New Business Fund Ignores Biggest Issue: Red Tape

Written by:
24 April 2019
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Originally Appeared In

The Australian Business Growth Fund is a short-sighted proposal which ignores red tape and industrial relations as the major constraints on small business growth in Australia.

The fund, announced by the Prime Minister on Tuesday,  would see the federal government partnering with banks to provide small and medium business owners with equity. The assumption is that access to credit is the key constraint on small business growth. However, this is not supported by the best available evidence.

Forty-eight per cent of respondents to a survey published in 2018 by Westpac said regulation was the highest hurdle to business success in Australia. The next highest response was just 14 per cent. And access to credit was not even measured, although “other” rated 2 per cent.

Similarly, the most recent Global Competitiveness Report published by the World Economic Forum found that Australia ranked 77th out of 140 nations for the burden of government regulation, where a higher ranking represents a worse outcome.

The report also found that over the last decade Australia dropped from 75th to 105th for “flexibility in wage determination” and from 46th to 110th for “hiring and firing practices”. New Zealand, meanwhile, improved from 29th to 19th and 103rd to 20th, respectively.

If credit is a constraint on growth, it’s a result of government regulation. Perhaps if the government wanted more credit growth they shouldn’t have implemented the Banking Executive Accountability Regime. Or imposed a new tax on banks. Or provided the Australian Prudential Regulation Authority with $150 million in extra funding in this year’s budget to impose yet more red tape.

The product of misguided public policy is a crisis in business investment. New private business investment in Australia is just 11.5 per cent of GDP, which is lower than it was during the Whitlam years.

Main causes

Small businesses in particular are struggling. There were 38,000 fewer new businesses created in 2018 compared with a decade earlier, according to the Australian Bureau of Statistics. And recent research by the Institute of Public Affairs estimated there would be 250,000 more businesses in Australia today if business creation continued at pre-Global Financial Crisis levels.

Besides missing the main causes of small business decline, the Australian Business Growth Fund is itself a questionable undertaking. History is replete with examples of taxpayer subsidised, government-backed finance going wrong, from Fannie Mae and Freddie Mac abroad, to Tricontinental and the Victorian Economic Development Corporation at home.

But perhaps the biggest error is that the new fund itself is the institutional opposite to the sector it claims to support. Small businesses are entrepreneurial, risk taking and innovative. Governments are lethargic, risk averse, and subject to cronyism. Only a bureaucracy could think that more bureaucracy could revive a sector which is anathema to bureaucracy.

The only beneficiaries of the new fund will be the major banks who will be “partnering” with government. Small business owners, meanwhile, will have been sold another policy pup as the business investment crisis in Australia worsens.

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