Friday, 2 November 2018

LESS IS SOMETIMES MORE

It has been said that the first duty of a chancellor when delivering a budget is to contrive not to make things worse. It appears that on that measure at least Phillip Hammond has succeeded. So, for our sector we have seen a freeze on the duty levied on beer, cider and spirits, although the duty levied on wine will rise in line with RPI. My guess is the chancellor thought that wouldn’t upset the trade too much as most wine sold in this country is produced abroad, but it is a blow for British wine producers who’ve seen a bumper harvest this year due to the warm weather. Meanwhile, bowing to popular prejudice we will see a new duty band on ciders with an ABV of 6.9% to 7.5% from February 2019. This is designed to tackle the infamous strong white ciders frequently, though by no means exclusively, drunk by chaotic street drinkers. Given that these products have a market share of 0.27% it is hard to see this as anything more than political virtue signalling.

Predictably, health groups are unhappy at the duty freezes. They’ve been campaigning relentlessly for the return of the alcohol duty escalator and bemoaning the revenue ‘lost’ due to its abolition and previous duty freezes. Professor Sir Ian Gilmore, chairman of the Alcohol Health Alliance, described the duty freeze as “a missed opportunity” to use a duty increase to fund alcohol services. By his reckoning, duty freezes have cost the Treasury £4 billion in the last five years and will cost it a further £5 billion by 2023.

But is this calculation of lost revenue correct? It’s based on the assumption that increases in the duty rate will always lead to an increase in the duty take. The same assumption is often made about tax rates in general. And yet when the higher rate of income tax rate was reduced from 50% to 45% the tax-take from it rose from 25% of government tax revenue to 28%. This is an example of ‘Laffer’s Curve’. Art Laffer is the American economist who first observed that if a tax rose beyond a certain point it delivered diminishing returns. The art of setting tax and duty rates, from the government’s perspective, must be to maximise revenue without damaging the incentives to work or invest. Over-burdensome duty rates do both and have the effect of reducing demand for products and reducing the number of jobs the sector can sustain.

So, have previous duty freezes and the abolition of the duty escalator led to the loss of revenue that Gilmore cites? The fact is that in every year since the hated duty escalator was abolished alcohol duty has delivered more revenue to the Treasury, not less. Between 2013-14 and 2017-18 the revenue from alcohol duty rose from £10 billion to £11.5 billion – an increase of 15%. Health campaigners make the simple mistake of assuming the volume of alcohol sold would remain unchanged even if prices rose because of increases in duty and that’s where their calculation of lost revenue comes from. This is curious, not least because when they argue for minimum unit pricing they assume the opposite – that consumption will reduce significantly in response to raising prices.

In the run-up to the budget health campaigners argued that the pub trade hadn’t benefitted from the abolition of the duty escalator. They sought to drive a wedge between publicans and brewers. It is obvious that duty increases are not the only factor putting upwards pressure on the cost of running a pub, but they are a major factor. Between 2008 and 2013 – the duty escalator years – beer prices to the on-trade rose by 21%. Between 2013 to 2018 - in the five years since the duty escalator was scrapped – beer prices rose just over 11% (Source: HMRC). So, beer price rises to the on-trade have nearly halved since the duty escalator was abolished.

This benefits pubs and consumers and will help safeguard 3,000 jobs that would otherwise have been lost (Source: BBPA).


The announcement of rate relief for the next two years is also welcome, although not a substitute of the root-and-branch reform of business rates that is needed. Given the uncertainty around the outcome of the Brexit negotiations, this is probably as much as the chancellor could promise. So, if not three cheers for ‘Spreadsheet Phil’, we can perhaps offer one and a half cheers!

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