How poor quality regulation reduces productivity and business dynamism

The Productivity Commission’s first interim report explores the causes of poor-quality regulation that reduces productivity and business dynamism — and lays out some steps for the government to reverse course.

There is a well-known saying, wrongly attributed to Otto von Bismarck, that laws are like sausages. It is better not to see them being made. The practical reality of how parliament, ministers and agencies make regulation is not always visible to the businesses it impacts or the people it is intended to benefit. But the recent work of the Productivity Commission (PC) on regulation provides some rare and valuable insights into the causes of Australia’s growing regulatory burden.

The first interim report of the PC’s five pillars productivity inquiry was released on 31 July. The opening half, dealing with corporate tax reform, attracted the most media comment. The second half focuses on the impact of regulation on business dynamism. It identifies the perverse incentives and process breakdowns in government that result in regulation that is poorly targeted or designed — or inefficiently administered — and jumps straight to how our regulation-making culture and processes need to change.

The regulatory drag

The report points to a significant increase in regulation over the past two decades. It argues that the trend is going in the wrong direction. The PC found that, “Australia is falling behind its peers on economic regulation (regulation that directly influences prices, competition and market entry or exit). Australia slipped from fifth to 14th in the World Bank’s Ease of Doing Business indicator between 2005–20, and from second to 15th of 28 countries in the OECD’s Product Market Regulation indicator between 2003–23… At the same time, the volume of social regulation (which protects health, safety, the environment and social cohesion) has grown.”

This is not just a matter of too much red tape, or poor coordination between the Commonwealth and states. The report identified common issues with poor-quality regulation that include:

• Band-aid regulation that does not address the underlying cause of the problem
• Duplicate or inconsistent regulation that can manifest as multiple regulations affecting businesses in a geographic area or sector
• Overly prescriptive and rigid regulation that leaves little room for adaptation
• Overly risk-averse regulation that pushes too hard to address all harms or eliminate all risk, creating a disproportionate regulatory burden
• Regulatory delay when regulatory bodies fail to make timely decisions or provide necessary approvals or permits within a reasonable time frame
• A cumulative burden of multiple overlapping or conflicting regulations, which is often overlooked when assessing individual rules in isolation.

Sometimes that cumulative burden even occurs within a single statute. Another issue is regulation — as in financial services — that is drafted with so many qualifications and notional amendments that it has become unnavigable.

Counterweights to perverse incentives

The report identifies three core challenges facing policymakers, regulators and ministers. These will resonate with anyone who has worked in policy. The first is their “strong incentives to behave in a risk-averse manner, as any mistakes on their watch tend to be highly salient, while the economic dynamism and growth foregone can go largely unnoticed”.

The second is their “strong incentives to undervalue the burden they place on businesses, because governments (and the fiscal budget bottom line) do not, for the most part, directly bear the burden”.

The third is “a tendency for tunnel vision, as they allow their primary regulatory or policy objective to outweigh all other considerations”.

The tools and procedures that make up Australia’s formal regulatory policy — rules about rule-making — are meant to address these challenges. They include requirements for public consultation, rigorous regulatory impact analysis and parliamentary scrutiny. However, they are better on paper than in practice. Often, the tools and procedures are paid lip service only. The report observes, “the parts of Australia’s regulatory policy landscape most in need of reform are the culture and architecture around decision-making rather than the tools and procedures themselves”.

The PC argues we need counterweights to the government’s perverse incentives and tunnel vision. Its proposals include setting a clear agenda for regulatory reform by requiring government to “tie itself to the mast by adopting… a high-profile declaration that commits the Australian government to regulatory policy reform, anchors policy and regulatory decisions to the principles of good regulation, indicates how success will be objectively and independently measured, and commits to a set of immediate reforms that will at once reduce regulatory burdens”.

It also recommends bolstering high-level scrutiny by strengthening cabinet oversight to the standard required of budget proposals, appointing an independent statutory commissioner to oversee formal impact analyses and expanding the terms of reference of parliamentary scrutiny committees. The commission also recommends hardwiring regulatory stewardship into public service accountabilities and making greater use of external sectoral reviews to address cumulative regulatory burdens.

So, will it work?

It is hard not to be cynical about whether this problem can be fixed. Many commentators point to the tendency of societies and economies to accrete regulation as they become more complex. It can be difficult to persuade the public that not all risks can be avoided by legislation and not every bad outcome requires a regulatory response. And businesses that have built expensive compliance infrastructure — including systems that operate as a barrier to entry for new competitors — can be hard to convince.

But there are too many examples of regulations that have been rushed through without proper impact analysis and with inadequate consultation, or where poor legislative drafting fails to achieve the intended policy outcome. The PC has asked for the government to commit to some immediate reforms to reduce regulatory burdens and is looking for suggestions.

There is no shortage of ideas. The Australian Law Reform Commission concluded in 2023 that Australia’s corporation and financial services law was no longer fit for purpose and needed a complete reorganisation. Its recommendations sank like a stone. Large-scale reform projects — even just repealing redundant regulation — require significant expert engagement and broad community buy-in. Inadequate resourcing for legislative drafting remains a choke point.

The second Albanese government is committed to improving business dynamism. But reversing regulatory creep is challenging in a country that is as wedded to regulatory complexity as Australia. As the commission observes, “For all the support that public service advice, government processes and the efficient implementation of regulations can provide, the buck stops with the elected government: it decides what is regulated, and how”. The temptation of politicians to default to a complex regulatory solution when public opinion demands it is very strong. It will take some courage to turn that around.

This article first appeared under the headline 'Making sausages’ in the September 2025 issue of Company Director magazine.