National security concerns are slowing our economy

Juggling the demand for security with the need for economic productivity is proving a conundrum for governments.

As the unrelenting rise of the security state runs into mounting concerns about the potentially growth-dampening effects of its regulatory counterpart, conflicting pressures are pulling the economic role of the state in different directions. Policymakers are seeking to balance a security-led quest for resilience with a productivity-inspired campaign against red tape. The tug of war between the two is set to be an important policy theme.

Security issues

In the traditional security state, a deteriorating geopolitical environment plus increasingly assertive demands on its allies from the US are forcing Western governments to say farewell to the post-Cold War “peace dividend” and hello to increased defence spending. Australia is already committed to increase annual defence spending from two to 2.33 per cent of GDP over the next eight years. However, some observers want even greater uplift. The Australian Strategic Policy Institute has criticised a mismatch between rhetoric and resources, while the US Defense Secretary recently urged Canberra to boost spending to 3.5 per cent of GDP “as soon as possible”. 

Closely related is a national-security-flavoured expansion in industrial policies across the developed world. With Australia’s Future Made in Australia (FMIA) initiative, for example, one of its two streams covers “economic resilience and security” and encompasses “industries where some level of domestic capability is necessary or efficient to deliver economic resilience and security”.

Then there is the rise of the non-traditional security state, with state-led responses to climate change and the energy transition prominent. In Australia, the second of FMIA’s two streams partly captures this. Meanwhile, other non-traditional demands for greater security are visible in rising voter calls for state-provided protection more broadly, including to manage the consequences of ageing societies and ever-growing demands for healthcare. In one sign of the non-traditional security state surpassing its traditional counterpart, Treasury estimates National Disability Insurance Scheme-related expenditure next year will exceed traditional defence spending for the first time.

Yet as the security state — narrowly or broadly defined — expands, there has been an intensifying focus on the economic costs associated with a growing state footprint. Traditionally, critics have focused on the direct budgetary cost of higher government spending and the consequences for tax burdens, crowding out budget deficits, public debt and interest rates. Such worries persist. But increasingly, another set of concerns relates to the consequences for growth of a different aspect of the 21st century state — the regulatory state.

Red tape revolt

The rise of the regulatory state is typically associated with the post-Thatcher/Reagan era of privatisation and marketisation, which saw Western governments switch their policy approach from nationalisation and other direct economic interventions to setting and enforcing rules, regulations and standards for the market economy via an expanding range of institutions, agencies and regulators.

As economies grow more complex, this regulatory state becomes more pervasive, responding to new innovations, business models, challenges and policy priorities. Recent examples include the rise of the internet, digitalisation, environmental standards, climate reporting and advances in AI. Government regulatory policies are also a political response to the demands of older, wealthier and more risk-averse voter bases. The consequent steady expansion in the supply of new rules in response to these forces has led to fears economies risk “drowning in red tape”. 

In the latest edition of the AICD’s Director Sentiment Index, one in four directors see regulation requirements as one of the top economic challenges facing Australian businesses; 32 per cent say legal and regulatory compliance is the top issue keeping them awake; 59 per cent say compliance and regulation are impacting their board’s risk appetite; and 70 per cent say a major business deregulation agenda would have a positive impact on productivity and economic growth.

With productivity growth stalling and economic growth increasingly hard to come by in most advanced economies, policymakers are looking to deregulation and/or regulatory simplification as a potential source of dynamism. In a February cover story, The Economist magazine highlighted an unfolding “revolt against regulation’ citing Argentina’s “chainsaw-wielding” President Javier Milei’s campaign against regulation and the US Department of Government Efficiency as prominent examples of the backlash on red tape.

Less controversial fellow travellers in the shift to deregulate include a European Commission that has promised to wind back corporate reporting requirements. The historically dirigiste (strong directorial role in the economy) French government has pressed Brussels for a “massive regulatory pause”. The UK government has pledged to audit its regulators and abolish or merge more than 300 “quangos” as part of its plans to overhaul the British state. India, formerly the home of the “Licence Raj”, is now driving a series of “process reforms”.

Will Australia join the trend? There are positive signs. At the end of its first term, the government tasked the Productivity Commission with inquiries into the “five pillars” of productivity. Earlier this year, as part of its inquiry into pillar 1  — creating a more dynamic and stable economy — the commission said it would examine how Australia might “reduce the impact of regulation on business dynamism”. It acknowledged hearing for “more than a decade… that the burden of government regulation has increased”, noting although “regulation can help to achieve important economic and social objectives… excessive or inappropriate regulation can stifle business dynamism, resilience and productivity”.

Accordingly, the Productivity Commission will now “examine how Australia regulates businesses, including the institutional processes for introducing new regulation and how existing harmful regulation could be improved or removed”. Granted, this would not be the first time Canberra has committed to a deregulation agenda. Still, it’s one to watch.

This article first appeared under the headline 'Harsh realities' in the July 2025 issue of Company Director magazine.