period of financial deregulation in the light of these changes. The "modest trend" towards agency consolidation internationally was noted in the inquiry's discussion paper -- the inquiry predated the now prototypical example of an "all-in-one" regulator, or "mega-regulator", the United Kingdom's Financial Services Authority (FSA).
Governance and power concentration were factors for the participants of the inquiry when recommending the ideal regulatory structure. The inquiry rejected an FSA-style mega-regulator due to the need for efficiency and specialisation. And the inquiry was concerned with regulatory governance, noting that the single regulator may become "excessively powerful".
But nevertheless, the Wallis Inquiry's final recommendations as adopted by the government consisted of major agency consolidation into two main organisations, the Australian Prudential Regulatory Authority (APRA) and the Australian Securities and Investment Commission (ASIC). This model was popularly known as the "twin peaks" model, from a 1995 article which recommended delineating financial regulation according to function-prudential (APRA) and disclosure (ASIC). Advocating this agency consolidation, Treasurer Peter Costello said before the Wallis Inquiry:
The regulatory framework is hopelessly out of date. You have superannuation funds that are now in home lending and are essentially running banks and you have banks coming into superannuation -- you have got different institutions offering the same product, different regulators regulating the same product because they are offered by different institutions. Why do not we cut all that away and say whatever the nature of the financial institution we will have a regulator covering prudential and a regulator covering consumer protection and we can sweep a whole lot of that away?
While the "twin peaks" model amalgamates regulatory functions in a less extreme manner "than the United Kingdom's FSA, it was nevertheless a significant consolidation. By drawing the vast bulk of regulatory functions away from the Reserve Bank of Australia (the bank did gain some roles of the Australian Payments System Council), the new model eclipsed the international consolidations described in the inquiry's discussion paper. It is not inaccurate to refer to the new tri-regulator model as a system of "mega-regulators", even if the FSA provides a more "pure" example of such an institution. In both the Australian and international context, the result of the Wallis Inquiry' was the creation of two functionally-structured mega-regulators with economy-wide jurisdiction.
APRA, as a functional regulatory agency, has assumed prudential regulation of finance-based industries. It required eleven pieces of legislation, which constituted over 4000 pages, including four new acts and two omnibus acts. In total, APRA's foundation amended and repealed more than seventy existing acts. APRA absorbed the entire Insurance and Superannuation Commission (ISC), as well as roughly seventy staff from the RBA who had bank regulation roles. The prudential regulator has since experienced rapid growth, from a staff of roughly 400 at the time of transition to 570 in 2006. The annual federal appropriation for APRA has grown 55 per cent in that time. On top of the legislation which founded APRA, the prudential regulator has overseen more than sixty-six major regulatory changes since 2000.
For the insurance industry, the creation of APRA represented a significant increase in regulatory activity covering the sector. Under the ISC, the insurance industry had been regulated relatively lightly. In the view of the new consolidated regulator, this light-handed regulation was unsatisfactory. APRA's Executive General Manager of Policy, Chris Littrell, argued: "Until 2001 the Australian general insurance industry was characterised by an unsatisfactory culture of reluctant regulatory compliance by some entities, even among our largest companies."
Indeed, following the HIH insurance collapse, Littrell argued that eliminating this cultural clash was one of the early tasks that the regulator faced:
As an integrated supervisor, APRA is in a position to observe the managerial differences between our regulated sectors. Banks in general are run by people who are or have been risk managers, and by people who understand that regulation has its good points. In Australia at any rate, many insurance companies have been dominated by salesmen, who often viewed regulation as something to be avoided. Having come up the career ladder by dealing with actuarial restrictions, they tended to treat regulatory requirements as another annoyance to overcome, rather than a guide to good practice.
