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With a Hammer, Everything Looks Like A Nail

Regulatory Exemptions as a Potent Tool

· Sam Perkins,Regulation,Regional Policy

Temporary regulatory exemptions have the potential to achieve a better regulatory regime by subjecting proposed rules to trial-by-fire. That is, as long as they do not confuse businesses and negatively impact investment with an uncertain regulatory environment.

 

Almost all of the job growth in Australia over the past year has been in Victoria, and of that the vast majority has been in Melbourne. With regional areas being left behind, policymakers must find ways to allow a catch-up to occur. Without such a process, Australia’s two-speed economy risks generating huge geographical inequalities.

 

One of the challenges of social sciences like economics is the near impossibility of conducting experiments in the clinical sense. In these terms, social science experiments are fraught with such a high number of confounding variables that drawing clear conclusions is exceptionally difficult. The theory goes that all else being equal, a government that changes the tax rate will watch the rate of business investment change, but a thousand other factors happening simultaneously means that all else is never equal. A possible way around this may be to suspend specific regulations within a defined area and for a specified time, to track the change relative to the modelled no-change scenario and then track changes after the regulation returns in order to pinpoint the magnitude of its particular effect. We’re seeing geographically-based regulatory changes in Victoria already; the 2017-18 Budget includes payroll tax cuts for businesses operating in regional areas. This is an encouraging sign that governments are willing to consider treating regional areas differently in order to achieve equity goals, although this looks like a permanent change rather than a regulatory experiment.

 

That is an idea that appears in the Productivity Commission’s newest report Transitioning Regional Economies. While the Commission has touched on it before, the report suggests regulatory exemptions as a mechanism for supporting economic renewal in regional areas hit hardest by the winding down of the mining boom. Noting the possible “scope to trial exemptions of regulations that unnecessarily inhibit people and business owners from responding to changes in economic circumstances in regions”, the Commission specifically mentions planning, zoning and development processes as well as some environmental regulations as possible areas for such exemptions to be trialed.

 

While the Commission is light on suggestions as to particular regulations, it has invited public comment. Policymakers should be seeking to pre-empt criticism, so we have broken down the chief argument against temporary exemptions. That chief objection is that if a regulation can be scrapped temporarily, we can’t justify bringing it back. This line would be that a regulation identified as an unnecessary impost on local business activity should be removed rather than suspended, which is a straightforward and uncontroversial argument. A lighter regulatory burden over a period of time means businesses have to change their practices to take full advantage, before returning to the old regulatory regime after the exemption ends. This creates uncertainty when such a period falls over an election (will the new government end the exemption?) or if a scandal occurs during the exemption (would this incident have happened if the regulation was still in effect?).

 

This argument does not connect with the implementation of such a policy, however, if the policy is confined to regulations affecting business decisions that are not taken repeatedly. These exemptions would apply as long as businesses followed certain guidelines. Examples might be building permits, initial registration of a business or professional, or requirements for impact studies. This way, a two-year exemption on conducting an environmental impact assessment for a construction project that is considered to be low-risk would be able to more quickly go ahead, without creating uncertainty about similar projects in the future (as once the two years is up, the old process comes back into effect and businesses are incentivised to bring forward investment decisions).

 

The potential political risk comes when a minister approves a regulatory exemption without adequate consultation with the community affected. If consultation is properly conducted and the ideas for exemptions come from the people who will be affected, the political headline is one of regulatory relief. If it is done without meaningful consultation and it is bureaucrats who create exemptions, the headline story becomes one of politicians siding with business over people.

Regulators should actively consider requests for exemptions from locally-connected businesses and individuals, and confine their exemptions to regulations that have limited ongoing effects. If the idea is to stimulate business investment and consumer activity, the significant exposure of companies to political risk is to be carefully avoided.

Sam Perkins is a Policy Analyst at FPL Advisory, writing on political risk and change management in regulatory affairs

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