Crack down on the high cost of living or growth suffers

Douglas McWilliams
THE emergence of competitive economies in the East is a well-known phenomenon. But less understood is the challenge this poses to the West. First, the rising East will squeeze traditional markets (albeit while creating new ones). Secondly, it will turn the terms of trade for primary products against us.

We are not powerless, however. Emerging economies have their weaknesses as well as strengths. But to understand how to return prosperity to the West, we must define a new theory of how growth is generated.

Growth is constrained by balance of payments and by inflation. The first is because trade is now all-pervasive. Any economy that is going to succeed must be successful at exporting. But built into this, it looks increasingly likely that we will have to participate in currency wars. The City is expecting sterling to weaken further this year. But currency devaluations are only damaging if they lead to inflation. This is where the second part of my prescription becomes necessary.

We must act aggressively to squeeze down the cost of living in the UK. Currently, it is at 11 per cent higher than the OECD average. More worryingly, the cost of living in Britain is 2.75 times that of India, 1.75 times that of China, and nearly 1.5 times the cost in Singapore – which has one of the highest standards of living and one of the highest life expectancies in the world.

Our costs are particularly high for housing and utilities (18 per cent above the OECD average); transport (31 per cent); recreation and culture (14 per cent); restaurants and hotels (12 per cent); and miscellaneous goods and services (15 per cent).

Of critical importance, therefore, is improving the supply of housing and commercial property. The latest reforms to the planning system may be starting to have a positive effect, but the government must watch to ensure no backsliding. Imposing high fuel and energy costs in the name of an ersatz greenery must also be avoided. US electricity costs are now as much as 50 per cent lower than ours in those states that have avoided green surcharges.

Ending the war against motorists is essential. Public transport should compete by providing a better service, not through handicapping rival modes of transport. Part of the high cost of transport reflects very high salaries paid to unionised employees – London tube drivers now earn more than the base salary of EasyJet pilots, though the level of skills required is nowhere near.

I estimate that if, over 10 years, we reduce the cost of housing, commercial property, energy and transport in the UK to the OECD average, GDP would be about 15 per cent higher than it otherwise would have been. We could return to a rate of growth close to the 2.5 per cent we used to enjoy before the economic crisis.

It’s not impossible to get back to economic growth – I’ve outlined a plan that I’m convinced would achieve it. The only issue is whether we have the will to give growth priority.

Professor Douglas McWilliams is executive chairman of the Centre for Economic and Business Research. His fourth lecture as Gresham professor of commerce will be held at the Museum of London at 6:30pm on Thursday 24 January 2013.