Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

I join my right hon. Friend and other hon. Members in welcoming you back to the Chair, Dr. Clark. Your immense experience of our proceedings as well as your well known fairness will help us greatly.

Smoking is the single largest cause of preventable illness and premature death in the UK, killing 120,000 people every year. The increase in duty on cigarettes has encouraged existing smokers to smoke less or to quit and has discouraged children and young people from taking up the habit. Maintaining the real price of cigarettes and tobacco is an important contributor towards our health objectives. The clause therefore increases rates of excise duty on all tobacco products by approximately 1.8 per cent., in line with inflation, with effect from 6 pm on 7 March 2001.

We had many discussions last year about the discrepancy between the indexation rate for excise duties and allowances. We argued that it was swings and roundabouts. This year's figures demonstrate that that is the case. Allowances are being uprated by 3.3 per cent. and excise duties by only 1.8 per cent. I suspect that we will hear a good deal less about that in this Committee. I commend this clause to the Committee.

Mr Oliver Letwin (West Dorset, Conservative)

I do not intend to spend an undue amount of time on the clause. There is nothing terribly new to say about it, but I want to rehearse the reasons why the Opposition believe that it is a mistake to go on raising the rates for tobacco. I accept the point that the Financial Secretary makes about relative indexation, and if I can be allowed so unusual a departure, I confess to having made the mistake last year of believing that the Government intended to continue with the asymmetry in a direct line rather than following the swings and roundabouts principle. This year they have followed the swings and roundabouts principle, and we should be grateful for that. I withdraw some of the remarks that I made last year on that subject.

Our underlying difficulties with the idea of progressive nominal rises in tobacco duties remain. There is a particular force to this argument, because this year appears to be the year in which the fiscal crossover, which I believe that the Liberal Democrat Members, alongside the Government, thought would not happen, has happened. The Financial Secretary might give an explanation for the decline in revenues that differs—it would be worth listening to—but, as far as we can determine, the duty differentials that have opened up because of the UK's poor competitive position on duty have led to yet another significant increase in smuggling, as we expected.

Let me begin by stating a few points on which we agree with the Government, before moving on to those on which we clearly do not agree. We agree that smuggling is a bad thing. I know that we agree because we both support taking considerable steps to try to stop it. The Government would not be spending large sums of money to try to stop smuggling if they did not think that it was a bad thing. I suspect that we agree that the reason why people smuggle is not that they enjoy it as a pleasant pastime on a Saturday afternoon but because they are trying to make money from it, which they are able to do because of the duty differential. So far, I am being uncontroversial—at least I hope so.

I suspect that we agree with the Government—we certainly agree with the hon. Member for Truro and St. Austell (Mr. Taylor); his report remains in obscurity, but the contents of it become clearer and clearer over time—that the cause of the intensity of the smuggling is the size of the duty differential. In other words, normal market economics, albeit in a subterranean and illicit form, have prevailed. The supply of smuggling has arisen because the price advantage of smuggling has grown. So far, I suspect that we are on common ground.

I believe that we also agree—I have never been sure about the Government's position, but whether or not they agree, it is true—that the effect of that kind of smuggling not only deprives the Revenue of money but criminalises large numbers of people in the UK who probably lead perfectly blameless lives otherwise, at least in relation to the law.

Mr Tony Banks (West Ham, Labour)

It is absolute nonsense to say of someone who breaks a law that they would be innocent if not criminalised by the Government. One might as well say that a law-abiding citizen who commits murder has been criminalised. If someone breaks the law, he has broken the law.

Mr Oliver Letwin (West Dorset, Conservative)

I completely agree with the hon. Gentleman that the fault for breaking the law lies not with the Government but with the lawbreaker, and I completely agree with his implicit assertion that the lawbreaker should be punished if caught. However, the fact remains that large numbers of our fellow citizens who otherwise obey the law engage in the criminal activity of buying roll-your-own—one can see that happening in many pubs around the country—from someone who got it off the back of a lorry. I attribute the blame for the action to the people who engage in it—I agree with the hon. Gentleman about that—but mortal flesh is weak. It is regrettable that they break that law, because they begin to put themselves on the wrong side of the law in general. To be a law-abiding person—I exempt parking tickets and speeding fines— [Hon. Members: ``Oh.''] Well, I certainly exempt parking tickets. I do not believe that by getting a parking ticket an individual puts himself into a different relationship with the state. Perhaps I am wrong about that.

Mr Alun Michael (Cardiff South & Penarth, Labour/Co-operative)

Will the hon. Gentleman give way?

Mr Oliver Letwin (West Dorset, Conservative)

In a moment. I agree with the hon. Member for West Ham (Mr. Banks) that when someone starts buying illicit cigarettes, they take a deep, and wrong, action and put themselves in a position where their whole relationship to the state and to authority begins to go wrong. That is not to say that everyone who buys illicit cigarettes moves on to other more serious crimes—that would be a crazy assertion—but it is very dangerous. The blame lies fairly and squarely with that individual, but there is something wrong about an arrangement in which many of our citizens engage in that blameworthy activity.

Mr Alun Michael (Cardiff South & Penarth, Labour/Co-operative)

The hon. Gentleman is going down a dangerous path. He referred to parking and speeding. For many years, not having insurance was considered a lesser offence. However, that meant that the victim of a serious accident might not have been able to gain compensation. If the hon. Gentleman is asserting that some offences do not really matter, he needs to be clear about what he means.

Mr Oliver Letwin (West Dorset, Conservative)

I am not saying that they do not matter or should not be punished. On the contrary, they should. If there is a law, it should be obeyed. If it is disobeyed, the person who disobeys it should bear the penalty. There is no doubt about that. What I am saying is that it is possible for people occasionally to overstay in a parking spot without necessarily changing their entire relationship to the state. It is also possible for people to buy roll-your-own off the back of a lorry and not change their whole relationship to the state, although that is a slippery slope.

