Regulatory Responsibility Bill - Hon Rodney Hide

Speech by Hon Rodney Hide to Russell McVeagh Senior Commercial Clients, at Russell McVeagh Offices, Vero Centre, Shortland Street, Auckland

Thank you for the opportunity to talk to you today about the Regulatory Responsibility Bill - a subject close to my heart.
This Bill is an attempt to improve the quality of legislation and regulation.

That we have a problem has long been recognised. There have been numerous attempts since the 1980s to make improvements to regulatory processes.

Other countries struggle with the same problems, and for the same reasons.

The problem is that politicians have poor incentives; they must get re-elected, and the political cycle is short.

Politicians are vulnerable to interest group pressure, and at times invite that pressure by pandering to various interest groups in search of votes. It's unfortunate, but it's a fact of life in a democracy.

It is in the nature of regulation that all too often the consequences are not easily discerned, the winners and losers not easy to identify.

Sometimes, however, the losers from a regulation are few, while the winners are many, and all armed with a vote.

These considerations are well understood in what is known academically as public choice theory.

The problem is a fundamental one and it is embedded in the nature of government. Now lets consider the problem we are dealing with in New Zealand.

Consider this astonishing statistic. Between 2000 and 2009 over 68,000 pages of regulation was passed. That's significantly up on the previous decade and the decade before that. And that's on top of all the existing regulations.

In light of this tidal wave of regulation, it is hardly a surprise that the quality of New Zealand's regulation has deteriorated significantly relative to the rest of the world. Our ranking in the OECD Product Market Regulation has dropped from 4th in 1998 to 12th in 2007.

And I don't think it is coincidental that our multi-factor productivity growth rate has slipped from the 2.1 per cent per annum rate of the two decades before 2000, to only 0.7 per cent from 2000 to 2006.

Mediocre policies will not be enough to overcome whatever disadvantages we face from New Zealand's small size and geographical isolation. If we are to attract and retain increasingly mobile skills, capital, technology and entrepreneurship, and close the prosperity gap with other countries, New Zealand needs to offer a regulatory environment that is significantly better than our competitors.

The Regulatory Responsibility Bill is designed to address these issues. It is a new institutional process, one that demands proper and deliberate reflection on new and existing regulation, and requires this to be done transparently, not behind closed doors.

I see this Bill as akin to, and as important as, the Public Finance Act and the Reserve Bank Act.

These two Acts have changed the institutional structure around decision-making in the crucial areas of fiscal and monetary policy. Both have fundamentally improved the transparency of decision-making.

With monetary policy there can no longer be a nudge and a wink from the Finance Minister to keep interest rates artificially low, and thereby allow inflation to rise. Now the inflation target is public, and the decisions made to achieve it are kept away from political hands. The government can change the target of course, but they have to do that publicly.

Transparency is absolutely fundamental, and it has fundamentally changed the outcome of monetary policy in New Zealand, as evidenced by our low and stable inflation rate.

Our Reserve Bank Act was a world leader, and has been imitated widely. I believe the Regulatory Responsibility Bill could be as well.

So, how do our regulatory institutions look currently?

What we have are Regulatory Impact Statement requirements and the Legislation Advisory Committee guidelines.

There is much in them that is good. But in the last decade and more, they have largely been ignored. This is despite them being Cabinet Manual requirements.

Clearly this process is inadequate.

We need to change the 'regulate first, ask questions later' culture that has developed, into one that only progresses regulation that conforms with sound principles.

Departures from these principles should be acknowledged. Reasons for those departures should be clearly stated. Responsibility for the opinion that departures are justifiable and in the public interest should be assigned.

And some disciplines need to be put around all this. Otherwise, the empty and contemptuous assertions of compliance that we have seen in the past will re-emerge and make a farce of what we are attempting to achieve.

The Regulatory Responsibility Bill that I introduced to the House in the last term of Parliament imposed such commonsense requirements.