While HIH's collapse and the subsequent royal commission heralded the beginning of a major wave of regulatory increases in the insurance industry, its genesis was the foundation of APRA itself, which coupled the insurance industry with the much more highly regulated banking industry. Indeed, plans to increase regulation of the general insurance industry preceded the 2001 collapse of HIH. The Financial Services Reform Act 2001 classified most insurance as a "financial service" -- with the notable exceptions of reinsurance, health insurance and government insurance-and therefore required an Australian financial services licence. Financial product advice, dispensed by intermediaries not directly providing insurance, also required licences under the 2001 Act to do so. The Act also imposed significantly increased product disclosure requirements, and capital and corporate governance requirements.
The Association of Superannuation Funds of Australia, in its submission to the Reducing Regulation Taskforce, stated that since the establishment of ASIC and APRA, supervisory levies paid by superannuation funds had increased dramatically. Indeed, APRA's expenses relating to superannuation have grown, even though the number of superannuation funds has decreased significantly.
For the banking sector, a great deal of the regulatory change after the foundation of APRA was concerned with the transfer of regulatory authority from the still-existent RBA towards the new prudential regulator. But the most significant regulatory change has been adopting the Basel II Capital accords.
The implementation of Basel II under the auspices of a mega prudential regulator has, for many organisations, had the effect of a dramatic increase in regulatory burdens. Basel II constructs an internationally consistent framework for banking capital requirements and accounting standards. For large, internationally active banks, implementing Basel II has much important significance. However, for smaller domestically-based authorised deposit-taking institutions, Basel II provides little benefit. For credit unions, whose involvement in international markets is low, the cost of implementing the framework is precipitously high. Similarly questionable benefits have accompanied APRA's uniform adoption of the International Financial Reporting Standards, which affects major, internationally active Australian banks and small domestic co-operatives like the St Mary's Swan Hill Co-operative Credit Society alike.
APRA's activities illustrate clearly the perils of uniformly applying regulations that are designed for a specific class of institution.
UNDER THE TWIN PEAKS model of financial regulation, ASIC regulates company and financial services law for consumer, investor and creditor protection. Where APRA regulates for the viability of financial institutions, ASIC's many briefs include regulating conduct and disclosure, administering corporations law and consumer protection. To do so, it administers eight separate laws, including the Corporations Act 2001, Australian Securities and Investments Commission Act 2001, and the Insurance Contracts Act 1984.
ASIC was drawn from the Australian Securities Commission, and in 1998 absorbed the consumer protection responsibilities in insurance and superannuation of the ISC. It also drew consumer protection responsibilities in finance from the Australian Competition and Consumer Commission, replicating Section 52 of the Trade Practices Act in the ASIC Act. Further, ASIC absorbed the consumer protection responsibilities of the Australian Payments Systems Council and financial sector industry codes of conduct. In 2005-06, ASIC had regulatory responsibility for 1.5 million corporations and 4415 financial services businesses.
ASIC's growth has been the most marked of the economic regulators. Since 1999, the regulator's annual real appropriations have increased by 76 per cent. Its staff has grown from 1221 to 1471.
ASIC has overseen a rapid and comprehensive overhaul of corporate governance law under the Corporate Law Economic Reform Program (CLERP). The rapid, comprehensive change in corporate law under the continuous process of CLERP, as well as the Wallis Inquiry-era reforms which inaugurated ASIC, have been matched by the regulators use of legal instruments to modify the Corporations Act 2001. Since 2002, ASIC has issued more than 380 class orders, which materially alter the terrain of corporate law. Indeed, the Association of Superannuation Funds of Australia argues that ASIC's reliance on instruments like class orders has been a major cause of the increased complexity of corporate regulation in the last decade.
The gains from the expanding reach of regulatory intervention in the structure of the firm are uncertain. Prominent corporate collapses have been a regular feature of Australian economic history since before Federation. There is, however, little evidence to suggest that the dramatic increase in corporate, securities, financial and banking regulation that followed the wave of corporate collapses in the late 1980s has had any significant impact on subsequent collapses.
