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Sent: 23-06-2011 11:05:55
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How Many Bananas Does ASIC Consume?A How To Book Of Self Managed Super FundsMr Weaven's SMSF CommentsEmail Marketing For Planners
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How Many Bananas Does ASIC Consume?

Click here to buy - A How To Book of SMSF's by Tony Negline
John Robertson

Trying to justify a price increase by referring to a movement in the consumer price index is an artifice used to gain a commercial advantage that would not be available through proper analysis.

ASIC has just announced that effective from 1 July it will raise fees payable under the Corporations Act. The increases of up to 3.3 % are based on the 3.3% rise in the consumer price index over the 12 months ended March 2011.

One of the advantages of being a government monopoly backed by threats of imprisonment is that pricing power is less of a constraint on revenue than it might be for normal commercial entities.

Quickly advancing technology should be pushing down the cost of processing paperwork. One of the problems in having a business enterprise quarantined from the market is that it lacks the same pressures faced by others to maximise their productivity potential.

But let's put that argument aside and accept that ASIC cannot improve its productivity sufficiently to get its prices down and that its costs are rising. The question for ASIC and the government under whose legislation it operates is this: what is the analytical relationship between the services it provides and the Australian consumer price index?

Over the year to March, the highest rates of price increase within the consumer price index came from alcohol and tobacco (+11.2%), education (+5.9%), housing (+4.8%) and food (+4.3%).

These increases reflected a range of policy and environmental factors almost entirely unrelated to any function carried out by ASIC.

The absurdity of the link can be gleaned by understanding that the higher the price of bananas, the more ASIC can charge its customers. How many bananas does ASIC consume? If the government acts to lift the price of cigarettes, ASIC is entitled to charge every financial services company, for example, more for processing a license application.

There was a time in Australian history when a vast array of prices and contracts had CPI adjustments built in. That is no longer the case for the most coemptive parts of the economy.

Australian policymakers generally agreed in the 1980s that tying wages to movements in the consumer price index, for example, exposed Australia to a range of significant economic threats.

Under the formal wage indexation arrangements that prevailed in Australia as well as less formal links between wages and consumer prices, a shock to consumer prices would be rapidly translated into higher wages. The higher wages would flow into higher prices.

Not surprisingly, Australia suffered a relatively high inflation rate, a loss of competitiveness, the dislocation that came with higher interest rates and a depreciating currency which also added to consumer prices and wages.

It took some brave politicians and trade union leaders to wean Australia from that arrangement. More generally, Australian business and workers were told they needed to become internationally competitive and that they were no longer going to be featherbedded by institutionalising automatic price hikes backed, for manufacturers, by tariffs.

Economists have generally applauded this change as being for the better and an essential ingredient in the country's improved economic performance over the past 15 years.

Nonetheless, there are still some recalcitrants clinging to the CPI teddy bear. Landlords, for example, persist in tying rents to the price of bananas. Schools try to justify higher fees that way. So, I have seen recently, has an investment platform.

Recourse to the consumer price index is a clever trick to convey a legitimacy that might not otherwise exist. "I want to charge you 3% more because the government has announced that the CPI has risen 3%" can be harder to argue against than "I want to charge you more because I think I can get away it".

The real irony is in a government applying a standard to its own activities that it decries for others.

If automatic linkages are going to be outlawed for some, economic equity requires that they be outlawed for everyone. The government could start by requiring its own entities to justify any higher prices and show cause why they are unable to deliver the benefits of technological advances as lower prices.

To protect the economically weak, the government could consider tackling service providers through legislation. They could be told they can no longer intimidate people into paying more by citing a wholly unconnected and irrelevant movement in the consumer price index.

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