Best Practice Regulation Handbook
1. Productivity and regulation
The potential for productivity growth to generate higher incomes for Australians makes it a natural and important consideration for decision makers. Productivity is the only driver of income growth that is unlimited, as opposed to resource exploitation or increases in population and labour force participation, each of which face natural limits. The continuing need to stimulate productivity rightly remains at the forefront of government policy.
Almost all regulations have the potential to impact on productivity, either through the incentives which they provide to businesses to change operating and investment decisions, or more directly through their impacts on compliance costs. It is inconceivable to think of a modern economy functioning without regulation. Regulation is the lifeblood of a modern, well-functioning economy. However, poor regulation can cause frustration and unintended consequences, or simply add red tape that adds nothing useful to the economy.
Australia’s productivity story
Productivity improvement has been one of the key drivers of enhanced Australian material living standards over the last forty years. The productivity growth surge in the 1990s was driven by microeconomic reforms in the 1980s and 1990s that increased the influence of market forces. Markets assist in enhancing the efficiency of Australian industries by lowering input costs and maximising competitive pressures which, in turn, increase the incentives for firms and industries to be innovative and entrepreneurial.
The Productivity Commission found that observed productivity and price changes in the key infrastructure sectors in the 1990s – to which microeconomic reforms have directly contributed – have increased Australia’s annual GDP by 2.5 per cent.
Productivity growth rates have fallen during the first decade of the 21st Century from the previous high levels of the 1990s. Although still subject to debate, this may reflect the short term economic shocks from a severe drought on agriculture, water and the electricity sector, increased investment in mining resulting in a higher use of mining resources with lower yields as well as more systemic factors.
The opportunities and challenges of ongoing globalisation are diverse. There is increasing demand for Australian exports from rapidly developing economies such as China and India, driven by rising incomes and consumer expectations for higher quality goods and services in these countries. This provides opportunities not only for the Australian primary and resources sectors, but also for the services sector (such as education, tourism and financial services).
Competitive pressure from lower labour cost countries has been a feature of the past which has led to the transformation of Australian firms and the economy – and rising incomes and living standards for Australians. This competitive pressure can be expected to continue.
Factors that can improve productivity include technological change (adopting new knowledge), investment in human capital (such as education and training), investment in physical capital (such as transport and communication networks), and high quality regulation that is efficient and effective.
In order to reap the benefits and respond to the challenges of ongoing globalisation, the Australian economy needs to remain as efficient, flexible and responsive as possible. Rather than providing specific industry support, it is more effective to ensure that general microeconomic settings are in place to allow industries with the best prospects to compete so that the most productive industries will be winners.
The best practice regulation process seeks to assist the government in meeting these objectives. It is for this purpose that the best practice regulation-making requirements exist – they are a means to an important end.
Best practice regulation making
While regulations are essential for the proper functioning of society and the economy, the challenge for government is to deliver effective and efficient regulation ‑ regulation that is effective in addressing an identified problem and efficient in terms of maximising the benefits to the community, taking account of the costs.
Determining whether regulation meets the dual goals of effectiveness and efficiency requires a structured approach to policy development that systematically evaluates costs and benefits.
The problem to be addressed and the related policy objective should be identified as first steps in the policy development process. A range of options for achieving the objective should be considered (as well as no action or the status quo option);and an analysis of the likely economic, social and environmental consequences.
Effective consultation ensures that both the regulator and the regulated have a good understanding of the problem, alternative options to address it, potential administrative and compliance mechanisms, and associated benefits, costs and risks.
The broader concept of transparency in government has become increasingly important for regulatory governance. Transparency can improve accountability as well as address issues concerning regulatory failure, such as regulatory capture, rigidity, market uncertainty and inability to understand policy risk.
The Australian Government’s best practice regulation requirements provide a systematic approach to ensure high quality regulation and are consistent with the OECD Guiding Principles for Regulatory Quality and Performance.
OECD Guiding Principles
The Organisation for Economic Co-operation and Development (OECD) contends that a coherent, whole-of-government approach is needed to create a regulatory environment favourable to the creation and growth of businesses, productivity gains, competition, investment and international trade (OECD 2005). The OECD Guiding Principles for Regulatory Quality and Performance captures the dynamic, whole-of-government approach to implement regulatory policy.
- Adopt at the political level broad programmes of regulatory reform that establish clear objectives and frameworks for implementation.
- Assess impacts and review regulations systematically to ensure that they meet their intended objectives efficiently and effectively in a changing and complex economic and social environment.
- Ensure that regulations, regulatory institutions charged with implementation, and regulatory processes are transparent and non-discriminatory.
- Review and strengthen where necessary the scope, effectiveness and enforcement of competition policy.
- Design economic regulations in all sectors to stimulate competition and efficiency, and eliminate them except where clear evidence demonstrates that they are the best way to serve broad public interests.
- Eliminate unnecessary regulatory barriers to trade and investment through continued liberalisation and enhance the consideration and better integration of market openness throughout the regulatory process, thus strengthening economic efficiency and competitiveness.
- Identify important linkages with other policy objectives and development policies to achieve those objectives in ways that support reform.
These principles have been endorsed by the Australian Government and serve to provide broad guidance on its regulatory governance arrangements. The aim in this Handbook is to implement the principles in a clear, concise and practical way.
| Previous Foreword |
Next 2 The government's regulatory impact analysis requirements |
Contact for information on this page: OBPR contacts page