There is a very real likelihood that the excessive restraints placed upon corporate form and function, particularly at the executive and upper management level, can have a detrimental effect on entrepreneurial activity. Regulatory micromanagement places a significant burden upon innovative practices and structures. It also induces substantial costs upon firms. For instance, regulatory measures which attempt to foster "compliance culture" by imposing personal legal liability for business decisions upon executives reduce the incentive to take up those senior management positions, and raise the salaries of those who do.
As with all tax and regulatory burdens, firms try as far as possible to pass these costs on to the consumer. It is indicative that an August 2006 CPA Australia survey found a strong perception that the overwhelming beneficiaries of CLERP 9 auditing processes reforms were regulators and auditors.
The other major federal economic regulator is the Australian Competition and Consumer Commission, which has also seen significant growth in staff and resources. However, compared to ASIC and APRA, the ACCC's regulatory regime was relatively stable during the period of the Howard government, further reinforcing the view that regulatory agencies and bureaucracies grow regardless of any obvious "need" to do so. Telecommunications and media regulation saw a major change in 2003 when the Australian Communications Authority and the Australian Broadcasting Authority merged to form the Australian Communications and Media Authority. Furthermore, the Reserve Bank, the Australian Taxation Office, and the Australian Customs Service all exit the Howard decade with substantial regulatory powers.
HOW MUCH of the blame for this remarkable increase in the regulatory burden and high levels of regulatory uncertainty can be laid at the door of the prime minister's office? The phenomenon described above is, unlike some other ways we can measure government activity, diffuse. It is not a phenomenon that is subject to system-wide review by the senior ministry, unlike, for instance, government spending, which is constantly subject to the scrutiny of the budget process. For this reason, one of the perennial tasks of regulatory watchdogs like the Productivity Commission and VCEC is simply to estimate the size of the regulatory state. Given the paucity of published information, these agencies can only guess at how many regulatory agencies there are across the country, let alone determine how much we spend on them.
The origins of regulation vary significantly. Some do, unquestionably, originate in cabinet-level policy decisions. Populist regulations which cover issues like pornography on the internet or teen drinking are just as much political strategy as regulating, and are consequently of interest to senior government ministers. But these regulations are only a small portion of the total regulatory burden-internet filtering may be a high profile regulation, but is ultimately a drop in the pool compared to the gigantic array of rules which the government administers.
Furthermore, the prime minister's office is not directly responsible for minor changes to the finer points of financial service regulation, consumer product regulation, or occupational health and safety laws. Indeed, even those regulatory frameworks which are high-profile are ultimately defined by individuals well down the chain of government delegation from the cabinet. For example, while the WorkChoices reform program may have had its origins in the senior ministry, the complexity of its regulatory and legislative framework is largely attributable to thousands of minor decisions made by a diverse array of lawyers, regulators and advisers who actually drafted the nearly 2000 pages of regulation and legislation. The government may have signed off on the final WorkChoices bill, but they did so because their more informed and technocratic subordinates convinced them that deregulation meant re-regulation.
Similarly, it is not fair to blame the Howard government for the substantial regulatory burden emanating from the states, or for the petty regulations imposed by local government, both of which constitute a substantial part of the regulatory landscape. The federal government can exert a degree of pressure on the other levels of government to reduce regulation, as it did under periodically during the Howard era, but doing so rarely does more than continue to erode our crippled federalism.
If we are to discover a major source of much of the regulatory increase over the past few decades, it is also necessary to cast our eye over the regulatory agencies themselves. Regulators are delegated substantial amounts of discretionary power to make decisions regarding the structure of their jurisdiction's regulatory framework, which gives them significant political power. These regulators are systematically biased towards an ever more expansive interpretation of their proper role in the economy and, compounding this, the "cat-and-mouse" nature of regulatory negotiation and compliance leads regulators to lobby for legislative enhancements to their coercive powers. The powers and independence with which regulators have been vested means that they operate in a substantially separate sphere to the executive branch of government. To a surprising degree, regulatory agencies are autonomous actors in Australia's political system. The capacity for the government to restrain their decisions, and therefore the degree to which we should consider the government responsible for their excesses, is limited.
