Jun 2, 2014

Why is Australia so expensive — and who’s responsible?

If business wants to complain about the high cost of operating in Australia, it should demonstrate some courage and call out the culprits -- other businesses and the politicians that pander to them, Bernard Keane and Glenn Dyer write.

Recent months have brought the emergence of one of the perennials of economic debate in Australia -- the lament that Australia is a high-cost place to do business. Last week Scottish economist James Mirrlees declared that Australian wages needed to be closer to Chinese levels, or the government would have to subsidise them, in order for Australia to compete for international investment with China. That came after one of the annual winter rituals in Canberra, "Minerals Week", in which the men (and woman) who run our mining companies flock together to collectively insist that Australian workers need to be more "flexible" and cheaper -- though no one said aloud what many of them probably think, that Gina Rinehart’s idea of $2 a day was an appropriate benchmark. But that’s just wages. The complaint extends more broadly. In May, the World Bank declared Australia to be one of the most expensive economies in the G20, and in March, KPMG revealed Australia was now the second-most expensive place in the world to do business. Both pointed to the strong dollar and the resources boom, which has lifted our national income. So who's to blame for Australia being so expensive? The dollar The Aussie dollar has defied everyone, from the current and former government to the Reserve Bank, and now the plunge in global iron ore prices, which should have dragged it lower. But its strength is the result of a sound, low-inflation economy, a respected independent central bank, the hunt for yield around the world in these days of quantitative easing, and the AAA stable credit rating, not to mention official interest rates at 2.5%, instead of zero or near zero elsewhere. Who's responsible? We all are: governments, unions, business and regulators. Despite the hysteria from the current government and whingers on both the Left and the Right, Australia is a well-run, efficient economy where the rule of law and transparency work to our good. But if we lost our AAA stable rating, it wouldn't be the national catastrophe many will proclaim it to be. Real estate We all know residential property in Sydney and Melbourne is very expensive -- so much so that foreign commentators routinely predict the bursting of the Australian property bubble. But high prices are because of one basic thing: people in Sydney and Melbourne like it like that. For generations, state governments have pursued policies that have choked off the availability of land and discouraged medium-density housing to pander to NIMBY voters, while the federal government has driven up the price of existing housing stock with negative gearing policies that help push the cost of housing beyond the reach of many Australians. Who's responsible? Local, state and federal politicians and (if you own a house or have an investment property) you. Electricity Electricity prices have rocketed over the last decade as that industry has taken advantage of the flawed rules around pricing regulation to bloat their maintenance budgets. As a result, Australia has household electricity prices higher than in the European Union, the United States, Japan or Canada, even after exchange rates are taken into account. But on the positive side, that’s meant a de facto carbon price has been in operation, creating the circumstances in which electricity demand peaked in 2008-09 and has fallen every year since then. Who's responsible? State and federal governments, electricity transnationals, state-owned power companies. Food and groceries Despite persistently low inflation since 2008 -- except when natural disasters intervene -- Sydney and Melbourne are also in the top 10 cities in the world for expensive food and groceries. While we buy a lot of overseas food that costs more because of transport and foreign exchange costs, we also have farm-gate access to some of the world’s most efficient food producers, who insist they are struggling. So why is it expensive to buy groceries in Australia? Our homegrown supermarket duopoly (which also act as an effective monopsony for producers), which earned over $4.5 billion in profits in 2012-13. Who's responsible? Woolworths, Coles, the Australian Competition and Consumer Commission, and the fact that there's only 23 million of us. Cars Australians still can’t buy cars as cheaply as they should -- a Mazda 6 in the US starts at around US$22,000 while they start at $37,000 here. Even with the closure of the local car industry, we’re still in the process of cutting automotive tariffs via the inefficient mechanism of free trade agreements, and there’s no sign that the absurd 12% tariff on second-hand imports will be removed to put serious downward pressure on Australian car prices. Who's responsible? Successive governments (the Abbott government honourably excepted), rentseeking manufacturing unions and car transnationals. Financial advice According to the Reserve Bank, Australia has higher costs in superannuation than many other Organisation for Economic Co-operation and Development countries, and retail superannuation clients face "considerably higher" fees than elsewhere. That reflects the capacity of the banking cartel/AMP-owned retail funds and financial planners to skim off fees by exploiting disengagement among clients. The previous government’s Future of Financial Advice reforms partly addressed this by requiring planners to get their clients’ approval every two years for fees. The current government is now trying to repeal as part of its plans to gut FOFA. Who's responsible? The big banks and AMP, financial planners and the Coalition, which is determined to make it even worse. IT products Australians pay far higher prices than people in other countries for IT hardware and software, particularly for high-profile brands like Microsoft and Adobe, and music. Worse, the gouge is backed by local business, which are the victims just as much as consumers. Last year, in a submission to a parliamentary inquiry into high IT and content prices, the Australian Industry Group claimed that prices shouldn’t change to reflect currency fluctuations because consumers liked stable prices and it would be "impractical". This is the same AIG that usually complains about how "businesses are struggling to cope with high costs". Who's responsible? IT companies, local business groups who lie to protect them. Taxis Sydney and Melbourne have some of the world’s most expensive taxi fares, ahead of cities like Paris, New York and Rome. That's because in the most blatant example in the Australian economy of industry capture, the taxi oligopoly in effect controls industry regulators and politicians, enabling it to minimise new entrants and block emerging competitors like Uber (like retailers are trying to do with online shopping). Who's responsible? The taxi industry, those who purport to "regulate" it and politicians too gutless to take it on. Management Australia has an ongoing problem of underperforming management and boards that perpetuate some of the worst practices of Australian business, particularly in the resources sector (Rio Tinto in aluminium and coal, BHP in nickel, Newcrest Mining in gold), where tens of billions of shareholder values have been destroyed. Multifactor productivity continues to be weak in Australia despite labour productivity improving in the past couple of years. As Treasury has argued, Australia is far behind its overseas competitors in management practices, and this is flowing through to our poor MFP performance. Who's responsible? Australia's boards, and cheerleaders on the Right who insist the only problem in Australia is the need for lower wages and poorer workplace conditions.


