Economics - Prices 2

So is there any third theory to explain "high-price Britain"? Surprisingly there is, although you could be forgiven for not knowing about it. It was put forward in research on British productivity, done for the Government by the management consultants McKinsey. This theory is that high prices result from all sorts of interferences with the free market. Wherever the consultants looked, they found major obstacles to free and full competition, generally created by governments. This may seem strange: we are accustomed to reports that Britain offers an attractive business environment. It does - in terms of taxation and the social costs of employment. But it is far from perfect.

Take supermarkets. McKinsey points out that it is particularly difficult to get planning permission in Britain. It has become even more difficult in recent years since John Gummer, as environment minister, discouraged out-of-town developments in 1993 and again in 1996 - a policy that Labour has largely continued. The policy may be supported on aesthetic or "environmental" grounds, or because they imagine it will improve town centres. But the policy has a direct impact on supermarket prices. It means that the cost of land for supermarket-building is as much as 40 per cent more expensive here than in America. It also means that the supermarkets built here are relatively small: the average size in France is 50 per cent bigger; in the US, 90 per cent bigger than in Britain.

The result is that French and American hypermarkets enjoy much bigger economies of scale. The cost of building a double-size supermarket is much less than double the price of single size. The architect's bill is not double, nor the builder's. In a more favourable planning environment, permission is easier to obtain. Yet the sales of a double-sized supermarket are nearly twice those of a smaller supermarket. So big super-markets are inherently more profitable. They can therefore afford to have lower margins. All this is exactly the same logic that makes the price of food in a supermarket lower than that in a corner shop.

Or take car prices. Once again, government is at fault. As Christopher Booker has previously pointed out, past governments have obtained an exemption from the EU rule that dealers and manufacturers must not enter price-fixing agreements. Meanwhile, McKinsey points to another obstacle to free competition. A European Union deal has limited the Japanese share of the market to 12 per cent for many years. In other words, the most successful car manufacturing nation in the world has been prevented from competing properly. In theory, this limit should be removed at the end of this year; meanwhile, the limit has kept prices high across all Europe.

But the story gets worse. The Japanese drive on the left, as we do. So it should be easy for dealers there to export their cheap cars here. But even such 'grey' imports have been kept out. It has been made virtually impossible for a Japanese dealer to sell to, say, Asda or Tesco. A limit of 100 cars every five years has been imposed on importers. To its credit, the Government has realised that this is a restriction on trade and announced this weekend that it intends to end it. So we might at last see Japanese or Korean cars at British supermarkets.

The Government was not so helpful with regard to prices in the Budget. The extra excise duties on petrol and diesel mean that delivery of every object we buy in the shops will cost us more. This comes after several years of tax increases on fuel that have made British petrol, the cheapest in Western Europe in 1993, now the most expensive. This in a country that is a net exporter of oil. Our oil importing neighbours, on the other hand, have seen fuel prices fluctuate with the market. Meanwhile, the VAT duty that we pay on most goods is much higher than the sales tax payable in most American states. In that direct way, too, it is government that makes our prices higher.

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