Bernard Hickey looks at fresh research showing we're more expensive than we should be and unpicks how to shred 100% rip-off reputation

By Bernard Hickey

I love welcoming people to our beautiful and friendly country, but one thing I'm becoming increasingly uncomfortable about is our prices.

New Zealand is an expensive destination and it's getting worse.

We all remember the uproar when British rugby commentator Peter Bills described New Zealand during one of those visits as 100% rip-off rather than 100% Pure.

It felt like harsh criticism at the time, but it has rightly forced us to look at just how expensive we've become relative to the rest of the world and why.

This week the Productivity Commission published a paper by Victoria University Professor Norman Gemmell, which looked in depth at our prices relative to the rest of the OECD and picked out some reasons why we're so expensive.

It made for sobering and sometimes surprising reading.

It turns out we punch above our weight in all the wrong ways. We may be relatively poor in terms of spending per capita, but the prices we charge are much higher than our wealth would suggest.

Professor Gemmell looked in particular at the prices of two types of goods and services and aimed to separate out the 'oil from the water' whenever they mixed.

Firstly, he looked at tradable goods and services, which are those where the price is set on international markets, which means things we export or import, or things which have to compete with those traded goods.

This includes many imports and things we buy here such as meat and milk that we also export.

He found our tradable prices were the ninth highest in the OECD, even though our spending per capita was the 22nd highest.

Secondly, he looked at non-tradable prices, which includes things such as electricity, government services, real estate and construction, where there is no competition with the rest of the world.

Our prices in 2005 were the 19th highest in the world, which was also higher than where we should have been relative to our spending power.

Professor Gemmell used the deepest data available that could be compared with other countries, which was for 2005. That's a bit old, but more recent data from the World Bank for 2011 also shows we punch above our weight.

In that survey we're the 11th most expensive in the world, up from 22nd in 2005.

So, if anything, the prices Peter Bills had to pay for car hire, wine, restaurant meals and clothes when he wrote his 100% rip-off article in the New Zealand Herald in 2011 were worse than in 2005.

The detail was the most surprising.

The perception I had before reading the research was that our non-tradable sector, which is the least competitive and most prone to government and private monopolies, was not as expensive as for our tradable goods, where competition is more intense.

It turns out some of our least-competitive sectors, such as government-run health and education were relatively cheap because they were larger scale operations with higher skilled staff able to generate some economies of scale.

I'd speculate that our use of a single-buying agency such as Pharmac and our nationally organised health and education systems have helped there.

Some non-tradable sectors such as real estate, construction, electricity and gas tended to be more expensive because they were either capital intensive and had to cope with New Zealand's relatively high cost of capital, or full of one-man bands unable to obtain the economies of scale to drive down prices.

Our tradable sectors were also more expensive than I expected.

Again, the cost of capital for our farmers and other exporters was a major factor.

The combination of expensive non-tradable goods and services with expensive tradable goods and services just compounds the problems. High costs for electricity and real estate further inflate the cost of our milk powder, meat and electronics on the global stage, but that doesn't explain it all.

Professor Gemmell suggested our particular types of exports may be expensive because they are subject to high tariffs and subsidies in their major markets of Europe, the United States and parts of Asia. That offers us some hope that they might fall as those tariff barriers are dismantled and subsidies removed.

New Zealand has some natural disadvantages which are always going to make it difficult to get our prices down. We have only 4.5 million people and we're about as far away from at least two of our major markets as it's possible to get, which increases transport costs.

But that shouldn't stop us from relentlessly trying to ramp up competition, clamp down on monopolies, increase the skill levels and use of capital of our workers, and find some economies of scale in our businesses and governments.

However, it's clear a major driver of high costs throughout our economy is our high cost of capital. Essentially, that's referring to our high interest rates relative to the rest of the world.

We're seeing that with bells on right now as our mortgage rates rise over 6%, while America's mortgage rates are falling again towards 4%.

Anything that lowers our cost of capital will help, be that through an increased savings rate, lower demand for residential investment, bigger Government surpluses, or some change in tax policy.

Whatever works to cut our interest rates relative to the rest of the world should be welcomed because it doesn't just cut the cost of mortgages.

It cuts the costs of everything and creates a virtuous circle because it will encourage more capital investment in equipment and skills that improve our productive output per hour, raise wages and allow us to cut prices.

Lower interest rates also, of course, take pressure off our currency, which would add to that virtuous circle, encouraging us to invest in our productive sectors and shift more resources into those parts of the economy that compete with the rest of the world.

There is no silver bullet to fire to kill off our rip-off rep, but we should keep our eyes on the prize of a cheaper New Zealand so when we next host the World Cup we can welcome back Peter Bills with open arms and an open till.

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A version of this article has also appeared in the Herald on Sunday. It is here with permission.