If Opposition Members think that I am taking some kind of cheap party political shot, they are wrong. If they examine their consciences, they will find that they agree with me. There is a real danger to our society if large numbers of our fellow citizens engage in activity that is fundamentally illicit and dishonourable, and come to feel that they are on the wrong side of the law.

The present duty is the cause of the smuggling, and the smuggling is the cause of the criminality alongside the blameworthiness of the criminal. We must ask whether that situation can be allowed to continue. Is it fiscally proper? Does it result in higher fiscal revenues? Is it socially proper? Does it result in a better society? Is it a proper result from the point of view of the nation's health? Does it make us healthier?

Let me take those questions in reverse order. There is no doubt that the prevalence of smuggling, and of smuggled and often inferior tobacco, is not improving the nation's health, but is making it worse. All the evidence suggests that whereas licit smoking is under control, illicit smoking is burgeoning. That is not to the advantage of the nation's health. I have already made the social point. I suspect that Opposition Members will agree that there is a grave danger to our society arising from the extent of the smuggling.

Now we turn to the new and interesting development. So far as we are able to determine, the fiscal effect of those rising differentials has now turned against the Government, and I await the Financial Secretary's comments on that. That seems to undermine the whole case that the Government have been making in the past three or four years. It is always asserted that, whatever else one may say, the protection of the revenue was secure, and that with each increase in the duty differential the elasticities were such that, despite increasing smuggling, the revenue would rise. That no longer seems to be the case.

Finally, I come to a point usually made by the Paymaster General rather than the Financial Secretary, although it will perhaps be made again today by the Financial Secretary. A great part of the structure of the argument in defence of the Government's continued nominal increases in duty has been that the duty differential of which I am speaking, between, for example, a purchase in Calais and a purchase in Dover, is largely irrelevant, because, so the Paymaster General frequently asserts, the big and organised smuggling is often from countries of origin with duties that are way below ours. I suspect that my hon. Friends have also heard her argue that repeatedly. If her argument were carried to its conclusion, it would assert that even a 10, 20 or 30 per cent. reduction in our duties would not make a significant difference to smuggling, because the big smuggling is from countries where the duty is 20 per cent. or similar to ours and there would still be profit in it. Therefore, she argues, huge amounts of Government money should be spent on enforcement rather than on attempting to decrease the duty differential.

Mr Tony Banks (West Ham, Labour)

I am listening carefully to what the hon. Gentleman says. He implies that smuggling has arisen because of the differential in duty on cigarettes between this country and the continent. However, that differential has always existed. We have all the disadvantages of a single market, but not the advantages. When there was a duty differential in the past, people were allowed to bring in only 200 cigarettes; now, there is the nonsense of people going to the continent in a white van, getting as many as they like and bringing them back. The problem was bound to arise. The issue is not so much the difference in duty as the single market with regard to cigarettes.

Mr Oliver Letwin (West Dorset, Conservative)

Before I respond to that, let me say how much I welcome the fact that a Government Back Bencher on the Finance Bill Committee, albeit a distinguished former Minister, is actively taking part in proceedings. That is a welcome development.

Mr Tony Banks (West Ham, Labour)

I just wanted the hon. Gentleman to know that he was not on his own.

Mr Oliver Letwin (West Dorset, Conservative)

I fear, however, that the hon. Gentleman's arguments are not at one with those of his hon. Friends on the Front Bench.

Mr Tony Banks (West Ham, Labour)

There's a surprise.

Mr Oliver Letwin (West Dorset, Conservative)

They have argued that the problem arises from smuggling not across the channel with people being able to move back and forth and buy cigarettes at will in Calais, but from much further afield and on an organised basis from countries with deeply discounted regimes.

I believe, however, that the problem resides in great part in informal smuggling from just across the channel. The hon. Gentleman is wrong to think that the problem arises from the single market. There is duty to be paid on entry to this country if the cigarettes are brought here for resale. An illegal act is occurring. That has nothing to do with the single market, which does not permit people to enter this country without paying duty on the differential.

Mr. Banks rose—

Mr Oliver Letwin (West Dorset, Conservative)

I shall give way in a moment.

The cause of people seeking to bring cigarettes across the channel is the scale of the differential. The industry tells us—I hope that these figures are accurate—that the total tax in the UK per 20 cigarettes is £3.37. The average for the rest of the EU is £1.39. In France, it is £1.61. When a duty differential is well over 100 per cent., there is a problem, but it is not the single market. The problem is geography and competitive taxation.

Mr Tony Banks (West Ham, Labour)

I did not say that the single market was a problem. I said that, in this regard, we get the disadvantages. Movement is allowed as a result of the increase in the amount of tobacco and alcohol that people can bring in for personal consumption, but we do not have the advantages of the equalisation of taxation, which is why I passionately believe in a single market. When the hon. Gentleman's party was in government and the trade started, I remember saying as a Back Bencher that it would escalate as soon as the amounts of tobacco and alcohol that could be brought in were increased and that that would have a damaging impact on the tobacco and alcohol retail industries, especially in the south-east. That was pooh-poohed by the Government, who said that it was perfectly within their control.

Mr Michael Jack (Fylde, Conservative)

On a point of order, Dr. Clark. May I elicit your guidance on the appropriate length of interventions?

Dr Michael Clark (Rayleigh, Conservative)

I, too, had been wondering about the length of the interventions. I think that they are about right. If hon. Members have several interventions to make, they should catch my eye and make their own contribution.

Mr Oliver Letwin (West Dorset, Conservative)

I do not have the slightest doubt that the hon. Member for West Ham (Mr. Banks) will catch your eye in due course, Dr. Clark. If what the hon. Gentleman said is right, and I do not doubt his word, that his assertions were pooh-poohed, my hon. Friends, who were then responsible for managing such matters, were in the wrong. [Interruption.] My right hon. Friend the Member for Fylde (Mr. Jack) will speak for himself.

