Ireland’s High Living Costs

From the well-known blog :

Ireland’s High Living Costs

We all know that Ireland has a high level of living costs – second highest in the EU

Living Costs 1

Irish prices (living costs) are 40 percent above the EU average.  However, comparison with the EU average can be misleading.  High-income countries invariably have higher living costs.  In the graph above all countries in our peer group exceed the EU average.    So the better comparison is with other high-income countries and not the EU base-line.  Nonetheless, bar Denmark, we are well above price levels in those countries – even high-cost Sweden.

While there is an acknowledgement that Ireland is a high-cost country, there is less discussion over where those costs lie.

Living Costs 2

No one would be surprised that alcohol and tobacco are more than twice the price of EU levels, given our high excise levels.  Nor would many be surprised that housing and energy are nearly 90 percent higher than the EU average.  Health follows third.  At the other end, clothing and footwear, and household furnishings are at the EU average. 

While this tells us where particular categories stand in relation to the EU average, it doesn’t tell us what are the biggest contributors to Ireland’s high living costs.  For instance, communication prices – which includes both telecommunications goods and services, along with postal services – are 46 percent higher than the EU average.  But we only spend 3.4 percent of our income on communications.  So even if we were to reduce these prices to our peer group level, it wouldn’t make a significant impact on our overall living costs. 

So what are the biggest contributors to our high living costs?

Living Costs 3

Unsurprisingly, housing and energy leads the table.  Nearly a quarter of our living costs in excess of the EU average is due to this category.  Next up is alcohol & tobacco, hotels & restaurants, miscellaneous goods & services and health.  These five categories account for nearly 75 percent of our excess costs.  It is within these categories that we need to make progress if we are to lower living costs. 

It wasn’t always like this – not to this degree.  Back in 1995 Irish prices were actually below the EU average.

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Price rose quickly during the frist phase of the celtic tiger economy, rising to nearly 30 percent above the EU average by 2002.  It stayed at that level until a price drop following the financial crash.  But once the economy started to recover, so did prices.

There are other ways to measure the impact of high prices; in particular, from a life-cycle perspective.  For instance, young people will spend more on recreation and rents; those in their 30s and 40s will spend more on children (childcare, clothes, education-related costs); those in their 50s and 60s are likely to spend more on prescription medicine.  Capturing a life-cycle approach, combined with disposable income, would add to our understanding of the impact of living costs on households.

So why are prices high?  There are a number of potential contributory factors.  But let’s first rule out two commonly cited factors:  taxes on consumption and wages.

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Our high prices can’t be put down to indirect taxation (VAT, Excise) as Ireland is below most of our peer group.  Similarly with wages – Ireland is at the bottom of the table in the market (i.e. private sector) economy.

So what might be the contributing factors?

  • Periphery costs?  Given that we need to import – by sea or air – a number of our inputs or final products, this extra travel cost could add to prices.  However, we import most of our clothing and footwear – yet these prices are well below other high-income countries.
  • Lack of competition?  This is the go-to explanation for many as ‘competition’ is viewed as a panacea for consumer prices and choice.  However, the restaurant sector is highly competitive (i.e. lots of enterprises) but prices remain high.  Non-alcoholic drinks are 39 percent higher than the EU average.  Can this be explained by lack of competition? 
  • Lack of scale?  Economies of scale can reduce prices but our small domestic market can be a barrier to achieving this scale – hence, imports.  Are there some items higher priced because of market size or structural features?
  • Lack of social spending?  Childcare fees are ultra-high, due to lack of state investment.  Ditto with GP services.  Public transport fees in Dublin are higher than in other European capitals.  How much of our high prices are due to Irish people having to pay on the private market what others throughout Europe consume through social markets – for free or at below-market rates?
  • High Profits?  Are prices high because Irish business extracts higher profits?  In the domestic market sector Irish firms have a lower profit margin than most of their EU peer group countries – which is consistent with a poor performing domestic sector.  There might be exceptions in certain sectors.

We need to establish the reasons for our high prices.  We used to have a National Prices Commission.  This body monitored and regulated prices in the economy.  Businesses in many sectors would have to apply to the Commission in order to raise prices.  In this Parliamentary Question from 1978 we find the Commission giving price increase permission to products ranging from tinned strawberries to coal, cemetery charges, bread, confectionary, GP fees, energy, cheese and more.

I’m not suggesting going back to that regime.  It wouldn’t be possible (though we shouldn’t rule out temporary controls in key areas such as energy).  However, a new Prices Commission could be established to investigate the extent of high prices on key goods and services – especially in comparison with other European countries – the reasons for these high prices and what steps could be taken to lower prices would be extremely helpful in the debate.   There may be market reasons outside the control of the state.  But there may be a number of steps a government could take to tackle our high costs.  A new Price Commission could not only inform the debate, it could politicise prices and bring new light to old practices. 

Most of all, we shouldn’t be fatalistic about our high living costs.  On the other side of our inflation crisis we can intervene in a number of ways – provision of public services, taxation, import substitution, removal of barriers to competition, etc.  There is a way to bring prices under some sort of control.

It’s called politics.