Too much red tape self-applied by business

Just what rules we need though is vexed and is the central theme in the latest in Deloitte’s  Building the Lucky Country series. 

The main problem is Australia’s general approach, particularly in more recent years – and the private sector is more guilty of this than the commonly considered culprit of big government – has been one of where rules don’t exist, we create them, and where they already exist, we make more. 

Rules and regulations overlap, contradict, eat our time, weigh us down. We’ve created a ‘compliance sector’ that employs one in every 11 working Australians. 

Private Sector targets its foot 

Now the line above about the private sector is not a sneaky dig at businesses big and small. The cold, hard reality as shown in our Get out of your own way: Unleashing productivity report is that, of that $250 billion ‘headline’ number,  the annual cost to administer and comply with rules the private sector imposes on itself comes at a not insignificant $155 billion. 

Many businesses have done to themselves what they often complain about governments doing – piling on bureaucratic pounds without counting the cost. 

The burden is greatest on larger businesses that have built rules and compliance around their growth trajectories (and then forgotten to go back to see if those rules were still relevant, necessary or contradictory). 

But smaller privately owned businesses are also being choked by red tape of their own creation.  They regularly voice their concerns regarding government regulation, however, employees in private businesses spend more time on self-imposed rules in areas such as HR, IT, finance, legal and corporate governance than their counterparts in listed companies – an average of six hours a week. That is less than their counterparts in the public sector but more than those working for listed companies.

Time spent per week on self-imposed red tape by type of organisation

Privately owned businesses are increasingly seeking advantage by investing in cloud technologies, data analytics and talent, however they often constrain their agility and productivity by tangling themselves (getting in their own way) in self-imposed rules to the detriment of their investments and their competitiveness. 

Entrepreneurs just as guilty of tying themselves up 

Often motivated to start their own business to free themselves of rules and bureaucracy and embrace the autonomy and agility, entrepreneurs so often watch their business grow and then unwittingly find themselves bound up in their own red tape. 

While the cost of complying with self-imposed rules created by the private sector is double that associated with government regulations, addressing even some of this burden can release productivity, drive innovation and deliver to the bottom line.

The states of red

The compliance burden is also acutely felt at the state and territory level. Not surprisingly, NSW leads the way in terms of the impact, which costs the state around $70 billion each year. Victoria is not far behind (at $55 billion), followed by Queensland ($50 billion), Western Australia ($37 billion), South Australia ($16 billion) and the ACT ($10 billion). Even the impact on the likes of Tasmania ($5 billion) and the Northern Territory ($4 billion) is not to be sneezed at and represents significant upside if they can get the regulation, compliance and productivity equation right. 

Our $250 billion figure is actually an underestimate. While difficult to quantify, economists have long agreed the biggest burden of rules and regulations comes because an excess of rules saps incentive, enterprise and innovation across our economy. But saving just 10 per cent of this $250 billion cost (without a net loss of the matching benefits of rules) would equal 1.6 per cent of national income, ranking its impact with some of the largest reforms Australia has ever seen. 

There is a huge payoff to the profits of Australian businesses and the incomes of our workers if we simply get out of our own way.

Chris Richardson is a partner at Deloitte Access Economics and Kristian Kolding is a Deloitte Access Economics director.