We should perhaps have been more alert to the evolution of such proposals, but that does not rescue the Government from a more serious accusation. Some years later the trends were more evident and the retail industry, especially the small, independent retailers, began to be crucified by the difficulties so presciently identified by the hon. Member for West Ham. At that time, instead of responding by saying, ``Ah yes, our hon. Friend pointed that out some years ago. We must recognise the force of his observations because they have clearly come to pass,'' the Government said, ``We are now the Government. We are going to continue merrily increasing the differential.'' The Conservative Government's lack of prescience has become this Government's blindness to the facts, which is regrettable.

We should abandon our party badinage and agree that the time has come to end the lunacy; we must move away from an ever-widening differential and try to find the means to enforce the regime against smugglers, as the Government are trying to do, although not sufficiently effectively. We must also ask ourselves how we can possibly justify widening the differential.

I hope that the Financial Secretary will illuminate the Paymaster General's arguments, to which I referred. It would be helpful to understand whether there is a solid, intellectual and statistical basis for her assertion. What proportion of smuggling is from countries with very low duty? What countries—or set of countries, if discretion forbids direct identification—are involved? How low is their duty? What proportion of smuggling is judged to come from countries nearby which have a significant duty differential but one that is so great that it becomes impossible to imagine significantly diminishing it by a different set of policies for our own duties? We need answers to those questions. Instead of rehearsing the general argument we must consider whether a serious policy option is to do something about the matter in the light of the facts. We may begin to do something when the Financial Secretary has given us the facts, as I hope he will. We are urgently in need of them.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

Notwithstanding the Financial Secretary's excellent skills, I regret the absence of the Paymaster General who is, I am sure, detained on serious business in Brussels. She played a leading part in previous Finance Bill Committees and on the Floor of the House in respect of the important matter of policy, which is the substance of the clause. The hon. Lady has a detailed knowledge of the subject and has appeared before several Treasury Committee hearings. Despite the Financial Secretary's exceptional skills, the debate is the poorer because of the Paymaster General's absence. The reasons behind those opening remarks will become clearer as I detail some growing concerns about the Government's handling.

The hon. Member for West Dorset was right to say that the Liberal Democrats have supported the Government year in, year out on their policy of raising excise duty on tobacco products. We support also their policy objectives on health and cracking down on fraud through legal means, such as new technology, the recruitment of more Customs and Excise staff and having new stamps on packets, which we debated last year. We do not want to give tacit support to lawbreakers. If they break the law passed by Parliament, they should be punished; at no stage should we give any succour to them, even on a parking ticket. Sometimes people park cars in dangerous places, which can be a threat to other people's lives. It might seem a small offence, but it can be significant.

In previous debates, as the hon. Gentleman mentioned, we discussed in detail the elasticities of tax revenue with respect to duty. We also discussed cross-price and demand elasticities, and had debates using reports by the Institute for Fiscal Studies and rejoinders to those reports from industry. They were some of the best tax debates that we have had in this Parliament because they were extremely well informed. We have debated various enforcement techniques, and the Government have made strides on smuggling, which should be recognised.

On a recent trip to the Crown court in Kingston, I was regaled by judges who were almost fed up with having to try tobacco smuggling cases. They complained that such cases took up too much of their time but I had to say that, although I understood their frustration, they were engaged in enforcing the law. Their work was not only bringing lawbreakers to justice by fining and imprisoning them properly, but sending out a wider signal that is a key part of the Government's strategy to deter future smugglers.

It is being made clear that the Government will take a hard line on smuggling and that, if people smuggle, they will be caught, punished and imprisoned. That will bring to an end that illegal traffic, and I support the Government and Customs and Excise in cracking down on it in every possible way.

Despite those remarks and that past support, I want to enter a note of caution and a caveat to our support for the Government's policies on this matter, because several issues about the Government's handling of it are leading to our support wearing thin. They are detailed issues, but must be aired before we pass the clause. As has been mentioned, the Government failed to publish the Taylor report. I will not go into that in detail, because it has been covered in the past and I do not want to go over old ground, but the Government also have not published a more recent and potentially more damaging report—the Rocques report, which was set up by the Paymaster General. Customs and Excise announced on 7 July 2000 that John Rocques, ex-senior partner of Deloitte & Touche, would lead the inquiry and report to Mr. Broadbent and the Minister by the end of November 2000. Indeed, I believe that the Minister received a preliminary report in November and, after John Rocques had asked for more time, the final report in the new year. However, that report has not been published and the Treasury Committee on which I serve criticised the Government for their failure to do so. The Paymaster General was good enough to give the Committee an informal briefing on progress with the Rocques inquiry, but she has gone no further and the report has not been published. We received a letter explaining why not. Many reading it gained the impression that Customs and Excise had rejected the conclusions of the Rocques report—it was too critical of the Department—and asked him to draw fresh conclusions

In the Financial Times on 5 February this year, Mr. Rocques affirmed that there were no reasons why his report should not be published and acted upon. So here we have a second major report commissioned by the Government on this key area of policy that has not been published. That should help explain why I am concerned.

Furthermore, the Treasury Committee report was published on 22 March 2001, but the Government have yet to reply. This cross-party report—some Labour Members signed up to it—does not pull its punches. I shall not detain the Committee by reading all the conclusions—you would call me to order if I did, Dr. Clark—but conclusion (b) states:

``The Government owes Parliament an urgent statement about the scale of the loss of excise revenue between 1994 and 1998, the reasons for the loss and the steps taken to prevent such losses occurring again. The Government should also explain the current status of the Rocques report and indicate the date by which it aims to secure publication''.

So yet another senior House Committee wants the Government to come clean about what is going on.

