I recently returned from a holiday in the USA where, as always, I was struck by how cheap everything is. Part of this is down to exchange rates – my pounds go a long way the other side of the Atlantic – but that’s not the whole story.
I found that for most things the dollar price was the same or lower than the GBP price would have been at home – which is to say, something that costs £1 here, would sell for $1 or less is the US. If our incomes worked out as £1=$1, then that might make sense, but they don’t. In fact, the median income ratio is more like $1.5=£1, meaning life is about 50 percent more expensive for us Brits than it is for Americans.
The question is, why? Several reasons for Britain’s high prices spring to mind:
- Property prices are exceptionally high in the UK – partly a result of limited space, but also a product of our restrictive planning system. Government restricts the supply of available land, driving up prices. High land prices mean higher rents and higher wage demands, both of which push up costs for retailers. Then they have to charge more for their goods and services.
- VAT, at 17.5 percent, is much higher than the sales taxes in the US. High fuel duties don’t help either, since most goods have to be transported. Indeed, the very fact that Britain is a relatively high-tax economy pushes up prices – sellers need to charge more to come out with a decent profit.
- Regulation, another burden on business, has the same effect. In particular, employment regulations make labour more costly in the UK in the USA, as does a higher minimum wage (where, again, $1=£1). And that drives retail prices up.
- The EU’s Common Agricultural Policy and the Common External Tariff, makes a range of goods (especially food and clothing) more expensive than they would be if we traded freely.
Pondering these things, it’s pretty clear that smaller government and freer markets could do a great deal to reduce the cost of living in the UK. Is anyone surprised?