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RBA's snapshot of key Australian economic data

What is causing Australia's high cost of living and how can the impact of this be lessened to improve Australia's competitiveness? Murray Hunter looks at the problem and proposes a number of solutions.

ON MANY scales, Australia is one of the most expensive places in the world to live. With over 750,000 people unemployed in Australia, and rising, a potential bout of inflation through the depreciation of the Australian dollar – and an inevitable increase of taxes later this year – this should be of major concern to many people.

On the positive side, the decreasing value of the Australian Dollar will help create an environment for potential new export industries if the Australian economy can become competitive in the world market again. The hope is the Australian export base will diversify from minerals, and expand to include innovation driven products.

A lower cost of living, especially if this can translate into a lower cost base for entrepreneurial start-ups, may help increase economic activity. This is needed if a recession is to be avoided in the near future. Unemployed can also be gainfully put back to work.

What is causing the high cost of living?

So what is causing Australia's high cost of living and how can the impact of this be lessened to improve Australia's competitiveness?

The previously high Australian dollar made Australia an expensive place for tourists. That same exchange rate made imports cheap for Australians as well. However what is important is how much a currency unit can really purchase in terms of another, its purchasing power parity. Today in Australia, a dollar will get you nowhere. Just look at the price of a cup of coffee, or a coke, or a public transport ticket. Go to a country like Malaysia and use a Ringgit (the Malaysian dollar unit) and in many places one can still buy a cup of coffee (just), or a light meal.

This very poor purchasing parity of the Australian dollar is a true indication of how high Australia's cost of living really is.

This poor parity standing comes from many factors.

Urbanisation in Australia has many costs associated with it. Business premise rentals are high. Public transport is expensive. Tolls are expensive, as well as local government rates and general operating costs. The wages for people to perform any service are very high. This makes it very expensive for a retailer to open a shop on an hourly basis.

Added to urbanisation, the cost of goods which have to be brought in from far distances and the practice of multinational companies geo-blocking Australia as a high price market. This generally makes many branded goods more expensive than other countries. Just check out the prices of well known branded goods compared to what you could purchase the same item for in another country. A can of Coke costs only A$0.60 in a corner store in Thailand or Malaysia. Logistics costs are so high in Australia, it costs just as much to ship something around Australia, as it does to ship the same good around the world.

Competition plays a major role in keeping prices down. However the retail sector in Australia is not as competitive as one would believe. Basically three organisations, of which two control 90 per cent of the market. control the Australian grocery market. This goes through most sectors, four major banks, two department store chains and no more than a handful of discount store chains. The Australian market is basically not a competitive one and this does affect the level of consumer prices.

Australian lifestyle is a travelling one. You have to travel to do anything and once you do, the costs of travel by car or public transport, parking, tolls, and any outside food and beverages all start to add up. A family day at the movies could cost hundreds of dollars. Tickets to an AFL football match start at A$25. Even a ticket to the Royal Melbourne Zoo starts at A$15.80 for a child and A$31.60 for an adult. Cigarettes and beer in Australia are amongst the most expensive in the world today.

People are paying for things they didn't pay for before, like childcare, gardening, housekeeping and so on.

Finally, state governments around Australia have promoted gambling as a major recreation through the granting of casino and jackpot machine licenses to over 7,000 premises in the country. Gambling losses amount to A$1144 per person in Australia. Any recreation, holiday, vacation, or hobby will cost an enormous amount of money.

Underlying Australia's infrastructure is the small population base. Australia is a country of only 23 million, not considered a large enough market for most multinationals to manufacture in today. It's very hard to develop any economies of scale in high volume manufacturing within Australia. The relatively high cost of outbound shipping deters the thought of Australia being a manufacturing base for most companies.

Historically, Australian wages are very high. Weekend and overtime penalty rates are double the normal pay rates, and employees are given extra pay during holidays. In addition to wages, businesses must pay a payroll tax, which is a tax on employment. There are many other expenses involved in keeping employment and salary records.

Taxes are very sophisticated in Australia, starting with local government rates, goods and services taxes (GST), company taxes, and personal income taxes. The cost of compliance with taxes is very high, where extremely detailed records are mandatory and onsite inspections made by tax officers on a regular basis.

One of the major tasks facing successive Australian governments over the last decades is fiscal management. There are so many demands upon public money from education to healthcare, to infrastructure development and maintenance, to defense, and social security. The strain of spending during the 2008 recession, military spending and other fiscal responsibilities has maintained the budget in deficit for the last decade.

Widening the tax base is inevitable

It is therefore inevitable that the tax base must be widened and taxes increased if the government is to continue meeting its commitments in the future. The burden of tax must increase within Australia. There are calls this week to raise the GST to 15 per cent to fund healthcare expenditure. This will be one of the most predominating future political/social issues facing the present and future governments in Australia.

This is preventing governments governing with a vision. Governments are now financial managers rather than designers of the future in most developed countries like Australia.

A high burden of regulation is adding to the cost of living

A major influence upon Australia's cost of living is the high burden of regulation. There are more than 130 national regulatory agencies in Australia, a federal and eight state and territory legislatures and around 500 local government jurisdictions, making up three levels of government. There is much duplication between these three levels of government. Each year more and more laws, regulations, and orders are put into effect, making Australia one of the most regulated countries in the world today.

This regulatory burden puts Australia at a competitive disadvantage.

