Treasury’s BIM on Regulation – Complacency Rules, Productivity Slows

The Treasury’s 15 page Briefing for the Incoming Government on regulation here that was released yesterday focuses on Treasury’s envisaged regulatory quality and reform work programme for the year ahead.  The new aspect of the reform work is the need to progress a new version of the Regulatory Standards Bill as specified in the National-ACT confidence and supply agreement.

The existing work programme is a worthy one, but is focused on the largely joyless task of encouraging government agencies to produce better quality regulatory analyses when many may lack the expertise or the incentive to do so.

The proposed timetable for work in a version of the Regulatory Standards Bill that is based on Treasury’s option 5, downloadable from here, envisages that the Commerce Committee would be able to invite submissions on the amended Bill in June 2012.  It would report back in October enabling the Bill to be enacted in December, should parliament choose to do so.  This is a mind-focusing timetable.

The narrow work-programme-based focus of the paper and its brevity have resulted in a briefing that provides ministers and the public with virtually no basis for assessing whether the work programme is likely to provide the community with value for money.  Exactly what is the problem that is being addressed, and will the programme effectively solve that problem in a way that maximises the net benefits to the community?

From a business community perspective, the problem definition aspect of the paper seems alarmingly complacent.  Paragraph 4 declares that the regulatory environment in New Zealand is “sound” and that “[o]ur basic regulation standards are high”, albeit while noting some slippage.

Presumably, what it means is that New Zealand ranks well internationally for regulatory quality.  But this is not, unfortunately, evidence that our regulatory environment is sound, let alone of a high standard.  Other counties with similar rankings to New Zealand are struggling to improve regulatory quality, acknowledging that they have a real problem.

Contrast paragraph 4’s level of comfort with this sentence from page 116 of the 2025 Taskforce’s 2009 report, remembering that this Taskforce was serviced by the Treasury:

Good estimates done in other countries, using a variety of methodologies, suggest that as much as a third of the income gap to Australia could be closed if we were able to move New Zealand to world best practice across all major of regulation.

Another concern is that the briefing does not have any recognisable framework for assessing the nature of the regulatory quality problem.  For example, it does not acknowledge that regulation is generally best achieved by open competition backed by private (civil) law sanctions against fraud and coercion.  State regulation may help facilitate a mutually beneficial transaction between two parties that does not occur voluntarily because of some remarkable impediment, but careful examination is required to make sure that it is not instead benefiting one party at the expense of the other party.

The briefing does not identify the key incentive problems with government regulation, both on the demand side and on the supply side.  Narrow-purpose interest groups, firms, and government regulators will always lobby for more government regulation for self-interested reasons and there are equally conventional political economy reasons for politicians to respond to those self-serving demands.  Further, there are incentive reasons why policy agencies might hesitate to lean against these forces by providing good quality analyses that expose the ill-justified nature of the hidden transfers of costs and benefits.

There is a significant difference between a bureaucratic approach to regulatory quality based on good intentions, leaving current incentive structures in place, and the incentive-based approach taken by the Regulatory Responsibility Taskforce (RRT). This can be illustrated by comparing the RRT’s list of regulatory principles here, against which new and existing laws and regulations should be tested, and the Best Practice Regulation Principles and Assessments checklist provided in Annex C of the Treasury briefing.

First, Annex C has no presumption in favour of liberty or security in the possession of private property.  Rather than being an exception to the norm, regulation by government is the only form of regulation that the Annex (and the briefing itself) acknowledges.  Contrast this with principles 7(1)(b), 7(1)(c) and 7(1)(i)(ii) in the RRT’s report.

Second, Annex C pays no attention to the question of who would win and who would lose from a proposed law or regulation.  It thereby pays no attention to the issue of regulatory incentives or whether such wealth or income transfers would be compensable under a system of voluntary exchange and therefore should be compensable under a forced exchange.  Contrast this with principles 7(1)(c) and 7(1)(i) (v) in the RRT’s report.

Third, Annex C does not aim to preserve the supremacy of parliament in respect of delegated taxes and charges or ensure a role for the courts based on merit review being the norm.  Contrast this with principles 7(1)(d) and 7(1)(g) in the RRT’s report.

Fourth, in contrast to the focus on accountability through certification proposed in the RRT’s report, the lack of accountability envisaged in Annex C can be illustrated by its first principle – that economic objectives are given ‘an appropriate weighting’.  Setting aside the puzzle as to why the focus of a cost-benefit assessment should not be on citizens’ overall welfare, ignoring the formally irrelevant distinction between economic and non-economic aspects, who would determine what weighting is appropriate?  Further, if the courts defer to the regulator’s inevitably subjective opinion on the matter, as seems likely under judicial review, what accountability is provided by the later principle in Annex C – that regulators must be able to justify decisions and be subject to public scrutiny?

When a regulator is required to pursue conflicting objectives with no clarity about the trade-offs, any decision concerning those trade-offs is formally as good as any other decision.  Purposeful management is formally impossible. These common situations make the desirable principle in Annex C that ‘the regulatory regime provides predictability over time’, little more than wishful thinking.

In August last year Roger Kerr wrote:

The lead departments on regulation are Treasury and the Ministry of Economic Development (MED). For years they have been telling the world that “New Zealand has a high-quality regulatory environment.  For years the private sector has been arguing that it is staggering under an avalanche of regulation (reflected in sagging productivity growth rates).  I have never known such a gulf between private and public sector perceptions.

Indeed.

Statistics New Zealand is due to release its productivity estimates for the year ended March 2011 on 15 March this year.  The Business Roundtable will review the productivity slowdown situation after these estimates are published.

Disclosure. Bryce Wilkinson, the author of this note and acting executive director of the Business Roundtable, was a member of the Regulatory Responsibility Taskforce

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