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Radical Surgery on Regulation Needed

June 2006

Radical Surgery on Regulation Needed

In her statement to parliament at the beginning of this year, the prime minister said that the government would be reviewing regulation.

"Feedback from business suggests that higher quality regulation would lead to more growth and investment - and we want to engage with business on how to achieve that."

Certainly less and better regulation is badly needed. Since the regulatory reforms of the 1980s and early '90s, which helped improve the business environment and lift economic growth, the regulatory juggernaut has gathered pace again.

In its last report to parliament, the Parliamentary Counsel Office advised that in calendar 2004, a record number of statutory regulations were made and a record number of pages of acts and regulations were published.

The prime minister is right to be concerned about the consequences for growth and investment. In last week's Monetary Policy Statement, the Reserve Bank predicted less business investment over the next few years and a falling growth rate. It expects potential output growth to slow from 3.2% currently to 2.6% by 2008.

This is more evidence that government policies are killing the goose that has been laying the golden eggs.

Roderick Deane is one business leader who has been speaking out about regulatory excesses. He has pointed to problems with the Commerce Act, local government legislation, the Resource Management Act, the Employment Relations Act, the Kyoto Protocol, and regulation of banking, telecommunications, electricity and company takeovers.

The fact that World Bank surveys have found that, on a range of criteria, New Zealand is a good place to do business is of little consolation. The work is focused on developing countries and few, if any, of the problem areas identified by Roderick Deane are covered in the World Bank's research.

Businesses often talk about the costs of complying with regulations, but these are not the main source of regulatory cost.

As Gary Banks, chairman of the Productivity Commission in Australia, has said: "More damaging from a broader economic perspective can be the impacts on incentives for entrepreneurship and innovation, the distorting of decision-making away from the most productive avenues, or constraints on firm responsiveness to changing market conditions."

In an independent capacity, Gary Banks recently chaired a taskforce established by the Australian government to rethink regulation in that country in response to business concerns. The taskforce found that many of the concerns were justified and made 178 recommendations for reform, around half of which have so far been accepted.

In response to a presentation by Gary Banks at a Business Roundtable seminar last month, minister of commerce Lianne Dalziel reiterated a comment in a recent speech on the government's regulatory review.

"If I could choose any Australian institution and have it transformed into a truly trans-Tasman institution", she said, "it would be the Productivity Commission."

That much is encouraging. However, the Productivity Commission has often been asked to review existing and contentious regulatory policies in Australia, but policy issues seem to be off-limits in our government's review.

Moreover, while Ms Dalziel has agreed with criticisms of the quality of regulatory impact statements accompanying bills, she has cited as an example of better practice the cabinet paper on telecommunications unbundling. Yet officials acknowledged in that paper that no cost benefit analysis of the issue has been undertaken.

Ms Dalziel has also referred to the growth in New Zealand's capital markets following greater securities market regulation, seemingly unaware that the market capitalisation of listed companies has fallen from 54% of GDP in 1996 to 44% today, according to the New Zealand Herald. Further costly intervention in capital markets is in prospect with the KiwiSaver Bill now before parliament.

Ms Dalziel is aware that the review starts from a low base of credibility with business. Her own Small Business Advisory Group gave her a 5.3 out of 10 score for the government's response to its first report.

The government has rejected its most important recommendation, a 90-day probation period for new employees, at a time when the Australian government has scrapped so-called unfair dismissal laws altogether for small and medium-sized businesses.

And charging the Ministry of Economic Development to lead the review is hardly a good augury. It has been responsible for many of the poor regulatory impact statements, and did not produce one on unbundling.

So, while welcoming the review, the business community will need convincing that the government is serious.

Perhaps a first step to give it reassurance would be to appoint Roderick Deane to head an independent group to oversee the task. Another would be to look at the possibility of using the Productivity Commission to audit regulatory impact statements, as it does in Australia.

And if the government genuinely wants to engage with business, it should consider the top priority for regulatory reform of many business organisations, namely the enactment of a constitutional-type regulatory responsibility act to discipline regulatory policy making.

Roger Kerr is the executive director of the New Zealand Business Roundtable.


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