Red tape is holding back startups

Governments should be cutting red tape to help startups thrive in a post-pandemic world. Source: Flickr.

As we all know, COVID-19 brought its fair share of challenges to the small business and startup community.

Federal and State Government officials had to move swiftly and decisively to dampen down and then prevent further spread of the virus. In particular, Western Australians enjoyed the 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 can governments 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 ways this could be achieved.

Cutting taxes (at both the State and Federal level) and reforming our complex and archaic industrial relations system are two notable areas. But the most obvious way Federal and State Governments can immediately make a start is by cutting red tape. 

Fortunately enough, the pandemic seems to have been a catalyst for governments to reduce red tape and improve efficiencies. The Morrison Government recently committed to reducing the ‘unnecessary regulatory burden’ in the 2021-2022 Federal Budget, as they put it. It is expected that measures to reduce red tape will deliver an average reduction of $430 million per year in compliance costs.

This is welcome news for startups and small businesses who have to deal with unnecessarily complex, costly and lengthy reporting requirements in pharmaceuticals, occupational licensing, childcare and international education.

The McGowan State Government has also made some progress by slashing red tape in the resources sector. With Labor’s recent landslide victory in the WA State Election, let’s hope they stay committed to the deregulation agenda in the coming years.

Unfortunately, regulatory reform in other areas relevant to startups leave much to be desired.

Although tax cuts were included in the budget aimed at helping startups and small businesses, it is argued that they are illusory. Startups may not be paying much tax anyway, as they may be in loss-making mode. And massively expanding government debt means committing to higher taxes in the future. 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 – with so many awards and agreements the potential for error is high. The Productivity Commission reviewed Australia’s industrial relations system more than five years ago, identifying “several major deficiencies”. The system has still not seen much change since.

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 has 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 281,553 in 2014-15, which is lower than the 284,153 created the year prior — despite continued population growth. In 2003-04, the figure was 325,935. Imagine all the potential innovative ventures, new jobs and technologies that were never created due to such 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. Part of the reason was the overly complex regulatory burden which made it so difficult to attract early-stage startup funding from overseas. One major recommendation was removing the overly prescriptive requirements regarding the Significant Investor Visa Program. 

Furthermore, the report said that changes to the Complying Investment Framework (CIF) for the Business Innovation Investment Program (BIIP) will directly have a significant impact on many startups’ desperate for seed-stage venture capital investment.

According to 2020 data from Pause Fest, more than half of Australian startups feel the government is not listening to their concerns or perspectives, while 43% said Australia does 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 CEO of Pause Fest, George Hedon. “Clearly we need to examine the barriers start-ups 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,” Mr Hedon continued. “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.

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.

Tom Young

Overall, it is good to see both State and Federal governments committed to reducing red tape. But this year presents a post-pandemic opportunity to accelerate this 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 any 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.