The Republic is an expensive place to live, as confirmed again by the latest Eurostat figures, which show that the price of consumer goods and services here is the second highest in the EU after Denmark and a striking 40 per cent above the EU average. Ireland is, of course, one of the better-off countries in the EU, but the traditional GDP measures seriously overstate this. And the problem is that prices here are relatively high compared to household incomes, which hits living standards. The take-off in the rate of inflation has put all of this back in the spotlight, but high-cost Ireland is a problem which has been creeping up on us over recent decades. The latest Eurostat figures, for 2021, provide some clues as to why.
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1. The widening price gap
The price of Irish goods and services is 40 per cent above the average of the 27 EU states and around one third higher than the original 19 EU member states. Denmark is just fractionally more expensive than Ireland – also around 40 per cent over the EU average. The widening of the price gap between the State and the EU average over the past decade is noticeable. In 2010, Irish prices were 20 per cent above the EU average, fifth highest in the table and around 5 per cent ahead of France. Now we are effectively joint “first” and prices here are one fifth higher than the French level.
Slowly but surely, Ireland appears to have become relatively more expensive, in terms. The widening of the gap seems at odds with generally moderate Irish consumer price inflation between 2010 and 2019 and presumably relates to the precise basket of goods and services used and adjustments for purchasing power undertaken by Eurostat, a complex and sometimes controversial area.
The comparisons. however, do show where prices are relatively higher here - and where they are not. Food prices here remain about 20 per cent above the EU average, prices for many consumer goods such as clothing, footwear and electronics have risen from below the EU norm to around the average, while alcohol prices, driven by taxation, have risen more rapidly here and are now twice the EU average. Tobacco prices are now two and half times the EU average.
The gap has jumped in some areas. A notable change has been in communications, where the costs of telephone and postal services have risen to more than 40 per cent above the EU average, from 4 per cent in 2010. And energy prices here, already 15 per cent above the EU average, are of course under huge pressure everywhere.
The most obvious gaps are in a few areas. Services are relatively more expensive in Ireland than many goods. In terms of goods the issues are focused in a few areas - food and energy in particular. Unfortunately these are two areas now under serious inflationary pressure. Ireland has also made a policy choice to tax alcohol and tobacco at a high level.
2. Why are prices so high here?
There are a range of historical and economic reasons why prices are high in the Republic. As a small peripheral island market, the cost of transporting goods here and distributing them is higher. The economies of scale evident in bigger markets do not apply. Indirect taxes here are also relatively high. The standard 23 per cent VAT rate applicable to many goods and services is at the higher end of the EU and international average. And excise duties are high here, with a particular impact on alcohol and fuel prices. A recent analysis by Bonkers.ie pointed out that excises add over €3 to every bottle of wine – before VAT is even counted in – and around €8 to a pack of cigarettes, while the tax take on fuel is over one half. High tax is also a factor in the car market here .
There is often – correctly – controversy over the price charged in the Republic for consumer goods such as clothes compared to markets such as the UK. But in general prices in areas such as clothing, footwear and consumer electronics are roughly in line with the EU average, suggesting that – while not perfect – competition in these sectors is playing an important role. Despite the increasing presence of lower cost food retailers, however, and the undoubted impact this has had on areas of the market, food prices here remain close to one fifth above the EU average, with notable gaps in areas such as breads and cereals and milk, cheese and eggs. Competition – and prices – in areas such as mobile phone services may not be quite so intense, judging by the figures showing communications costs 40 per cent above the average. Huge increases in the use of services such as broadband here may affect the comparisons over the years. It can be hard to measure price changes when the nature of the product is changing too, but again Ireland seems to be relatively harder hit in this area.
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Other economies also work differently. High public transport prices here may in part reflect subsidies in other countries or the role of state-run operators. Either way, transport services – bus, train and air fares – here are almost 40 per cent above the EU average, compared to 20 per cent in 2010. The recent public transport price cuts will have helped a bit, but for now they are temporary. And while this goes beyond what is measured by the Eurostat figures, which focus on consumer rather than wider household spending, we know that the role of the State in areas such as childcare and health in other countries is often larger and delivers lower costs for households. And we know also that housing costs here are high, with rents among the highest in the EU and mortgage rates also well above the EU average, the latter again partly due to lack of competition in the market.
The final issue in the Irish price level is a generally high-cost environment. The National Competitiveness and Productivity Council has consistently pointed to the relatively high cost of legal services, banking and energy for Irish businesses, all things which are eventually passed on to consumers. The business environment is also affected by high insurance costs and the claims culture – also a key factor in consumer costs in areas such as childcare.
3. The policy dilemmas
It is unfortunate that the Republic heads into a period of rapidly rising prices with a price level which is already among the highest in the EU. A key policy goal, as well as supporting those worst hit, must be to ensure that Ireland’s relative position does not worsen, thus lessening competitiveness. Part of the response will be more payments to households to offset higher prices – via welfare and public sector wages. Energy prices could come under pressure again in the winter. In the longer term, a wider strategy is needed to tackle high-cost Ireland. Part of this is likely to come via public subsidies in areas such as childcare and rents – a concept now referred to as the “social wage”, or what the State offers to households beyond cash payments or wages for public servants. Competition in banking will be examined by the Banking Review. There are some moves on legal and insurance reform, though this can be painfully slow and incremental. But finding ways to lower costs will be essential, because the alternative – raising taxes and channelling back cash to compensate and subsidise services, can only go so far.
