Arthur Sinodinos (NSW, Liberal Party, Shadow Parliamentary Secretary Assisting the Leader of the Opposition) Share this | Link to this | Hansard source

I want to talk about nudge economics, which actually follows quite logically from Senator McKenzie's contribution.

Mark Bishop (WA, Australian Labor Party) Share this | Link to this | Hansard source

Why don't you talk about the MRRT?

Arthur Sinodinos (NSW, Liberal Party, Shadow Parliamentary Secretary Assisting the Leader of the Opposition) Share this | Link to this | Hansard source

Senator Bishop, this is a very interesting and emerging topic of public policy. It was brought to my attention at the recent round of Senate estimates. During questioning at the hearing of the Senate Finance and Public Administration Legislation Committee, the Office of Best Practice Regulation, which sits within the Department of Finance and Deregulation, testified that nudge economics is an area of public policy which the OBPR has been focusing on as part of its work program.

During their testimony it was discovered that not only had the office released a public discussion paper on the topic and held a range of seminars across the Public Service but they are in fact holding a series of 'nudge' trials within the department—

Mark Bishop (WA, Australian Labor Party) Share this | Link to this | Hansard source

What sort of trials?

Arthur Sinodinos (NSW, Liberal Party, Shadow Parliamentary Secretary Assisting the Leader of the Opposition) Share this | Link to this | Hansard source

Nudge economics; I will explain in a moment, Senator Bishop—testing various aspects of its theoretical underpinnings.

Given my recent work as Chair of the Coalition Deregulation Taskforce I thought it appropriate to make some comments about nudge economics as a public policy tool and the use of it by the federal government. Nudge economics can be broadly defined as the use of psychology and behavioural economics to change the choice architecture with a view to influencing people's behaviour.

In the regulatory context, the use of nudge economics is about how governments can use regulatory design and implementation to alter how citizens make economic decisions, particularly consumer choices. The discipline gained international attention within public policy circles via the publication, in 2008, of Nudge: Improving Decisions about Health, Wealth and Happiness, by Cass Sunstein and Richard Thaler.

Mark Bishop (WA, Australian Labor Party) Share this | Link to this | Hansard source

Is this code for putting up prices?

Arthur Sinodinos (NSW, Liberal Party, Shadow Parliamentary Secretary Assisting the Leader of the Opposition) Share this | Link to this | Hansard source

We will come to prices in a moment.

Sue Boyce (Queensland, Liberal Party) Share this | Link to this | Hansard source

Senator Sinodinos, please ignore the interjections.

Arthur Sinodinos (NSW, Liberal Party, Shadow Parliamentary Secretary Assisting the Leader of the Opposition) Share this | Link to this | Hansard source

Madam Acting Deputy President, I take them because they are normally quite intelligent. They are showing great interest in the subject.

The underlying theory of nudge and behavioural economics is that individual actors do not follow what is known in the economics literature as rational choice theory—that is, they do not necessarily make consumption decisions in a rational or logical order via ranking preferences of goods according to what will maximise one's own utility. There may be some lessons in all this when selecting the next leader of the Labor Party. Rather, nudge and behavioural economics assumes that individuals make economic decisions based on different factors such as their risk appetite; social norms; self-perception and ego; the source and format of information received; as well as whether they are open to change or whether they prefer the status quo.

Nudge economics considers how consumption decisions are made and whether various regulatory mechanisms can influence how an individual makes their decisions. We have seen various examples of these regulatory mechanisms in modern approaches to public policy at the Commonwealth level, particularly in policy areas such as tackling the health effects of excessive consumption of tobacco and alcohol products.

The Office of Best Practice Regulation outlined three forms of nudges. Firstly, there is a pure nudge—that is, mechanisms which change a consumer's choice architecture without placing additional regulation on business. An example is pre-filling government forms. Secondly, there is an assisted nudge—that is, regulatory mechanisms which place requirements on business which change a consumer's choice architecture without directly limiting the choices available to consumers. An example is businesses being required to provide consumers with greater product information. Thirdly, there is a shove—that is, regulations which directly affect consumers and businesses by limiting their choices.