The Public Accounts Committee is also interested and the National Audit Office registered a note of concern about the Government's handling of the problem. In a preliminary report, the Comptroller and Auditor General said on 9 February that he was unable to certify that

``adequate regulations and proceedings have been framed to secure an effective check on the assessment, collection and proper allocation of revenue'',

or that

``the sums brought to account in respect of such revenue are correct''

because of problems with the collection of excise duty. When the Comptroller and Auditor General publishes such a report, albeit preliminary, the House should stand up and take note. We are right to be concerned about further tax changes without clarification of where the Government stand.

The Comptroller and Auditor General is a servant of Parliament, not of Government. He has a superb staff working for him on behalf of this place and our constituents, so we must take his statement seriously. The NAO will move on from its preliminary report and produce a more detailed report to Parliament. Unfortunately, it is not yet concluded, but I know of its concerns about the weak controls of Customs and Excise.

A whole series of reports—written or part-written—could be before us to illuminate the debate and help us decide whether it was appropriate to continue with the tobacco duty escalator. The Government have the written reports, but they have not informed today's debate, which is scandalous. I speak as a Member who has supported the Government's policy throughout this Parliament, so I cannot be criticised as partisan or a Johnny come lately.

The hon. Member for West Dorset referred to other evidence that provided cause for concern. When the Government have provided an estimate of the loss of revenue due to smuggling—

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

I just want to pick up one of the hon. Gentleman's points. He said that the escalator is continuing, but it is not. It has been halted and the Bill contains only an inflation rise.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

I am grateful for that intervention: I was incorrect. Excise duties are still being treated this year in terms of indexation. The question remains whether we have reached a point of diminishing returns. Are the elasticities such that increases in taxation lead to a reduced yield? I have argued against that in the past, because all evidence and analysis suggested that we had not reached that point, but I am now beginning to question that. I hope that we have not, because of the health signals that are so important to the Government's policy. We cannot bury our heads in the sand: if we have reached that point, we will need to review our strategy.

Before the Financial Secretary's intervention, I was talking about the Government's published figures. The hon. Member for West Dorset alluded to them when he said that more smuggled products than the Government acknowledge may come from the EU as a result of the differential between the UK and other member states.

The Tobacco Manufacturers Association says that the Government operate on a 20:80 rule. With 80 per cent. of the smuggled product coming from outside the EU, duty changes make no difference to the bulk of it. The association takes issue with the 20:80 rule of thumb that Customs and Excise uses to calculate the loss of revenue. It uses pack tests, an analysis of the packets that are thrown away, often after football matches. Various football stadiums have been swept up after the match and the packets have been counted in order to work out where the cigarettes were produced and imported. On the basis of several such detailed researches, the Tobacco Manufacturers Association believes that the split between extra-EU and intra-EU smuggled products is more likely to be 40:60 to 60:40. If so, the Government figures are wrong.

Mr Oliver Letwin (West Dorset, Conservative)

That is precisely the difference to which I was alluding. It is hearsay that Customs and Excise operates on a 20:80 principle. I say hearsay advisedly because we have never had—certainly not in Committee—open acknowledgement of the figures on which Customs and Excise bases its estimates. That is what we need. At the moment, the pack tests provide the only evidence available in the public arena. As the hon. Gentleman rightly says, they suggest that the Government's analysis is deeply flawed.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

The hon. Gentleman is right. We have not had that admission. The intellectual framework behind the Government's policy has never been clearly elucidated, so we have been unable to scrutinise it properly. That is the problem, and it stretches our patience too far. I am not sure whether there was a Division on the Budget resolution behind the clause; if there had been, we intended to support the Government. We want the Government to come clean—

Mr Adrian Bailey (West Bromwich West, Labour/Co-operative)

I have heard assertions that Government policy is not scientifically based, but does the hon. Gentleman agree that that using what is swept up in stadiums after football matches provides an irrational and illogical basis on which to make Government financial policy?

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

I agree, but the hon. Gentleman's Government have published two reports: the Taylor report and the Rocques inquiry. They have commissioned them, they are there, they have been completed, and we would like to have them published so that we do not have to rely on such a ``poor''—I put that in inverted commas—amount of evidence. However, it is the only evidence that we have to go on.

Mr Oliver Letwin (West Dorset, Conservative)

I am sorry to intervene again on the hon. Gentleman, but while I thoroughly endorse what he is saying about the reports and the need to have them published, I hope he would agree that we would not want to have on the record the assertion that the pack test is poor. It is an imperfect measure, but quite a statistically significant sample is being operated on and, as far as I am aware, there is a reasonable expectation that that sample is random.

One does not imagine that people going to football matches are particularly inclined to be smugglers. We do not know of any reason to suppose that the two are correlated. So if they are honest tests, and I do not think that it has been asserted that they are not, and if they are statistically significant tests, and it has been well established that they are, and if they are likely to be based on a random sample, and they probably are, then far from being poor, they are a reasonable basis for estimation, although I completely accept that it would be better if we had the Government figures.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

The hon. Gentleman will agree that I put the word ``poor'' into inverted commas, because it is relative. Compared to some of the analysis I assume that the Government have done, it is not as good a test. However, the hon. Gentleman is right that it is potentially an extremely accurate test. We just do not know whether it is, though, because we have not seen any other evidence, and it is difficult to put it into context. Perhaps Customs and Excise have based their own analysis in these reports on such taxes. We do not know. I would like to have been able to give the hon. Gentleman a better answer.

Mr Adrian Bailey (West Bromwich West, Labour/Co-operative)

Will the hon. Gentleman give way?

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

In a moment. Because the hon. Gentleman's Government are failing to be open and transparent, we are unable to answer such questions. Before the hon. Gentleman intervenes, I hope he will criticise his own Government and have the courage of his convictions to say ``Look, I would like to know the truth behind this, so please publish these reports that you have already on your desks.''