The Bill itself was referred to Parliament's Commerce Committee. The Committee saw the potential value of it, but had some questions about the statement of regulatory principles and the proposed role of courts.

The Committee recommended that a taskforce review the proposal.

So, in line with the National-ACT confidence agreement, the Regulatory Responsibility Taskforce was asked to examine the Regulatory Responsibility Bill and make recommendations.

The Taskforce's recommended Bill is in many ways similar to the model I introduced, but it provides more specifics about how Ministers and regulators can depart from principles and about the role of courts.

It blends the two existing approaches into a simple and elegant solution to the problem of the deteriorating quality of regulation in New Zealand.

The Bill recommended by the Regulatory Responsibility Taskforce has three key elements:

The first is a benchmarking mechanism. This involves a clear statement of the principles that all good regulation should comply with. These principles are distilled from sources such as the LAC guidelines and Parliament’s Regulations Review Committee.

They cover six key areas including the rule of law, protection of individual liberties, protection of property rights, taxes and charges, the role of courts, merits review, and good law making. Together, these rules comprise the benchmarking mechanism.

Second, we need a mechanism to provide transparency in regulation. We need to constrain the ability of Ministers to bully their officials into giving them the answers the Minister wants, or getting what they want with a nod and a wink.

To achieve transparency we need a requirement that Ministers and Chief executives certify as to whether the regulation they are responsible for complies with the principles, and if not, the justification for incompatibility - this is the transparency mechanism.

Third, we need an incentive mechanism that ensures that Ministers and officials comply with these processes. Thus the Bill allows for a process by which individuals may apply to the courts for a declaration that a particular piece of regulation is incompatible with the principles - this is the incentive mechanism.

So that's it. Benchmarks for quality; transparency in decision-making; and an incentive to comply.

One of the most exciting parts of the Taskforce's proposal is the idea that people can hold a government to account should the government mislead the public over whether proposed legislation complies with the principles of good law making.

A Minister can still advocate for, and a government can pass, legislation which departs from the principles, but they have to acknowledge that upfront and give the reason why - they need to justify that decision.

If they don't acknowledge that upfront, and do pass legislation which departs from the principles, a member of the public may apply to the Courts for a Declaration of Incompatibility. This declaration would state that a particular piece of legislation does not comply with the principles.

In short, if they don't comply with the legislative principles, they will be found out. That’s what transparency and accountability in law making is all about.

Ultimately it is this transparency that will change the approach and improve the quality of regulation.

The Taskforce also proposed various supporting measures to give the Bill more bite. For example, they suggested that a Special Select Committee be assigned the task of reviewing bills for consistency with the principles of responsible regulation.

The Taskforce's Bill is a challenge to Parliament, but it is a challenge that Parliament asked for.

The taskforce is saying: "Here is a set of tools and disciplinary measures that we expect to improve the way you regulate."

The rest is up to us as politicians.

There is no close international precedent to the Regulatory Responsibility Act I am proposing, although there have been numerous attempts around the world to find ways to improve the quality of regulation.

But we led the world with our Reserve Bank Act, and we can do the same with regulation.

But of course its novelty means some people will be nervous about its impact, and so will wish to scrutinise this Bill carefully.

And so we should.

Let me deal with two common criticisms which have been advanced.

Firstly, some argue the Bill will slow down regulatory processes and interfere with Minister's ability to get things done. But in fact nothing in the bill stops a government from doing anything it wants to, in haste or at its leisure. It is free to rush through non-compliant legislation.

The only difference is that this would have to be acknowledged up front. And surely that is a good thing.

This transparency would allow voters to assess whether the legislation or regulation was justified or not.
More generally, I would expect the transparency requirement to encourage a bit more deliberation in the legislative process. That may slow the process of legislation a bit, but given how often we pass legislation and then spend years trying to fix the unanticipated problems that arise, I see no harm at all, and much benefit, from trying to get it right the first time.

Secondly, it is claimed that the Bill challenges the traditional constitutional supremacy of Parliament by inviting the courts to review the decisions taken by parliament through the proposed declarations of incompatibility.

