The increasing weight, complexity and costs of federal regulation

New research from the AICD and leading economics consultancy Mandala Partners has revealed the cost of ever-growing federal regulation on all Australian organisations. It presents a compelling case that this cost is a drag on investment, innovation and productivity and Australia needs to take active steps to tackle this problem to remain globally competitive.

Key takeaways

1. Australian organisations now spend $160 billion a year (or 5.8 per cent of GDP) to comply with federal regulation, up 40 per cent as a share of GDP in the last decade;
2. The proliferation of regulation and its complexity has had a real-world impact through major growth in compliance related employment, legal spend and board time on compliance; and
3. There are practical, targeted reforms that the Government can implement to address this issue, including changes to corporate reporting requirements.

The growth of the regulatory state

Mandala’s research quantifies for the first time the long-standing concerns of AICD members with the increasing weight of federal regulation. These concerns have been borne out consistently in the AICD’s Director Sentiment Index with board time spent on compliance having more than doubled from 24 per cent to 55 per cent in 10 years.

Mandala found that:

• Federal legislation (Acts and legislative instruments) has increased by 142 per cent;
• The number of pages of legislation has almost tripled (up 190 per cent); and
• An aggregate measure of legislative complexity has climbed by 141 per cent from 2010 to 2022.

The growth in regulation can in part can be attributed to reforms resulting from significant events, such as the global financial crisis and numerous royal commissions. However, this is only part of the story, with rafts of delegated regulation (often issued by regulators) being the main driver of growth.

This growth has been largely unchecked. However, in the period 2012 to 2014 there was a brief period of genuine consolidation and reduction in regulatory volume. This effort was not sustained and following this period the growth in both regulation volume, length and complexity continued its inexorable rise.

It is important to stress that this research is limited to just Commonwealth regulation. State and local government regulation is clearly part of the broader landscape of the heavy weight of compliance in Australia. Directors often provide the AICD feedback that state and local regulation is frequently a barrier to productivity enhancing investments, for example in planning approvals.

Financial impact on all organisations

Mandala finds compelling evidence that the increases in regulation and its complexity have resulted in organisations dedicating increasing internal resources to compliance. This is illustrated through significant changes in employment associated with compliance roles:

• Compliance specific roles have doubled in number since 2010 and salary spend on these roles is up from $1.9 billion in 2010 to $5.7 billion in 2024; and
• Growth in compliance roles from 2010 to 2024 has outpaced the wider labour market across all sectors, but has been especially sharp in mining, construction and services (up 130 per cent – 153 per cent) compared with the whole of economy average (105 per cent).

In sectors where there is a greater proportion of NFPs and charities, such as education and healthcare, growth in compliance employment from 2010 has been particularly strong. In healthcare (including aged care and disability sectors) compliance roles have increased by 355 per cent and with the increase in education of 208 per cent.

Legal spending by organisations also represents a strong proxy for how increasing regulation is prompting organisations and their boards to turn to external assistance. External legal spend has tripled since 2010, equivalent to a 39 per cent increase in spending as a percentage of GDP and this growth is expected to continue in coming years.

Mandala also finds a relationship between greater compliance employment and business investment. Industries allocating a higher share of workers to compliance functions experience significantly lower capital growth when accounting for industry characteristics, conditions over time, and industry workforce size.

AICD reform proposals

New regulation often stems from genuine public concern over social and economic issues, including misconduct by businesses. Well targeted laws and regulatory obligations on organisations can be genuinely welfare enhancing and address market failures.

However, Mandala’s research shows the pendulum in Australia has swung too far – new layers of regulation are being added with limited regard for effectiveness, whether the benefits outweigh the costs or if there are existing laws that can address the problem.

Australia has become too hard a place to do business, and this needs to change for it to maintain global competitiveness.

The research and accompanying AICD Snapshot call for a number of targeted reforms to both existing regulation and future regulation:

Existing regulation

1. Publish an economy-wide regulatory stocktake to establish the true cost of red tape to business, and commit to a 25 per cent reduction in regulatory costs by 2030.

2. Increase the reporting thresholds for large proprietary companies and Group 3 climate reporting entities benefiting at least 1,500 medium-sized businesses, with estimated savings of up to $1.7 billion over four years.

3. Adopt in full the Australian Law Reform Commission’s recommendations to simplify and modernise Australia’s financial services laws.

4. Strengthen Cabinet scrutiny of new regulatory proposals, appoint an independent commissioner to oversee the Office of Impact Analysis, and conduct sector-wide reviews to cut regulatory burden.

5. Introduce systematic post-implementation reviews to assess the effectiveness and costs/benefits of new regulations and expand the use of legislative sunsetting.

6. Reinstate an independent corporate law advisory body – modelled on the former Corporations and Markets Advisory Committee – to deliver long-term, evidence-based reform advice to support Treasury and the Government.

The AICD welcomes feedback on this research at policy@aicd.com.au.