This sector accounted for 33 per cent of Australian GDP, or a worth of $338 billion, in 2007-08. It also accounted for 43 per cent of overall Australian employment in May 2009.

In its report, the Productivity Commission found that regulations used in an attempt to reduce risk could produce compliance burdens that impedde broader policy intent.

"Excessive minimisation or avoidance of risk through regulation can also lead to overly prescriptive regulations, 'black letter law' interpretation of regulations by regulators and excessive reporting requirements," it said.

"This excessive risk management can impede innovations in service delivery, increase costs, undermine staff morale and commandeer resources for compliance purposes away from the core aspects of service delivery."

The federal political structure was also blamed for creating overlapping and inconsistent regulations across states and territories.

Minister for Finance Lindsay Tanner welcomed the recommendations and said the Government would consider them.

"Reviews such as this have been necessary because in the past there has been no process for regularly scrutinising the cost creep to business from poorly designed or outdated Government regulation," she said.