Nevertheless, it would be easy to conclude, on the basis of the growth of regulation and the extremely modest efforts made to reduce the regulatory burden, that the Howard government's performance in this field was a failure. But we cannot measure governments against our ideal visions of free market economies-the economic study of politics which has developed over the last half-century has repeatedly emphasised the structural barriers to free market reform, and it is an all-too-common intellectual failure of right-of-centre politics to ignore these in debate. As Adam Smith noted in The Theory of Moral Sentiments, perfection is rarely the correct yardstick:
When a critic examines the work of any of the great masters in poetry or painting, he may sometimes examine it by an idea of perfection, in his own mind, which neither that nor any other human work will ever come up to; and as long as he compares it with this standard, he can see nothing in it but faults and imperfections. But when he comes to consider the rank which it ought to hold among other works of the same kind, he necessarily compares it with a very different standard, the common degree of excellence which is usually attained in this particular art; and when he judges of it by this new measure, it may often appear to deserve the highest applause, upon account of its approaching much nearer to perfection than the greater part of those works which can be brought into competition with it.
Following Smith, if we acknowledge the structural impediments to regulatory reform, we must ask how successful the Howard government was relative to other governments. It is easier to be sympathetic to the Coalition when we recognise that no Australian government has ever passed less legislation than its predecessor -- regulation appears inevitably to escalate over time.
But that does not mean regulation cannot be restrained. One of the great successes of the Reagan administration was to slow the rate of legislative and regulatory expansion significantly, particularly after the excesses of the Carter years. Data from the Federal Register -- which records rules, proposed rules and notices of the federal government -- shows clearly that unlike in Australia, during the 1980s the United States saw a notable slowdown in the rate of regulatory growth.
Certainly, slower regulatory growth is not deregulation. There were more pages in the Federal Register at the end of the Reagan administration than at the start. But the US experience does seem to indicate that growth can be restrained, if not entirely resisted.
So what are the lessons of the Howard era? John Howard was always a passionate supporter of the reform agenda, if not always a passionate reformer. But there is little to suggest that his government was aware of the significance of regulation as a restraint on economic growth, at least until its last few years, when its deregulatory rhetoric became louder. When the Prime Minister's Taskforce on Reducing the Regulatory Burden reported its findings, the government provided in-principle support for its recommendations but little action.
It is easy for a government to profess its distaste for over-regulation -- after all, is there anybody who actually likes "red tape"? -- but it is much harder for governments to nominate specific regulations which they have the political will to cull. The regulatory burden is more than the sum of its parts. Individual regulations still have to be removed individually. And when governments try, they come up against the institutional and political interests which have formed around those regulations. For this reason, a program for economy-wide deregulation has to be piecemeal, but systematic.
So if our wishes for deregulation are ever to be indulged, advocates of a free economy and free society have to hope for a political movement that shares our goals. Ronald Reagan may be our closest contemporary who worked to slow, if not reduce, regulation, but history does provide one example of a grand regulatory purge. The English Whigs and early Liberals are one of those rare examples in history that conducted a wide scale regulatory and legislative purge. The English had a long history of mercantilism and state power to recant. It has been estimated that, of the 18,110 Acts which had been passed between Henry III and 1873, four out of five were fully or partly repealed. Both the Reagan administration and the great English liberalisation shows us that deregulation is possible, but doing so requires a formidable dedication to reducing the power and size of government.
This was a dedication the Howard government lacked. In its absence, there was no institutional or philosophical bulwark against regulatory growth, whatever the origins of those regulations. The eleven years of Coalition rule merely illustrates the enormous challenge of reducing the regulatory burden.
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