Interesting comments from our Productivity Commission chair Danielle Wood are going the rounds about our low economic productivity, with Australians’ risk appetite, or lack of it, as a significant contributing factor, leading to excessive “red tape” said to be tying up, for example, construction of homes.[1]
As she writes, regulations, or laws, reflect our social preferences expressed in legal rules that dictate “what can be done, when, where, how, and by whom”.
These laws are “demanded, designed, and enforced by humans .. [and] it is no surprise they are shaped by the incentives, fears, and biases of those humans”.
But the end result is that “these forces have pushed us towards outcomes that satisfy no one”.
Commissioner Wood calls for a better understanding, and perhaps acknowledgement, of why “efforts to regulate away our problems all too often create new ones”.
In international comparisons of entrepreneurship, Australia rated poorly
The problem is not new, the PC’s 2015 report – Business Set-up, Transfer and Closure –[2] saying that in international comparisons of entrepreneurship, Australia rates poorly compared with countries like the UK, USA and Canada on entrepreneurial framework conditions (finance, government policy, research and development), perceptions and motivations for entrepreneurial activity, and fear of failure.
Such an economic and sociological analysis probably adds more to the debate than the usual blaming of bureaucrats and politicians, and the references to red tape.
It may be that the problem lies, as Wood suggests, more in the national psyche, harder again to identify.
Legal complexity
Commissioner Wood refers to the PC’s current “barriers to business dynamism” inquiry, itself seeking to identify and remove regulatory and perhaps also attitudinal barriers.
While that dynamism inquiry has a broad remit, it may not get to what might be seen as a central body of evidence of our aversion to risk – the law – which may be seen as a constant means of shoring up actual or perceived dangers, in order to protect us as citizens, but also to give us the hand holding some seem to need.
Our laws are under scrutiny for their complexity and over regulatory and impact on business. This is then said to have an impact not only on the law and the difficulties in its application but also in terms of its adverse impact on economic productivity.
Many studies of the increasing volume and complexity of our laws exist. The Australian Law Reform Commission’s review of our Corporations Act showed that since its commencement in 2001, it has almost doubled in length to more than 4,000 pages and over 800,000 words – longer than Tolstoy’s War and Peace, with Chapter 7 alone, on financial services, having similarly almost doubled to 265,000 words, the equivalent of Joyce’s Ulysses.
That the Corporations Act governs business compliance may be one explanation, both in that business conduct seems to need constant regulation, if the findings of the courts are any guide; and another might be, oddly, the desire of business itself to be regulated, to be told what to do in precise terms, but in its terms.
Default to regulation
There is also the usual political and media response to a problem that arises, to “pass a law – that will fix it…”, as we have recently seen.
Wood refers to governments’ increasing “default to regulation” when they are confronted with a tough problem; increasing criminal penalties is an easy one, or proscribing prejudice.
Wood’s bizarre example from a while ago is the demand for a new criminal offence of inserting needles into strawberries.
Even other laws continue to expand. A review of a number of commonly used acts of parliament showed a mean word count of over 194,000, or 2.5 doctoral theses; with the Crimes Act increasing by 1951% and the Migration Act by 1325%. See Legislative complexity: what is it, how do we measure it, and why does it matter? Lisa Burton Crawford, Elma Akand, Steefan Contractor and Scott Sisson, Aust Public Law, 2022.
Insolvency laws
The PC dynamism inquiry refers to our insolvency laws, which might seem odd to some, but their relevance lies in their claim to assist the economy in several different respects.
According to the World Bank, The Economic Impacts of Insolvency Regimes, Menezes and Gropper, insolvency laws can drive
“innovation and economic growth by separating financially distressed but still viable enterprises from non-viable ones. This helps free up capital for lending to new and productive enterprises. Also, irrespective of whether financial distress actually occurs, insolvency regimes can have an impact at a firm’s inception, with entrepreneurs being more willing to enter the market when they are not risking their personal lifesavings. Banks and investors may be more willing to lend when they can better price the risk should their loan or investment fail. When business enterprises do fail, effective insolvency regimes can facilitate asset reallocation to more productive uses”.