Mr Adrian Bailey (West Bromwich West, Labour/Co-operative)

To continue that line of argument, which I cannot help thinking has become somewhat convoluted, does the hon. Gentleman agree, given that most football grounds ban smoking, one could argue that the cigarette packets left in grounds after matches are from people who may be more predisposed towards illegal activity than would be normal. If one wants to take that as the basis of the test, it would be equally logical to make those assumptions in any further projections.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

That intervention is quite worrying. I hope that there are not many West Bromwich Albion fans among his constituents who might feel that that was a slur on their behaviour.

Mr Tony Banks (West Ham, Labour)

There are not many West Bromwich fans, full stop.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

I am not sure whether the hon. Member for West Ham was privy to much information on that point when he was Minister for Sport. I must reject the intervention by the hon. Member for West Bromwich, West, and just repeat that the taxpayer has already paid for detailed work. Unfortunately that work is not before the Committee today, which I much regret.

If the clause is put to the vote, I will recommend to my hon. Friends that we abstain. In the past we have supported the Government, but if they cannot explain themselves and promise to publish the reports before Parliament is dissolved, so that the country can see the basis on which tax policy has been based, or at least before the election, even if hon. Members cannot do so before it is dissolved. At least that would move the debate on in a proper way. It is not right to continue to support the Government if they continually hide the reports and take the information away from the British people.

I shall listen with even greater attention than usual to what the Financial Secretary has to say. This is an incredibly serious issue involving millions, or perhaps even hundreds of millions of pounds, that should go to the Exchequer, and which affects thousands of businesses throughout the country. The Government cannot continue to hide behind excuses when they have the information to hand.

Mr Tony Banks (West Ham, Labour)

I would normally come to the Finance Bill Committee to get a free box, which I am delighted to hear I will receive in due course. My membership of the Committee is made doubly worthwhile by some of the interesting points raised by the hon. Member for Kingston and Surbiton. I was unaware of the package test and sweeping up at football grounds as a way of producing evidence to evince arguments. I am a regular supporter of my club and a season ticket holder at Stamford Bridge, where the most that anyone sweeping up would find would be fingernails and broken hearts. It would be a very non-scientific way of discovering a correlation with the suicide level.

Smuggling, in technical terms, starts when someone brings in cigarettes that he may have declared are for personal consumption, but is then tempted to put them on sale, using friends in the tobacco industry and the retail trade in pubs and tobacconists to reprocess them. It started in the EU; as soon as restrictions on the amount of tobacco and alcohol for personal consumption were lifted as part of the single market, there was an irresistible temptation to claim that such goods were for personal consumption, when evidently they could not have been. Some people will always try to make money from opportunities that arise.

Can my hon. Friend say whether most of the smuggled tobacco products come from outside the European Union? The black market smuggling trade started within the EU. I warned the previous Government about that—it is all in Hansard—but they said, ``Nonsense. That will not occur.'' But it was so predictable; one did not have to be an expert to see what would happen.

Mr David Taylor (North West Leicestershire, Labour/Co-operative)

Does my hon. Friend agree that at least this Government did what the previous Government did not do and invested real extra resources in combating tobacco smuggling? In the hour that this Committee has been sitting, another 2 million illicit cigarettes have been brought into the country. One per cent. of GDP is related to tobacco smuggling, and the Government are at least trying to combat it.

Mr Tony Banks (West Ham, Labour)

My hon. Friend asks me an obvious question. Of course, I accept what he says; I speak as a party loyalist, for God's sake, but that does not mean that I cannot nitpick about Government policy from time to time. I want effective policy to be made more effective. However, enforcement measures are necessary only because of the problems caused by the differential duty rates between the United Kingdom and the rest of the EU. As a passionate and firm believer in the EU and the single market, I saw, down the line, one of the great advantages of an equalisation of duty rates across a range of products. It is nonsense for people to take vans from this country to France to load up with goods, many of which have been produced in this country, and to bring them back. It is about time we addressed the principle of tobacco duty, as well as its effect on the retail trades. Governments have always been disingenuous in their approach to tobacco duty. All Governments have at some point argued that tobacco duty should be increased on health grounds, to limit the consumption of tobacco, but would all Governments really want tobacco duty completely eliminated because no one smokes any more? I suspect not, because the duty makes such a significant contribution to Treasury receipts. If the Government were looking seriously at the issue from a health point of view, they should ban tobacco. As we know, tobacco-related diseases kill something in excess of 120,000 people—I do not know the precise figure—in this country alone.

Because no Government would want all tobacco duty eliminated, we have to be more honest. Are we looking at tobacco duty as a way of raising revenue or as a way of limiting consumption on health grounds? Are we looking at both? No Governments have responded to those fundamental questions. We want to be seen to be doing something to restrict smoking but do not want totally to eliminate it because of the revenue implications. I will get in and out of this point quickly: one reason why I have always believed in the legalisation of cannabis is because Governments could put duty on it. In response to arguments about health, I would say, ``Well, ban tobacco rather than cannabis''—but I do not want to embarrass my hon. Friend the Financial Secretary more than I have already.

The Government must address the issue. Governments should welcome reduced yields, providing the smuggling element has been reduced, because that would mean that not so many people were smoking—but, as I said, I am not sure that that is what Governments want. All Governments have got themselves into a problem over that and I am sure that when my hon. Friend replies he will explain the logical position of the Government.

Mr Howard Flight (Arundel & South Downs, Conservative)

It is certainly sensible that the Government have got off the escalator but the 6p increase and pro rata equivalent increase in rolled tobacco still increases the price differential between here and continental Europe and in the bootleg market. I call for a stepping back and rethink because the policy on the taxation of tobacco has become counter-productive.

I should declare an interest as a smoker—I should also welcome your chairing our deliberations, Dr. Clark. Over the past four years, cigarette smoking has gone up by 6.5 per cent. The Government sneaked out some figures earlier this month announcing that the revenue loss has been £3.7 billion. Theoretically, the tax on cigarettes should be aimed at the most effective point on the curve, both to discourage smoking in terms of demand and price and to deliver Government revenue. The first reason is health-related, the second pragmatic. However, we have clearly gone massively too far in the other direction because we are in the territory of diminishing returns on both fronts. We are not achieving the objective of discouraging smoking and we are losing revenue like billy-oh.

