The honeymoon is over: Business confidence in Tony Abbott’s government drops

From a three-and-a-half year high last month, business confidence data for October shows the post-election honeymoon is over, with business conditions continuing to underperform in non-mining sectors.

As Treasurer Joe Hockey recognised in his “Australia: Open for Business” speech in New York last month, the initial positive reaction of business to the change of government needs to be matched up with action. After all, slogans only go so far.

Australia’s lack of competitiveness, and its impact on investment and business confidence, is not only a result of the high Australian dollar caused by the mining boom, but is also to some degree self-imposed.

Chiefly among the culprits for the lack of competitiveness are the increased burden of regulation, a cumbersome Industrial Relations system, a tax system in need of reform, and our ambivalent attitude towards foreign investment.

There are some encouraging signs that an “open for business” agenda has begun to take shape. In a recent speech at the Sydney Institute, Parliamentary Secretary to the Prime Minister Josh Frydenberg articulated a well-thought through deregulation agenda. Deregulation may be an important first step toward increasing our competitiveness and encouraging investment.

The need for deregulation

The increased burden of regulation is well documented and mostly pre-dates Kevin Rudd’s 2007 election. The last six years arguably saw a steep increase in the pervasiveness of regulation with a number of high profile legislative changes such as the carbon tax, the mining tax and changes to the Fair Work Act, bypassing the regulatory impact statement process.

In the latest Global Competitiveness Report published by the World Economic Forum, Australia ranked 128 out of 148 countries in terms of the burden of government regulation. I would not take this ranking too seriously – for example China ranks 14 and Vietnam 106 – as it is based on perceptions that are not easily transferable across different cultures. Nonetheless, the increased burden of government regulation is a reality.

One example is that of food manufacturer Simplot and its struggle to gain authorisation from Biosecurity Australia to import pancake “pods”.

Given the need for deregulation to reduce the heavy cost of regulatory compliance, the next question is how to go about it.

What it takes to deregulate

The recipe for a successful deregulation program is neither new or untried. It includes a concerted effort to repeal existing, ineffective regulation.

One of my favourites stories about excessive regulation involves Law no 9502 enacted by the Sao Paulo City Council in 1997. This law mandates that signs be posted next to lifts requiring users to check whether the lift is there before walking into it. Millions of dollars are spent to meet this legislative requirement with no significant impact on behaviour.

As the Simplot example above highlights, there are likely to be many opportunities for the federal government to eliminate ineffective but costly regulations.

There are also opportunities to avoid duplication and better coordinate with states and territories. Some states such as Queensland have already been quietly but steadily working through a similar deregulation agenda.

Another important element of a successful deregulation program includes ensuring that new regulation, no matter how politically important, is subject to a rigorous cost-benefit analysis in the form of a regulatory impact statement. While it is well understood that cost-benefit analysis is very sensitive to assumptions, a key benefit of requiring a regulatory impact statement is that it forces government bureaucrats to identify the range of costs and benefits and, in the process, increases the scrutiny of a policy decision or new regulation.

Finally, the new government deregulation agenda should also include a commitment to an ex-post evaluation of regulation. This is now common practice in other developed countries and is part of the process of ensuring that regulators are held accountable for their decisions.

It could be argued the introduction of an ex-post assessment of a regulatory decision would make the regulator’s job more difficult and costly, as it would be expensive and complex to undo decisions that have been proven to be mistaken. This line of argument, however, misses the key point. The requirement for an ex-post assessment incentivises the regulator to get it right in the first place.

Overall, the deregulation agenda, while an important first step towards developing an open for business strategy, is to some extent the low hanging fruit. The hard yards, which have a much higher impact on investment and business confidence, are changes in the industrial relations system, tax reform and the treatment of foreign investment.

A more ambitious, politically challenging agenda

Despite existing rhetoric, real unit labour costs (non-farm) fell steadily between 1985 and 2010, and have remained broadly stable since then. This means that it may be possible that a more efficient industrial relations system could lead to a better allocation of resources and lower business costs while maintaining real wages at current levels. Framing industrial relations reform along these lines might provide a starting point for a foreshadowed review of the Fair Work Act by the Productivity Commission.

An open for business agenda must necessarily encompass tax reform. The BCA seems to prefer a wider base, lower rate approach. A proposed approach is to finance a reduction in the corporate tax rate via extending the GST to cover food, health and education. For consistency, such an approach should also include eliminating a range of existing tax concessions that have eroded the tax base. The politics of such an approach would, however, be very difficult.

I have argued elsewhere for a more ambitious change in the tax system involving the introduction of an Allowance for Corporate Equity (ACE), which would enable firms to deduct an imputed return on equity. The key conclusion is that tax reform is a long and hard road and will certainly test the government’s commitment to an open for business agenda.

Another thorny issue that will test the government’s commitment is its apparent ambivalent attitude towards foreign investment. This is illustrated by the divisions within the Coalition on whether the Treasurer should allow the acquisition of GrainCorp by Archer Daniels Midland despite its clearance by the ACCC from a competition perspective. A clear statement by the Treasurer when he makes his decision on the 17th of December could go a long way in establishing the government’s credentials as business friendly.

Whilst the change of government has sparked business confidence, the new government must capitalise on this momentum by taking definitive policy action.

There are many opportunities for policy change towards an open for business agenda for Australia, through deregulation and tax reform in particular.

Initial signs show that deregulation is on the agenda and this would be an important start. But broad based changes that encompass reforms to the industrial relations system, foreign investment policy and the tax system, whilst more difficult to achieve, are crucial for promoting a business-friendly environment in Australia.

This article was originally published at The Conversation. Read the original article.