By Sebastian Tofts-Len
COVID-19 brought its fair share of challenges to the small business and startup community. Federal and state governments had to move swiftly to prevent widespread transmission of the virus. Western Australians enjoyed freedoms many took for granted. Failed attempts at mitigating the virus’s impact around the world highlighted how missteps by governments could be disastrous.
As the Australian economy recovers, the priority now shifts from how governments can keep small businesses and startups afloat, to: what is the best way governments can help small businesses and startups thrive in a post-pandemic world?
There are various mechanisms. Cutting taxes (at both the state and federal level) and reforming our archaic industrial relations systems are two notable areas. But the most obvious way federal and state governments can start is by cutting red tape.
Fortunately, the pandemic seems to have been a catalyst for governments to reduce red tape and improve efficiency. The Morrison Government recently committed to reducing “unnecessary regulatory burden” in the 2021-2022 Federal Budget. These measures are expected reduce compliance costs by $430 million per year.
This is welcome news for startups and small businesses which deal with unnecessarily complex and costly reporting requirements, particularly in the pharmaceuticals, childcare, and international education sectors.
The McGowan government has also made some progress by slashing red tape in the resources sector. Staying committed to the deregulation agenda in the coming years would help to boost employment and encourage innovation in the startup sector.
Budget falls short in other critical areas
Unfortunately, regulatory reform in other areas relevant to startups leave much to be desired.
There was a reduction in the corporate tax rate for small to medium enterprises from 27.5% to 25%. But such tax cuts are purely illusory. They’re a pre-election sleight of hand from the government. As the great economist Milton Friedman once said, “keep your eye on one thing and one thing only: how much the government is spending, because that’s the real tax.” With the Treasurer abandoning budget repair with a raft of new spending measures, we must realise that massively expanding government debt means committing to higher taxes in the future. Ultimately, permanent tax cuts can only be sustained by permanent cuts in government spending.
Meanwhile, there is still much work to be done in reforming our industrial relations system, which is simply not fit for purpose in the current economic climate. The World Economic Forum ranks Australia as one of the least flexible labour markets, coming in at 99th out of 140 countries. Our current industrial relations are plagued by undesirable complexities, increasing barriers to employment and productivity. In addition to having one of the highest adult minimum wages in the world (recently raised from $19.84 to $20.33 per hour), there is a frustrating system of minimum rates for every job (called awards), including overtime, penalties, allowances, superannuation, and holidays. The regulatory complexity is an absolute nightmare for many employers and needs to be simplified.
The Productivity Commission reviewed Australia’s industrial relations system more than five years ago, identifying the aforementioned factors as “several major deficiencies”. The system has seen little change since.
Why slashing red tape matters
Putting aside these shortfalls, let’s get back to the issue of red tape.
Combined federal, state and local government red tape is costing the Australian economy $176 billion per year. Research from the Institute of Public Affairs (IPA) found that Australia had the biggest decline in entrepreneurship among similar countries; Australia’s small business entry rate declined by 40% between 2003-05 and 2012-14, a substantially larger decline than the United States, United Kingdom, and Canada.
Figures from the Australian Bureau of Statistics (ABS) show that the number of business entries was 281,552 in 2014-15, which is lower than the 284,152 the year prior – despite continued population growth. In 2003-04, the figure was more than 300,000. Imagine all the potential innovative ventures, new jobs, and technologies that were never created due to excessive regulation.
Overseas investor funding for startups is also declining due to onerous regulatory barriers.
A report from Australia as a Financial & Technology Centre Advisory Group recently found that the number of early-stage funding deals in Australia have declined from around $320 million in 2016-17 to $120 million in 2018-19. They emphasised the need to reduce the regulatory burdens on early-stage startups seeking to attract overseas funding. One major recommendation was removing the overly prescriptive requirements regarding the Significant Investor Visa Program.
Furthermore, the report indicated changes to the Complying Investment Framework (CIF) for the Business Innovation Investment Program (BIIP) would have a direct and significant impact on startups in desperate need of seed-stage venture capital investment. By cutting unnecessary regulation to fast-track the approval of BIIP applications, more than $100 million could be unlocked for capital-starved startups.
A 2020 study of 400 Australian technology startup founders compiled by organisers of Pause Fest – an annual Australian event focussing on innovation – echoed similar sentiments. It found that more than half of Australian startups felt the government was not listening to their concerns or perspectives and that 43% said Australia did not have the regulatory advantages of Asia, the United States, or Europe.
“As Australia looks toward economic recovery following COVID-19, the technology sector will play a pivotal role in jobs and wealth creation,” said Pause Fest CEO George Hedon.
“Clearly we need to examine the barriers startups face and listen to their concerns if we want to maximise the benefits the industry has to the nation.”
“There were some significant raises in Australia last year, but we continue to see not much happening in the early-stage investment space, which is impacting the vibrancy of our ecosystem and the formation of new startups.”
“It will, in fact, be even harder to start, build and maintain a small business in the very near future.”
Focussing on local government, Tom Young, founder of uDrew aptly points out a growing problem with local bureaucracy.
“It should be noted that regulations and proper processes are important and necessary within government and industry to ensure safety and quality of work, while taking the broader community needs into account,” he said.
“However, over time, over-regulation naturally builds up as each bureaucrat leaves their legacy based on their personal objectives or experiences, which leads to multiple contractive regulations, processes, and unnecessary complexity. Much of it is a result of shifting accountability, which then equates to jumping through multiple hoops for everyone.”
“I have witnessed too many fantastic innovations disappear purely through getting lost or running out of funding, attempting to navigate the process through no fault of their own.”
Overall, it is good to see both state and federal governments’ recent commitment to reducing red tape.
But with Australia recording the worst performance in its global ranking of competitiveness since 1996, this year presents a post-pandemic opportunity to accelerate the deregulation process even further – to help unleash startup growth and create new jobs, wealth, and technologies that improve our living standards.
Entrepreneurship is the driving force of the economy. If there is to be any real progress in ensuring innovation thrives, relieving the regulatory burden which is holding so many startups back should be one of the government’s top priorities. For a nation that relies so heavily on mining and property, it’s about time regulatory reforms focus on our small to medium enterprises.