A newspaper reports that small businesses are “going bust in record numbers” pointing the blame on the government’s tax and red tape regime. Those record numbers, a dubious description, might in fact be a good sign of a healthy economy.
The article continues that with 14,000 businesses entering insolvency in the 2025 financial year this is said to be a 33% rise on the previous year and compares with under 5,000 businesses collapsing in 2022.
It goes on to say the insolvency rates were artificially low during COVID and economists attribute the present spike to the removal of support schemes. However the latest numbers were “just the tip of the iceberg” and many more owners had “restructured or walked away without”.
Such newspaper stories are common, but there is a bigger picture.
Some detail
To get some detail out of the way in that story, the newspaper is referring only to corporate insolvencies, and companies comprise only 50% or so, if that, of small businesses.
As to the other 50% operating as sole traders or partnerships, the personal insolvency numbers are low, at around 12,500, well below the 10-year average of 19,000. There were over 35,000 during the GFC.
There are a significant number of “business bankruptcies”, around 45%, but still low on the overall numbers.
These numbers hardly show businesses going bust in record numbers, perhaps in record low numbers?
25,000 or so businesses going bust out of 2.5 million
As to the 25,000 or so businesses going bust, the rest, the other 2.5 million or so may be doing quite well.
The market competition process promotes the fittest businesses – the most efficient, innovative and legally compliant, allowing them to climb to the top of the ladder – and disposes of the less than fit, who fall off.
In that respect market competition is said to be
“by its very nature, deliberate and ruthless. Competing in the marketplace is tough. Competitors try to injure one another by taking away business. This is normal behaviour, expected in a competitive market. New entrants enter the market. Some survive and some do not. Efficient enterprises expand, while others contract.”[1]
The constant task of the ACCC is to protect that competitive process.
While those words are severe, the aim is to achieve the beneficial consequences of competition
“… low prices, higher quality goods, higher levels of service, greater variety of goods and services reflecting consumers’ wants and incentives to innovate”.[2]
The place of insolvencies in the economy
The big picture of the position of insolvencies in the economy is well explained by the Productivity Commission’s submission to the 2022-23 PJC inquiry, that insolvency and business “exits” in fact play an important part in maintaining the dynamism of the economy, ensuring that it is innovative and constantly changing – what once was termed “creative destruction”.
The PC conceded “an element of pain associated with financial distress” – insolvencies – but said that
“sometimes business exit is an important way for us [to] get economic growth through innovation and different business models, and in some industries in particular that is a mechanism by which innovation and productivity growth occur”.[3]
Insolvencies also occur for a good reason – unpaid tax, inefficiency and lack of innovation, stronger competitors, illegality and fraud, poor location, etc. Removal of those allows a fairer market to operate.
An adverse change in economic conditions is one way of separating out the strong from the unviable and weak.
So, the concern evident in the newspaper can be allayed.[4] Insolvency numbers might best be seen as evidence of a dynamic economy.
An economics perspective
A better analysis from an economics perspective appeared in the same newspaper in November 2025[5] with a focus on the merits of creative destruction – that “propping up failing firms is making it much harder for our bold young innovators and risk takers to thrive” – or that expeditious disposal of less than competitive firms is beneficial in making space for better firms to enter the market.
However, as the article explains, Australia’s rates of firm entry and exit have slowed, as has job switching – another creative element.
AI
As to a [part] solution, the article notes that the IMF has encouraged faster adoption of AI which
“could help unleash strong productivity gains … accompanied by increased business dynamism if the right policies are in place to enable high-productivity firms to continue to grow— and allow unproductive ones to exit the market — prompting an efficiency allocation of resources that supports aggregate productivity growth”.[6]
Allowing unproductive firms to exit the market, or pushing them.
Role of insolvency law
While insolvent collapses might be disruptive, it is not for insolvency law to defy the economics, and ‘rescue’ firms to retain jobs if they are a determinative factor. Other reports suggest laid-off employees can do well in the process.
Rather it is necessary for government to have processes to facilitate a ‘transition’ of the workforce to more relevant and productive tasks.
Irrespective of an insolvency, transitioning will likely be unavoidable for many in a changing business and technology environment.
In sum, the article says that “good reform means creative destruction: some old firms die, and some new firms enter” and it points out that “often the biggest beneficiaries are those [firms that] do not yet exist”.[7]
An effective insolvency regime?
Much of this is predicated on having an effective insolvency regime to promptly deal with insolvent businesses, either to try to revive those that are viable or close them down and let others have a go.
As explained in an OECD paper, Inefficient insolvency regimes: a barrier to creative destruction? concerns that exist about weak productivity focus on inefficient firms increasingly lingering as opposed to exiting the market, one example being personal insolvency regimes, serving to
“lower[ing] incentives for experimentation and entrepreneurs’ ability to start new businesses in the future”.
The 2023 PJC Report cites that a
‘well-functioning exit margin, which sorts successful market activities from unsuccessful ones, is vital to aggregate productivity growth’.[8]
The efficiency or otherwise of Australia’s regime is waiting on a comprehensive review under the recommendations of that PJC Report.
World Bank’s review of Australian corporate insolvency law – 2026
Perhaps pre-empting that review, the World Bank’s B-Ready forthcoming review of Australian corporate insolvency law in 2026, and in comparison with our neighbours and trading partners, will show where we stand.
Tax and red tape
As to red tape, imposed by government and business, my own brief comments are that in some respects Australia has been avoiding the costs of compliance with issues like anti-money laundering and modern slavery for years, and only now are we addressing those. In that time, Australia has been gaining unfair financial advantages. At least some of those ‘red tape’ costs in 2026 might be explained as recoupment from the profits unfairly earned by business in past years.
More broadly, red tape, however defined, seems to come from a cultural desire from business and others in Australia for the government to give detailed rules about conduct, evident in so much legislation.
Red tape can also develop in response to the government continually trying to regulate what appears to be a low level of corporate business conduct in Australia, or illegal conduct – from the major corporates down to the tax compliance of small business.
As to tax, proper payment by SMEs and others under the current rules might usefully be a precursor to any tax relief.
And merely from personal experience and observation, the [in]efficiency of many businesses themselves must also be an issue.
It is not only the government that imposes red tape.
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[1] Miller’s Australian Competition Law and Policy, 3rd ed, LBC, [7.260] citing Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd [1989] HCA 6; (1989) 167 CLR 177.
[2] Corones’ Competition Law in Australia, 8th ed, Thomson Reuters, Y Svetiev, at [1.50].
[3] PJC Report, July 2023, at [3.22].
[4] Among others.
[5] Going for broke in the new age of ‘creative destruction’, 15-16 November 2025, Tom Dusevic.
[6] World economic outlook: Global economy in flux, prospects remain dim, IMF, October 025, p 22
[7] Citing Matthew Maltman, 2025, About — One Final Effort
[8] ‘Insolvency Regimes and Productivity Growth: A Framework for Analysis’, McGowan and Andrews, OECD Economics Department Working Papers No. 1309, July 2016, p. 7.