Quoting from an OECD report, the PJC report said that
“a well-functioning exit margin, which sorts successful market activities from unsuccessful ones, is vital to aggregate productivity growth’: [3.24].
Whether we have that might be questioned: Have corporate rescue laws gone too far? Sydney Law School seminar review – Murrays Legal.
The law itself can also unduly impede those benefits. The 2023 PJC Report on Corporate Insolvency described our corporate insolvency system as “overly complex, difficult to access, and create[ing] unnecessary cost and confusion for both debtors and creditors”.
And bankruptcy law retains the concept of relation back, described by the 1988 Harmer Report as a “fictitious, artificial and abstract concept, and rarely understood”: [697].
Insolvency laws are shaped by an underlying societal attitude to the obligation to repay a debt, a breach being seen throughout history as censurable and punishable. Punishment for bankruptcy – wearing a yellow and brown bonnet in the public square – Murrays Legal
Moreso than other comparable countries, we are perhaps less forgiving of business failure, a cultural attitude evident in our insolvency laws.
In that respect, research does show or suggest that a more forgiving bankruptcy regime, with a short period of discharge, promotes entrepreneurial conduct and productivity.
The PC’s 2015 report gave focus to insolvency laws for that reason, saying that while government has few “levers” to prompt business dynamism, it recommended reforms to insolvency targeted at reducing the penalties and stigma associated with business failure as a means of improving entrepreneurial culture.
Australia has a problem
If the converse is true, Australia has a problem. Its bankruptcy laws publicly label a person as a “bankrupt” for at least three years after their bankruptcy. A person starting a new innovative enterprise with financial commitment and good planning may then fail as a result of unanticipated external events intervening, and become bankrupt. The impediments of a 3 year period of personal and financial restrictions follow.
The fact that a reduction in the labelling to only one year was announced by the government in 2015, in response to the 2015 PC recommendation, but never enacted, is some comment in itself.
The government instead has ‘bravely’ offered to give debtors an extra 7 days to respond to a bankruptcy notice but even then nothing has transpired.
In insolvency, a resistance to or fear of change may be a factor, with, for example, the recommendations of the 1988 Harmer Report’s to align corporate and personal insolvency never taken seriously. Change is seen to have dangers, like organised crime being assisted by reducing the period of bankruptcy to one year.
Though my own recommendation in 2009 for personal insolvency policy to be moved to sit with corporate insolvency in Treasury was acted upon, in 2025.
This fear is evident in the language of some describing certain budget changes in 2026, some of which Wood addresses.
It’s difficult, and slow
There are no doubt other issues involved but Wood’s analysis is one to contemplate and such deeper discussion of the issue is helpful. Acting on undue regulation and its repeal and setting out some principles to follow in the future might be useful, as she suggests, but the cultural attitudes behind them need to change and that may be harder.
Any such change would be slow and we seem to have been at this low state for some time, and declining. As Wood says, productivity is largely in the hands of the private sector.
Insolvency itself and its development has perhaps suffered too much from its niche of lawyers and accountants. The PC’s reminder to the 2023 PJC inquiry that “sorry to say, but we need businesses to fail”, and the need for efficiency in processes, are economics messages, among others, that some may say that insolvency needs. The more economics focused PC dynamism inquiry is therefore welcome.
World Bank review
Apart from the PC’s worthy endeavours, and what the private sector can do for itself, Australia will be assisted by the World Bank’s B-Ready review of our business laws, this year, including insolvency, allowing a comparison with our neighbours.
NZ has kindly offered to help
Evidence to the PJC from a NZ academic was that Australia’s corporate insolvency laws “are more complex and are likely to be inaccessible for many SME stakeholders without professional assistance”, politely suggesting that the NZ liquidation scheme can “provide Australia with a useful example of what an accessible and easily navigable legislative framework might look like …”.
With a further polite and helpful comment from the NZ parliament, that NZ parliamentary drafters produce statutes that “occupy one page to every 5-6-7 pages in Australia”.
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[1] The Red Tape Impulse | Inflection Points
[2] Business Set-up, Transfer and Closure, September 2015. Inquiry report – Business Set-up, Transfer and Closure