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8 thoughts on “Why is Australia so expensive — and who’s responsible?

  1. danger_monkey

    For shame, Bernard Keane, for shame. You should never, ever print the entire Donald Horne quote, which effectively flips the meaning of ‘Lucky Country’ most Australians understand.

    That’s un-Australian, mate.

  2. C R

    Thank you, thank you, thank you Bernard for putting into black and white what many people have needed to hear for a long time.

    With “deregulation” and selective “user pays”, the cost of doing business here will only get more expensive. It won’t be long before the increasing debt burden of all third level graduates puts pressure on wages. The knock on effects will be felt by everyone.
    We have been telling our kids for years they will have careers in jobs that haven’t even been invented yet, that they will have to retrain several times over their careers. Well, not now. How many will take on even more debt related to retraining? How much debt can individuals or couples cope with?
    Australians have to decide what kind of society they want to live in. Education is not an end user product – we all benefit from an educated society. Nobody minds co-payment, but there has to be a balance, and the idea that some ideological “market” b/s should dictate our social policy is an utter disgrace.

    Australia – the stuck on stupid country.

  3. Scott Grant

    On real estate prices, one should not leave out the rate at which Australia’s population is increasing, largely driven by a massive and excessive immigration rate.

    “Australia has the highest population growth in the developed world” – from The Big Australia Illusion by Callam Pickering, Business Spectator.

    Along with housing, this high rate of population growth makes it very hard for governments to keep up with the required infrastructure. Could this be a direct cause of higher costs, generally?

  4. AR

    Sooo, we the people,who (s)elect the oligarchs, political or commercial, every time we put our hand in our pocket, are not to blame. Whew, that’s relief.
    Nuttin’ to do with me mate, I only live here.

  5. scott redford

    Excellent piece but one thing is forgotten. With the Right wanting to bring down wages and cost of living rising no one seems to have thought about whether the masses will be able to live. How will the young and pensioners be able to live. The 1% live in fear of the masses so everything is aimed at controlling them. That’s why Gina bought part of Fairfax and that’s why terrorism is used as the reason for the gross invasion of privacy by the NSA and also Australian Governments. But the terrorists the Governments are afraid of are the terrorists NOW it’s the terrorists SOON they are afraid of. These are the people now who when faced with degradation of their way of life by those they elected start to turn on their ‘masters’. This is why social media and emails and face recognition and meta data spy’s on us. When or if it will happen remains to be seen but it isn’t paranoia on my behalf. I think we all know what’s happening.

  6. BookishMisfit

    Thanks for putting all this together so clearly. Great piece.

  7. The Pav

    Re the Comment on Cars

    “Who’s responsible? Successive governments (the Abbott government honourably excepted), rentseeking manufacturing unions and car transnationals.”

    Two things Bernard & Glen

    Please do not use the word “honourable” in regards to th current govt unless preceeded with “dis”

    Secondly, Abbotts negotiations could hardly be called successful for FTA’s unless you want to call rape consensual sex

  8. Helen Stevens

    Great article. It’s quite sad actually, Australia has such a beautiful landscape and some innovative intelligent people. Our infrastructure is highly antiquated (look at the train system of Sydney an international city, that has lost it social life), restrictive business rules and for the most part of what I’ve seen in my career – not all but far too many lazy, incompetent and narrow-minded public servants who have carriage to develop policy who should be handed a package. I’m Gen X though, there won’t be a golden handshake for me – the baby boomers have a tight lid on it and Gen Y are coming up behind me saying I’m better educated.

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