On reducing smoking and associated matters, we are also causing harm. The group among whom smoking has most increased is the young, particularly young women. The policy on duty is divisive because the affluent can pop across to France and buy all the cigarettes that they want cheaply. Those that get sucked into smuggling are very much the less affluent and those who are not close to the channel ports. On Second Reading, the hon. Member for Barnsley, Central (Mr. Illsley) had the honesty to admit that in his constituency one can hardly buy cigarettes other than on the black market. Small shopkeepers have been driven out of business and the constituency has become a black market territory. I was slightly horrified—although I did not believe it—to hear the hon. Member for West Ham talk even of the suggestion of banning. In my mind is the United States experience of prohibition. Whether we have absolute banning or the existing taxing strategy, it inevitably leads to bootlegging; that fact is as old as the hills.

Mr Tony Banks (West Ham, Labour)

I said ``logically''; I did not advocate banning, because that would clearly be completely unenforceable. If we think we have problems with drug abuse on our streets, try banning alcohol or tobacco and see what would happen. I was saying that banning would be the logical conclusion if we considered health alone.

Mr Howard Flight (Arundel & South Downs, Conservative)

I thank the hon. Gentleman for that comment.

What have we done? We have created about 150 Russian-style professional smuggling organisers—serious heavy criminals—just as prohibition did on a far bigger scale with bootleggers in the United States. I may add that the United States has been substantially stuck with the drug mafia as a direct result of the prohibition policies of the 1930s.

Mr Alun Michael (Cardiff South & Penarth, Labour/Co-operative)

Would the hon. Gentleman watch his language? The Government do not create criminals; they see an opportunity in a market. I am sure that he would agree that it is they who must take responsibility for that.

Mr Howard Flight (Arundel & South Downs, Conservative)

Of course I agree, but with respect to the right hon. Gentleman, that is a rather self-righteous comment. If, as a result of Government policies--and given human nature--a criminal body emerges, the Government indeed have a role in creating an environment that leads to criminals.

Mr David Taylor (North West Leicestershire, Labour/Co-operative)

Is that not just a classic example of the millennia-old logical paradox of post hoc ergo propter hoc? That fact that two incidents occur in sequence does not necessarily link the former to the latter.

Mr Howard Flight (Arundel & South Downs, Conservative)

With respect to the hon. Gentleman, I think that a common sense issue is at stake. The result of the price of tobacco here compared to that on the continent, just as of the complete prohibition of alcohol in United States when lots of people wanted to drink it, is to create an environment that bad people will exploit. If hon. Members cannot see that that is likely, they are living in an unrealistic utopia.

Mr David Taylor (North West Leicestershire, Labour/Co-operative)

The hon. Gentleman referred to the Government creating Russian-style mafias. That is the phrase to which my right hon. Friend the Member for Cardiff, South and Penarth (Mr. Michael) and I especially object.

Mr Howard Flight (Arundel & South Downs, Conservative)

The policies that the Treasury has pursued under both the present and the previous Administration have undoubtedly led to our current problems. It is widely believed that the reason why the Taylor report and the Rocques report have not been published is because they make exactly that point.

Mr Alun Michael (Cardiff South & Penarth, Labour/Co-operative)

I think that the hon. Gentleman does not understand the point that my hon. Friend and I are making. Government policy may create an environment—as the hon. Gentleman said once—in which crime and offending increases. Government certainly has a responsibility to seek to reduce offending and therefore to minimise the environment in which it happens. In so far as the hon. Gentleman criticises Government policy on that basis, there is a reasonable point for debate. However, to say that Government action causes offending is to appear to condone that activity. That is something that parliamentarians of every party should be careful not to do.

Mr Howard Flight (Arundel & South Downs, Conservative)

Yes, the Government have created an environment; the environment has led evil people to exploit it. With the greatest respect, I think that it is slightly pedantic not to accept that if Government policies—whoever is in power—lead to such things happening, the Government are responsible. My point is that that policy has led to the creation of such a mafia in this country.

Mr Brian H Donohoe (Cunninghame South, Labour)

Are the Opposition arguing for the legalisation of cannabis, ecstasy and all other drugs as that is the direction in which the hon. Gentleman's argument logically takes us?

Mr Howard Flight (Arundel & South Downs, Conservative)

We are debating the imposition of an increase in duty on tobacco. We are not debating cannabis but whether the duty policies that are being followed are being effective in their objective of both reducing smoking and generating the maximum revenue. My assertion is common sense and should be accepted by every hon. Member. Indeed, Government figures show that the results of the pricing policy to date have been counter-productive on both issues. While getting off the escalator is a good thing, widening the pricing gap is likely to worsen the present problems.

I turn now to another important point on which there is some muddled thinking. The starting point in terms of consumption is whether or not duty is paid. Within the non-paid category there is clearly that which is legal and that which is bootlegging and smuggling. No duty is paid on something like 80 per cent. of hand rolled. What proportion of that is illegal is not precisely known. The figure for packaged cigarettes is around 40 per cent. non-duty paid and again it is not precisely known how much is smuggled. We do not know whether the Rocques report had any evidence to offer on that point. Those figures show the counter-productive nature of the overall pricing strategy with regard to its objectives.

We all know from direct experience that there is a divisive situation behind what is bootlegged and what is legal. The pricing system broadly enables the more privileged members of society to buy tobacco easily at a lower price and then leads those who cannot afford to travel as much to break the law and to buy smuggled goods. That leads to the process that occurred under prohibition—an established criminal body managing to structure itself beyond the law.

