Why is the UK so expensive, redux

Tyler – the Sunday Times is a national newspaper

I applaud Professor Cowen for his Blog, but suggest both he and the contributors head for my website, Rip-Off Britain: http://www.rip-off.co.uk

Although I don’t claim to have ALL the answers as to why the United Kingdom is so expensive, as compared with many other countries such as the USA, the outrageous tax on fuel (gasoline), other taxes such as high import duties, VAT (sales tax) and property taxes, uncontrolled commercial rents, high property prices and gross profiteering by multi-national businesses (who deem us as ‘Treasure Island’), has much to do with the regime of high prices – which I might add has been this way for the past 50 years!

Has anyone ever wondered why British banks are the most profitable in the World? Recently five of Britain’s biggest banks unveiled combined profits of more than £19 billion!

Of course, the UK is not alone. Many other European countries including The Netherlands, Ireland, Denmark, Italy, Austria, Sweden & Norway also suffer from high prices.

Brits DO complain about high prices, but because we live on a small island we can do little about it. Even if one takes off to other European countries to buy ‘cheaper’ goods, UK Customs restrict certain items one can bring back to the UK without paying high import duties – regardless cross-border shopping is basically unrestricted within the European Union!

The situation can only get worse. With a previous Government estimate of 15,000 migrants from the new EU entrant counties – which NOW is in fact 600,000 – and with the entry of Romania & Bulgaria in 2007, the strain on local services, housing, etc., can only increase prices and unemployment.

Perhaps the only viable solution is to join the 350,000 Brits who are leaving the UK each year!

Keep the debate going.

Regards,

Paul Meyer
Editor, Rip-Off Britain
http://www.rip-off.co.uk

“It’s very expensive compared with Spain. As you spend £1 here you would pay in Spain €1. Everything just costs too much. We’ve been eating hamburgers to save money.†

I wonder if there’s a psychological effect here. For example, maybe it’s just human nature that a sandwich, say, is worth “5 units of currency”, and so that means a $5 sandwich in the US and a 5 Euro sandwich in Paris becomes a 5 Pound sandwich in the UK… and since Pounds are so much bigger than Euros or Dollars, the sandwiches suddenly become expensive.

Tom’s right, price discrimination is an important factor. But price differences of this magnitude indicate some highly monopolistic markets in the UK. And my experience is that prices are just about as outrageous all over the UK, including Scotland, and in Ireland as well. I figure the Isles have a kind of monopoly on healthy economic policies. Liberalizing economic reforms happened faster there, in part because of the parlimentary system. The continent remains a relative backwater with overbearing regulation, and the US is an ocean away. The US doesn’t have such high prices because of the much larger geographical area and diverse market. Yes, NY is expensive, but if you can’t afford it you just move to a cheaper city, like Atlanta. I don’t think the UK can maintain such high prices, but that it has for so many years is largely due to political rigidities on the contintent. Already, as mentioned, Brits are leaving at the rate of 350,000 per year, which will tend to reduce prices.

RIP-OFF BRITAIN? IF YOU ARE BRITISH, YOU ARE LAUGHING!

The true sign of whether Brits are being ripped off is whether growth in their ability to purchase goods and services is slower than in the comparable countries. Prices are certainly part of the story, but only a part. Nevertheless, let’s start with prices as they form the crux of this discussion.

Rents and over-crowding have something to do with high prices in the UK: supply for living space faces tight demand, and these high costs percolate through the economy. (A big mac in central London is expensive because McDonalds needs to pay Westminster rent). But to talk about Britain being a “rip-off†, or “uncompetitive† or “unproductive† is simply economically illiterate. By looking only at nominal prices only, one misses a key part of the living standard (and productivity) equation: income.

Take for example rents. Rents push up prices, but they are a transfer, not a real cost. The owners of property do very well at the expense of those who need to rent services. This may explain why foreigners in particular feel justifiably “ripped-off†. But to say the same of UK owners of property would be disingenuous. The fact is, people seem prepared to pay these rents.

To put this another way, British citizens would be being “ripped off† if the differential between incomes and consumer prices (purchasing power) rose more slowly than in non-“rip-off† countries. But this seems not to be the case. Measured on a purchasing power parity (PPP) basis (which accounts for differing prices of good as services internationally) the Brits have been doing relatively well: according to the OECD they seem to be getting richer faster relative to most their European counterparts. They are able to consume increasingly more of the goods and services they are supposedly being ripped-off over than their trans- Channel/Atlantic cousins.

To recap: British real incomes and real purchasing power has been rising faster than in most rich countries because nominal incomes (the sum of wages and capital rental income) in the UK have been rising faster than UK prices, and the excess of income growth over prices has been faster than in most European counties and possibly (if you believe the latest National Accounts revisions) faster even than the US over recent decades.

So no rip-off for the Brits. What about competitiveness? This applies only to tradeable goods and services. If, under market exchange rates (which is above the PPP estimmate), UK goods are that much more expensive, why does anyone buy them? Good question? The UK has a trade and current account deficit, and many European nations do not, but as a proportion of national income, it is a third the size of that in the US. This suggests that for whatever reason, consumers internationally still want to buy UK tradables. This argues against the “poor quality† flabby markets (bovine consumers) story.

Finally, in so far as the nominal exchange rate is above the PPP rate (which simply means UK that goods really are more expensive when compared in a common currency) this also benefits the Brits at the expense of visitors. UK consumers have greater purchasing power and firms an improved terms of trade. Many Londoners, for example, could rent or sell their flats and live well in Thailand without needing to do another day’s work in their lives. The really interesting question, then, is why don’t they?

The answer to the “rip-off” question, therefore, is Brits are doing very well thanks! Yet prices are high. Not least because foreigners are very keen to buy British products and services, and invest in British assets (including moving to, say, London and pushing up rent and property prices further). They could always vote with their feet, and their wallets, and ditch the UK, as indeed could the Brits. Then prices and incomes would surely fall, but until then, Brits should celebrate their world-beating increase in purchasing power! But I suppose it is in their nature to whinge?

Dimitri Zenghelis

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