Spotlight - UK drinks sector falls victim to sin tax strategy
The steep rise in alcohol duties announced in yesterday's Budget, which the Government says will help to tackle binge drinking, follows the publication of its review of the 2005 Licensing Act last week when the Government reiterated its commitment to 24-hour licensing. Ben Cooper asks whether the two policies represent a consistent approach to tackling excessive consumption or whether the duty hike is an opportunistic attempt to boost much-needed tax revenues through the age-old method - the sin tax.
The adage that what governments give with one hand, they take away with the other has been vividly demonstrated to the UK drinks sector during the last week.
Last Tuesday, the Government unveiled a raft of new measures aimed at tackling binge-drinking but crucially retained its commitment to 24-hour licensing. Indeed, broadly speaking the measures were aimed at better enforcement of current laws, such as tougher sanctions for retailers who sell to underage drinkers, bigger fines for drinking in public areas with a history of antisocial behaviour, the extension of the use of juvenile acceptable behaviour contracts, and action against irresponsible promotion.
The Government said that while 24-hour licensing had exacerbated alcohol-related violent crime in the small hours, it insisted that it had not created the "widespread problems" feared by some. Its review of the 2005 Licensing Act suggested that it had achieved "mixed results", culture secretary Andy Burnham said.
Drinks industry representatives welcomed the continued commitment to more liberal licensing hours.
Jeremy Beadles, chief executive of the Wines and Spirits Trade Association (WSTA), called the review a "balanced assessment of a policy that has given the vast majority of us a freedom enjoyed elsewhere in Europe for years". He said the WSTA welcomed the Government's recognition that 24-hour licensing had had a largely positive impact. The decision to stick by the new licensing laws was also welcomed by the British Beer & Pub Association (BBPA).
What a difference a week makes. In yesterday's Budget, the Chancellor, Alistair Darling, announced some of the biggest rises in alcohol duty ever seen. The increases put GBP0.14 on the price of a bottle of wine, GBP0.18 on a bottle of sparkling wine, GBP0.55 on a bottle of spirits and GBP0.04 on a pint of beer. Effectively, duty rates have been increased by 6% more than inflation. Added to duty increases that will come into effect on Sunday, an escalator for alcohol duty has been introduced that will see duties increase by 2% above inflation for the next four years.
Not surprisingly, the drinks industry's admiration for the Government has waned somewhat. Both the WSTA and the BBPA expressed their disappointment, along with major drinks producers such as Diageo and InBev. The WSTA also pointed out that UK consumers now pay more tax on wine than any other country in the EU, while the Scotch Whisky Association (SWA) observed that UK duty on Scotch whisky was now the fourth highest in the EU. The Association of Multiple Retailers (ALMR) described the rises as "binge-taxing".
While the fact that the Government needs to increase tax revenues to meet its current economic targets suggests a certain opportunistic element to the sharp rise in duties - though both the BBPA and the SWA cast doubt on whether the tax hikes would actually boost total tax income given the effect they would have on suppressing demand - the Chancellor said the increases were a direct attempt to prevent abusive consumption. The juxtaposition of the Budget rises with last week's announcement therefore makes for an interesting comparison.
There are two prime approaches a government can take when attempting to reduce alcohol consumption: limit availability and consumption opportunities or make it more expensive through taxation. Although the two are not mutually exclusive, looking at the two announcements, it might be fair to surmise that this government is now looking more to the latter than the former.
Pressure groups and public health advocates pointed out that alcohol retail prices have been falling as a result of aggressive pricing by supermarkets, itself a highly contentious issue of late. They saw the budget rises as a way of redressing that trend.
"This will go some way towards addressing the increase in the affordability of alcohol that has occurred over the past twenty years," the Institute of Alcohol Studies (IAS) stated. The IAS believes firmly that fiscal policies can be used to check consumption. "The evidence suggests that consumption will fall, along with alcohol-related harm. The tax system can thus be used to both raise revenue and address public health considerations." However, the organisation called on the Government to continue to put pressure on supermarkets to cease below-cost selling of alcohol.
Don Shenker, acting chief executive of Alcohol Concern, said that action "to address the issue of alcohol becoming more affordable with every passing year" was "overdue".
However, the WSTA said that its research, carried out by ICM in January 2008, found that 65% of consumers do not think that higher taxes will solve the problems associated with excessive drinking and in a range of options the Government could take to tackle the issue, raising taxes was seen as least effective.
In using fiscal measures to tackle abusive consumption, drinks industry advocates believe the Government is, in Beadles' words, "hitting all drinkers for the sins of a minority".
However, as many economists have commented since Wednesday's Budget, public finances are extremely tight. Not only has the UK government based its plans on some relatively optimistic economic growth forecasts but, even if those forecasts turn out to be accurate, it will be perilously close to breaking its so-called "sustainable investment rule" on public sector borrowing, where public debt is kept to 40% of GDP. In other words, it needs every penny of tax revenue it can eke out of the public.
While it is not inconceivable that the two policy strands demonstrated during the past week are ideologically linked, drinks industry advocates clearly believe that the motive behind the duty increases is rather more financial than strategic, and that as things become tight a sin tax has once again proved its allure.
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