Finally, I understand that the Government's target is to reduce the smuggling element to about 20 per cent. How idiotic. The target should be no smuggling. We should have a price strategy where the target is no smuggling. As many hon. Members will be aware, Sweden woke up to the problem a while ago and adjusted its pricing downwards by 30 per cent. to try to get closer to that position on the graph which would demonstrate that smoking is being discouraged without the duty straying excessively into the territory of diminishing returns.

Mr Mark Hendrick (Preston, Labour)

Is the Opposition's policy one of tax harmonisation across the European Union? If not, is not what he suggests a de facto means of tax harmonisation?

Mr Howard Flight (Arundel & South Downs, Conservative)

Before the UK joined what was then the common market, the price differential between tobacco here and tobacco in Europe was considerably less. The widening of that price differential has been entirely a decision of this country. It is self evident that where one lives in close geographic proximity it is unwise for politically correct or other reasons to have tax strategies that widen the pricing gap on retail goods because it leads to the distortions of which we are all aware. It has nothing to do with either tax harmonisation or common currencies. The power lies with this country and this Parliament to determine what is wanted.

I have gone on too long, so I shall conclude. The taxation strategy for tobacco went off the rails a long time ago. Instead of achieving its objectives, it has led to the undesirable development of a Russian-style smuggling mafia, and many more young people have taken up smoking than might otherwise have been the case. It is time for a breath of fresh air in both Westminster and Whitehall, and I hope that, by coming off the escalator, the Government are signalling a change in Treasury thinking.

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

We have had an interesting debate, which I have listened to carefully. I wish to comment on some of the points that the hon. Member for Arundel and South Downs (Mr. Flight) made. He misrepresented the Government targets, but I will come to that later. I draw his attention to the submission from Action on Smoking and Health, which was prepared in the run-up to the Budget. In section 2, entitled ``Tobacco taxation—a successful policy'', it describes how tobacco duty rises since 1997 have affected smoking:

``Over this period there has been a sharp drop in teenage smoking''.

The hon. Gentleman's point about increases in smoking is not right. Evidence from the general household survey is that, overall, smoking prevalence has not been increasing since 1997. The key indicator is the number of people who smoke, determined on the basis of personal interviews.

Mr Howard Flight (Arundel & South Downs, Conservative)

I referred to evidence that showed a 6.5 per cent. increase in consumption since 1996 and, in particular, an increase in consumption by young people. With the greatest respect for the organisation that he quotes, I believe that what it is saying is wishful thinking.

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

The hon. Gentleman is wrong. It is true that trade estimates on the number of cigarettes consumed show a 6 per cent. rise, but that is based on debatable assumptions about how the amount of hand-rolling tobacco is translated into the number of cigarettes. The key measure is not the number of cigarettes consumed but the number of people who smoke. The general household survey shows clearly that that has not been increasing. Indeed, the data show a considerable drop in teenage smoking since 1997. His pessimism on both fronts is ill-founded.

Mr Oliver Letwin (West Dorset, Conservative)

I am interested in the Financial Secretary's argument. Is he asserting that Her Majesty's Treasury's economists have advised him that the price level is more likely to have an elasticity effect on determining whether people smoke than it is on determining the number of cigarettes that they smoke? If so, it would be counter to every elasticity study that I have ever seen.

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

No, I am advising the hon. Gentleman that the general household survey shows clearly that the prevalence of smoking has not been rising. That is an observed fact. The key objective of the Department of Health, quite rightly, is that the number of people who smoke should be controlled.

Mr Oliver Letwin (West Dorset, Conservative)

The Financial Secretary is too intelligent for that. Surely, he recognises that we are debating whether the duty has been responsible for, on the one hand, decreasing the number of people who smoke—I accept his evidence that that is not increasing—or, on the other hand, whether it has been connected with the fact that the amount smoked by those who smoke has risen. If the duty were effective in either case, one would expect it to have been effective on the amount smoked by smokers, and not on determining the number of smokers. That suggests that, rather than duty, a third party cause, such as social convention among the young, is limiting the growth in the number of smokers. Is that not the case?

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

The hon. Gentleman has missed the key point in my comments, which was that trade estimates rest on assumptions about how hand-rolling tobacco is translated into numbers of cigarettes. There is scope for debate about how that calculation is made, but it is important to place on the record that the catastrophic situation described by the hon. Member for Arundel and South Downs is not borne out by evidence and that the prevalence of smoking is not rising.

I agree with comments about the seriousness of tobacco smuggling and that no one should be doing it. I welcome the robust position taken on that by my hon. Friends and the hon. Member for Kingston and Surbiton. That is why we announced last March the tackling tobacco smuggling strategy. It is designed first to slow the growth in tobacco smuggling, which has recently followed a strong upward trend—that is a target point, to respond again to the hon. Member for Arundel and South Downs—and secondly to put it into decline within three years. We provided £209 million for investment in extra staff and new equipment to do that, and Customs has increased the deployment of front-line staff and investigators during the past year. An extra 650 people will be in post by the end of this month and another 300 during the coming year. Customs has also put in place X-ray scanners designed to detect bulk consignments of smuggled tobacco. Three are in operation and two more will follow shortly, and a second batch will be ordered in the next few months. My hon. Friend the Member for West Ham is right that the previous Government should have listened to his and others' warnings and put those measures in place earlier. I do not agree with him about cannabis, but I agree on that point.

The strategy is at an early stage, but it is beginning to show encouraging results. In the first nine months of the past financial year, Customs seized more than 2.1 billion cigarettes destined for the UK market. The scanners are starting to pay dividends as well, and we are confident that they will spot large numbers of cigarettes being brought into the country. In those nine months, Customs investigators broke up 38 major organised crime gangs. Targets have been set and we are achieving them. Tough policies on vehicle seizures are having a powerful effect: in the first nine months of the past financial year, almost 6,700 vehicles were seized by Customs, which was nearly double the number seized in the same period in the previous year.

