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World class economy, first class prices

Ideas@TheCentre – The CIS newsletter (Sydney), 16 December 2011

Australia’s economy is the envy of the world. No country has weathered the financial storms of the past few years as well as Australia. In global economic terms, down under is very much on top.

Such statements have become standard ingredients in ministerial speeches about Australia’s recent economic performance. To a degree, they are true. And yet ordinary Australians may well ask themselves why they cannot see the benefits of this apparent ‘miracle economy.’

One reason may be that Australia has become quite an unaffordable place if you make an average income, which is what most people do. Australia may well have a world class economy but we also have first class prices. Buying a house, doing the weekly shopping, or owning a car is far more expensive here than in other developed nations. At least for part of these price differences, government has to take the blame.

It may not always be apparent, but government plays a big role in determining the prices of products and services. Taxes are the most obvious price drivers: think stamp duty or the Luxury Car Tax.

But often, government’s influence on the price level may be more subtle. Restrictions on imports, bureaucratic requirements, and restricted land supply do not yield government revenue. From the consumer’s perspective, however, they are like an invisible tax.

The supply of shopping space is a good example. For retail newcomers, especially big chain stores like ALDI and Costco, it is difficult to enter the Australian market. Few large operators dominate the sector, and entry is difficult thanks to planning regulations.

The result is a market structure that favours landowners and incumbent retailers. It may sound incredible but retail space is more costly on Sydney’s Pitt Street Mall than on the arguably more prestigious Champs-Élysées in Paris. These costs are immediately passed on to Australian consumers.

There are many hidden price drivers with which government has made life unaffordable for ordinary Australians. Like the ridiculous prices charged for Australian editions of international literature or the price spikes in the banana market after Cyclone Yasi.

No doubt the Australian economy has performed well in the past decades. But for Australian consumers to benefit from this development, government needs to step out of the way and stop needlessly inflating prices.

Dr Oliver Marc Hartwich is a Research Fellow at the Centre for Independent Studies. His report Price Drivers—Five Case Studies in How Government is Making Australia Unaffordable (with Rebecca Gill) was published this week.

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