These forms of nudge can be found across federal government policy in one form or another. While the literature on behavioural and nudge economics is gaining in popularity within public policy circles, it is important to not only outline the significant shortcomings of these techniques but also refocus the debate on regulation back to the core question—that is, why do we need regulation?

Contrary to those opposite, who like to portray the coalition as extreme neo-liberal ideologues, the coalition does believe in the need for sensible regulation. It can play an important role in a modern economy, whether through providing public safety through law and order, protection of property rights, enforcement of contracts, enhancing the operations of markets via improving product information or promoting competition. Regulation also plays an important role in dealing with externalities such as air and water pollution. Regulation comes in various forms, but the empirical evidence suggests that those regulations which affect the operation of the market—whether through limiting entry, market exit, price or competition—can have a disproportionate negative impact on the specific market and on the broader economy.

The coalition takes a conservative approach to the use of regulation. In our view, the mechanism which is fundamental to the operation of the economy is the market, and regulation should be targeted to enhancing the operation of the market and dealing with any externalities that may arise. We take a dim view of public policy choices and regulatory approaches that detract from the effectiveness of the operation of markets, but enhancing the effectiveness of regulation, where regulation is actually required, is a goal that all public policy practitioners should seek to achieve. This is not to argue against considering behavioural responses in forming regulatory responses, but the coalition is sceptical of technocratic planning and coordination and the nanny state. We do not believe in putting government at the centre of the economy, and we consider that the effectiveness of using regulatory responses to change an individual's choice architecture can be questionable. Individual Australians are not homogenous beings and people's reactions to such regulatory mechanisms may lead to unexpected outcomes. The use of such mechanisms requires large quantities of information to be effective and could potentially be a costly exercise.

Even with good information, policymakers can still get it wrong. An example of this is the alcopops tax increase debate in 2008, which the government said was designed to deal with alcopops being the drink of choice for those young adults engaging in binge drinking. The intent of the policy was to nudge consumers away from these alcoholic products. Our view was that the tax increase was misguided, given that it could lead to potential substitution effects, resulting in young Australians turning to other, potentially harder, forms of alcohol and other substances.

The use of nudge economics coupled with modern technology such as social media should not tempt government into manipulating public policy outcomes. Labor's experimentation with nudge-type initiatives also includes the failed Fuelwatch and GroceryWatch schemes. The policy basis for these schemes was that better information would lead to consumers acquiring products with lower prices. In the case of Fuelwatch, three government departments opposed the scheme on the basis that it could reduce competition and flexibility in the market, place an unfair regulatory burden on independent retailers and ultimately push prices higher rather than lower. These are just some examples of how badly-designed regulatory initiatives can result in ineffective and costly policy outcomes. I quote Kevin Rudd from 2007:

The truth is business regulation is now right out of control. The quantity and complexity of business regulation today is eating away at the entrepreneurial spirit of Australian business.

The reality of the Rudd-Gillard experiment is that Labor's regulatory agenda has in fact further exacerbated our productivity and red-tape challenges. The consultations across Australia conducted by the Coalition Deregulation Taskforce, which included Senator Bushby, Kelly O'Dwyer—the member for Higgins—and me, confirmed our suspicion that Labor's regulatory program is in fact imposing additional and costly new regulation such as the carbon tax, the mining tax, the Fair Work Act, national occupational health and safety laws, the Future of Financial Advice laws and others. This was confirmed by a national red-tape survey conducted by the Australian Chamber of Commerce and Industry in October 2012, which indicated that more than 73 per cent of survey respondents believed that the overall regulatory burden had increased in the past two years.

The reality is that in the regulatory space, as in other policy areas, the government has failed to deliver on its policy commitments. It should desist from further experimentation in nudge economics and the like and refocus on the bread-and-butter issues of how we reduce and improve regulation. Our case to the Australian people on 14 September—if that does prove to be the final election date—will be that only the coalition is serious and ready to deal with Australia's economic, productivity and regulatory challenges.