We debated UK duty paid marks at length in Committee last year, and they are being introduced on packets of cigarettes and hand-rolling tobacco to help the identification of smuggled goods. From 1 July, it will be a criminal offence to transport, sell, offer for sale or allow the use of premises for the sale of unmarked cigarettes and tobacco. All packs will have to bear the UK duty paid marks, which will deter people from selling unmarked goods and encourage pub owners and workplace managers to prevent sales on their premises. The strategy is in its first year, but as more front-line staff are put in place, new X-ray scanners come on line and pack marks are introduced, we will be able to take even more effective action against criminals who are involved in tobacco smuggling. I am confident about the way in which the strategy is working.

The hon. Member for West Dorset asked about the overall take on tobacco tax receipts. The current expectation for tobacco receipts in the previous financial year—this has not been finalised, but I am pretty confident about it—is that we have collected £7.6 billion, which is a little more than the projection in the 2000 Budget. As we all recognise, far too much money is not being collected, hence the strategy. Nevertheless, the fact that receipts are above what we expected provides confidence that we have now got the measure of the problem and are making progress in addressing it.

There has been a good deal of discussion about the extent to which the problem is driven by the duty differential between the UK and continental Europe and about estimates by Customs of how much tobacco comes from outside the EU. Figures on that were published earlier this year in response, I think, to the Treasury Committee's inquiry. The estimate is that in 2000, total cross-channel tobacco smuggling was worth £1.36 billion. The figure for freight smuggling was £2.3 billion. Of that £1.36 billion, cigarettes and other tobacco accounted for £470 million. There is also hand-rolling tobacco and the tobacco smuggled by air passengers, internet and parcel.

Mr Oliver Letwin (West Dorset, Conservative)

Will the Financial Secretary repeat those figures?

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

Gladly. In 2000, total cross-channel smuggling of tobacco was worth £1.36 billion, of which £470 million was cigarettes and other tobacco. The figure for hand-rolling tobacco was £890 million. Tobacco smuggling by air passengers, internet and parcel was worth £120 million. Freight smuggling of cigarettes was worth £2.3 billion. That adds up to £3.8 billion, so well over half is from freight smuggling.

I am happy to confirm and say on the record that Customs estimates that up to 80 per cent. of cigarettes smuggled into the country come in containers. Almost all of that comes from outside the EU. The hon. Member for West Dorset asked which countries those cigarettes come from. We think that they come from, for example, Dubai, China, some countries in southern Africa, Vietnam and Baltic countries, where it is likely that no duty, rather than a low level of duty, has been paid.

Mr Oliver Letwin (West Dorset, Conservative)

Is the Financial Secretary saying that 80 per cent. of the £2.3 billion freight is cigarettes in containers? What percentage of that does he expect has come from countries with zero or very low rates?

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

No, 80 per cent. is the estimate of the proportion of smuggled cigarettes that enter the country in containers. Those would come mainly within the figure for freight smuggling of cigarettes. As I said, almost all of that comes from outside the EU.

Interestingly, the hon. Member for Kingston and Surbiton drew attention to the tobacco manufacturers pack survey. Customs takes account of the evidence from that in forming its views about what is happening. However, that includes cigarettes bought outside the UK and brought into the country legitimately as well as smuggled products. That factor must be taken into account in interpreting the survey. He also drew attention, rightly, to the work of the Treasury Committee in this regard, to which we pay close attention. Its view was that it was not clear that reducing duty rates would affect large-scale smuggling, which appears to be the major problem, and it is right. We shall continue to pay close attention to what the Treasury Committee says.

I shall go through the strategy's targets for the coming three years. We expect the share of cigarettes accounted for by smuggling in the current financial year to be 22 per cent., which we want to come down to 21 per cent. next year, and 20 per cent. in the year after. That reduction must continue. I assure the hon. Member for Arundel and South Downs that we will bear down on the problem for as long as it exists. We want realistic and measurable targets to tackle the huge problem that has grown over a long period and which we are now taking steps to turn round.

The hon. Member for Kingston and Surbiton asked me about publication of the Rocques inquiry. Some of the inquiry has already been published: the hon. Gentleman asked specifically about losses of excise duty in the period 1994 to 1998, which were reported by the National Audit Office on 9 February. The chairman of Customs and Excise made a full disclosure of Revenue losses in his statement on the 1999-2000 accounts. More work needs to be done on matters arising from the Rocques inquiry; advice must be assessed in order to inform Customs and Excise's detailed plan of action to tackle the problems. We need to take legal advice on some issues before deciding what can be published.

Mr Edward Davey (Kingston & Surbiton, Liberal Democrat)

The Minister says that he needs to take legal advice and that some issues are still being worked on. However, the Government and Customs and Excise have known about such matters for some time. In her evidence to the Select Committee on 8 February, when asked about the publication date, the Paymaster General said:

``As I have said, I think we need to have these answers on the public record as soon as possible.''

That was nearly three months ago, when the problems outlined by the hon. Gentleman were known about. That is not good enough. The Minister must say when the report will be published and why it has not been published already.

Mr Stephen Timms (Financial Secretary, HM Treasury; East Ham, Labour)

Much of the information has been placed on the record, not least in my hon. Friend's evidence to the Select Committee. I shall pass on to my hon. Friend the hon. Gentleman's expression of regret, which all members of the Committee will share, that she is not with us today. The subject of the Rocques inquiry was alcohol diversion fraud and although it refers to tobacco it was not the central thrust of the report.

In the report on tackling tobacco smuggling we set out clearly the estimates and assumptions on which we base our anti-smuggling strategy. I draw to the Committee's attention the fact that the most recent figures published by Imperial Tobacco suggest that cigarette smuggling accounts for less of the non-UK duty-paid element than Customs estimated. The full range of evidence on these matters must be taken into account.

The clause strikes the right balance between protecting health and protecting revenue. The strategy is now in place to tackle the serious problem of smuggling and I hope that the Committee will support it.

Question put, That the clause stand part of the Bill:—

The Committee divided: Ayes 14, Noes 7.