But these declarations have no effect on the validity of the legislation. All these declarations do is to provide some belated transparency. What was claimed to be consistent with the Act's principles will be revealed as non-compliant. The legislation will still stand, and what happens as a consequence will depend on the usual political processes.

It follows that the supremacy of parliament cannot possibly be challenged by the Bill. Declarations will, however, send a powerful message to the government that sloppy policy and legislative practices will be exposed.

Not all of this territory is new or untried. Declarations of incompatibility have been utilised effectively in the United Kingdom's Bill of Rights Act. In addition, the Regulatory Responsibility Bill's transparency provisions will run parallel to the transparency provisions of the Public Finance Act.

The Public Finance Act imposes on government spenders certain responsibilities. It says if you are spending public money, justify it, and be accountable for it. The Public Finance Act has created a cultural shift in the way that money is spent in New Zealand and the whole mindset around public expenditure.

The Regulatory Responsibility Bill will do the same for the way we make law and regulate.

Of course, we are not relying on the Bill alone to guard against government failure. We have already introduced the 'Better Regulation, Less Regulation' policy statement, which sets the agenda for improvements to regulation under this Government.

We have strengthened the Regulatory Impact Analysis regime, demanding better, more independent analysis from officials, and more responsibility for that analysis.

We have asked for regulatory scans and plans so that we can get a picture of how much regulation we will impose on people, and how much we are imposing already. And we have targeted some of the most important regulations for review, to see what we need to keep and what we need to fix.

The point of all these measures is to get people thinking about the costs of regulating. I don’t mean the financial costs to government (which are easy to think about), or even the compliance costs to business, but also the dynamic, opportunity costs.

Those costs are the least easy to observe, but often the most important.

Regulations that cost little to enforce and impose no direct costs on business can still be burdensome if they prevent firms and individuals from taking advantage of opportunities or from taking on our competitors.

Regulations that stop businesses and others from doing valuable things need particular, systematic scrutiny.

As I've mentioned, Ministers have all sorts of incentives, some immediate, some medium-term and some long-term, but these are not necessarily aligned at any time with the long-term interests of the public.

Systematic disciplines, such as the Regulatory Impact Analysis regime and the Regulatory Responsibility Bill, offer a way of constraining the short-term dynamics of policy formation so that it better aligns with the long-term interests of the public.

I am working on convincing my ministerial colleagues that passing the Regulatory Responsibility Bill would be a major step on the way to improving the performance of our economy, reducing unnecessary business costs, lifting productivity growth, and thus ultimately boosting incomes in our country.

There is no doubt in my mind that this Bill can contribute profoundly to improving productivity and making the economy more competitive.

If we can build better regulatory processes into the structure of government decision-making, we will have taken a huge step forward.

It appals me to think of the unnecessary and wasteful compliance that we impose on our community, and the way it drains the life out of the energy, ideas and endeavour of ordinary kiwis.

It pains me to see great New Zealanders giving up on great ideas, or worse moving offshore, because they are tired and worn down by the plethora of silly regulations.

In closing I would just like to say where I see this proposed legislation in the New Zealand of the future.

I see it as the important missing link in the institutional structures that contribute to better governance in our country. We have the fiscal and monetary policy Acts. We need a Regulatory Responsibility Act as well.

The benefits that could flow to New Zealand from this Bill are enormous. All that requires is that it should contribute a small improvement in productivity, employment and growth.

We have flowing through Parliament a torrent of regulation, and much of it stinks.

You could say it's an environmental problem.

It is not stretching the analogy too far to say that this Bill would allow us not just to slow down the flow, but to improve the quality of it; and in time, it would allow us to address the quality of that substantial body of past regulation that so badly needs treatment.

I will always argue that we need to be bold in dealing to red tape, sloppy law and outdated and wealth sapping legislation.

And we need to be bold in making New Zealand a better place to live and work.

Thank you again for the opportunity to talk to you today. I am now looking forward to your questions.

ENDS

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