Although the intention of regulators is to provide a safe and healthy environment, the costs of compliance are enormous. Many simple building and renovation jobs require massive protective structures with safety officers which inflate the costs of the activity many-fold. Regulation effects production, storage, transport, labeling, food safety, competition and fair trading, and occupational health and safety. 

The costs of starting up a business are now horrendous in Australia. Even the setting up of a small restaurant can cost up to half a million dollars to satisfying food safety, OHS regulations, zoning and so forth. The dream of starting one's own business and being one's own boss is quickly disappearing in Australia.

According to the Global Entrepreneurship Monitor (GEM) 2014 Global Report, the new venture start-up rate in Australia is in the bottom 40 per cent in the world. Retail, warehouse and factory rents are extremely high, and require long term legal commitments. A business failure could keep a person in debt for the rest of their life.

An Australian Industry Group 2014 National CEO Survey reports that small business owners complained that compliance costs with government regulation are expensive and time consuming. These include payroll taxes, OSH compliance, GST records, waste and storage regulations, and labor laws covering union right of entry to premises, unfair dismissal, long service leave, and holiday loadings.

According to a World Bank Doing Business Efficiently Report 2015, urban zoning certificates are required in Australia, but not required in Finland, France, New Zealand, or Singapore. New Zealand's regulations are streamlined in implementation across the country, where enforcement is predictable. In Australia they are not. International trade procedures are cumbersome, where Australia ranked only 49th in the world in terms of efficiency according to the World Bank. In the same report, Australia's tax compliance procedures rank 39th in the world in terms of efficiency.

It is more burdensome for business to comply with governmental administrative requirements in Australia than in most other developed countries.

Australian households the most indebted in the world

The cost of living in Australia has been built by high debt levels across the whole economy. According to a Barclays Bank survey, Australian households are the most indebted in the world. Australians have taken mortgages, use credit cards heavily, take out personal loans and rely heavily on overdrafts to get by. Current household debt is over 130 per cent of Australia's GDP. 

Demand for housing facilitated through easy mortgages has played a role in increasing housing prices in urban areas. The concept of negative gearing has encouraged speculation in housing which has been fueling the housing market. Negative gearing has also been a source of high rental charges for properties, as most of the rent paid covers mortgage repayments.

High debt rates makes the consumers of Australia very susceptible to changes in interest rates and any future economic downturns.

Do we have the appetite to solve the cost of living problem?

Debt, high wages, and the high costs of compliance with government regulation and taxes are at the core of Australia's high cost of living. The demise of great Australian icons like Fletcher Jones, Ansett Airlines, Surfboard manufacturers, Darrell Lea, Ernest Hillier, Borders, and Angus & Robertson, are signs of what could come. Unlike Greece, Australia has no party to bail it out.

However the solutions to lowering Australia's cost of living and making Australia more competitive would take measures that very few Australians would ever agree to.

Australia needs to learn to live with a lower exchange rate. This will make imports much more expensive, but should at the same time provide opportunities for the revitalization of local industries. This clearly gives some scope for innovative entrepreneurs to take on imported multinational products, that once happened in Australia up to the 1980s and 1990s. Why should a shampoo, toilet cleaner, or food product be a multinational product?

The Australian spirit of competition against the multinationals should be rekindled. The Australian consumer product industry was once filled with products manufactured by locally owned family businesses, and there is no reason this couldn't be the case again.

Debt reduction is a necessity. This should begin with school education of the coming generation. Negative gearing should be abolished to help put a damper on housing and property speculation. The burden of regulation needed to be lessened and streamlined. This would have the effect of both lowering compliance costs in business and save government operating expenditure.

The concept of returning to the concept of small government needs to be revamped and discussed at a national level.

Immigration has to be drastically increased. Australia's population is rapidly aging. This is both lowering the tax base and increasing aged and health care requirements within the Australian community. Increases in immigration will broaden the tax base and help expand the size of the Australian market, which local enterprises need to manufacture with any sense of economies of scale.

Increasing the incidence of population could be the means of developing the North of Australia as a "gateway" to Asia. Darwin has the potential of being an Asian food supplier and financial centre in the future, truly linking Australia with the region.

There needs to be wage reform that would, by far, be the most unpopular move any government could make. Overtime and penalty rates need to be removed. Today it really doesn't matter whether the hours you work are on a Sunday or a Monday. Work should be work and paid on the basis of hours and not the time of these hours worked.

Finally “Enterprise Australia” needs a jump start, where a massive entrepreneurship drive is required. This is badly needed for suffering FIFOs and senior citizens who want to remain active due to their good health and longer lives. Entrepreneurship is also needed for the youth of Australia, where a fair percentage has never worked before.

There is a long-term challenge to the viability of the Australian economy, which must be discussed now. Australia needs to be brought together on this, where potential paths are discussed, so a national plan can be drawn up for the nation to follow. This plan must be completely holistic, and answer the question “what type of Australia do Australians really want?” It needs to discuss all aspects of Australian society, the economy, where the future drivers of the economy will come from, taxation, health care, defense, and the role of government.

Unfortunately it is hard to see in the present political climate how this could be done. However what is certain, is that if this generation doesn't have this discussion, the next generation will be left with our mess, locked up in a cocoon of a high cost of living, tied up with debt.

The opinions expressed here at not necessarily those of Independent Australia. You can follow Murray Hunter on Twitter @DalastKimbasabi.

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This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License

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