Edward O'Hara (Knowsley South, Labour)

With this it will be convenient to discuss the following: New clause 1—Review of tobacco products duty—

‘The Chancellor of the Exchequer will publish a review in relation to the effectiveness of tobacco products duty before1st March 2007 and will consult with organisations which have a special interest in tobacco products duty before publishing that review.'.

New clause 2—Review of hydrocarbon oil duties—

‘The Chancellor of the Exchequer will publish a review in relation to the effectiveness of hydrocarbon oil duties before1st March 2007 and will consult with organisations which have a special interest in hydrocarbon oil duties before publishing that review.'.

New clause 3—Review of rates of gaming duty—

‘The Chancellor of the Exchequer will publish a review in relation to rates of gaming before 1st March 2007 and will consult with organisations which have a special interest in gaming before publishing that review.'.

New clause 4—Review of amusement machines—

‘The Chancellor of the Exchequer will publish a review in relation to classes of assessment machine and rates of duty before 1st March 2007 and will consult with organisations which have a special interest in gaming before publishing that review.'.

I should explain that the purpose of grouping the clause with the proposed new clauses is to enable the Committee to debate the proposal for a Government review of the various duties referred to. We should not anticipate debate on subsequent clauses. I trust that that is understood.

John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)

I welcome you to the Chair, Mr. O’Hara. It is a pleasure to serve under your chairmanship again. In my experience you Chair proceedings with a firm and fair hand and I know that you will continue to do so. I am grateful to you for the guidance that you have given us on the grouping of new clauses to be discussed as part of the clause stand part debate.

I shall mention my views on the new clauses later, but first let me deal with clause 1, which increases the rate of duty on cigarettes, cigars, hand-rolling tobacco and other smoking and chewing tobacco products. It does so in line with inflation, therefore increasing the typical price of cigarettes by 9p, including VAT, and did so with effect from 6 pm on Budget day, 22 March 2006.

The Committee is aware that smoking kills more than 100,000 people in this country each year. It is the greatest cause of preventable illness and premature death in this country. So the duty increase, in line with inflation, will help to maintain the real price of tobacco, the contribution to Government revenues and the price support—a level of pricing that encourages people to smoke less or to quit, and discourages children or young people from taking up the habit in the first place.

Duty rates form an important part of our strategy to drive down the level of smoking in this country and of our target to reduce the prevalence or level of smoking to 21 per cent. by 2010. Those measures run alongside important provisions that we are making through the NHS to support those who want to quit and also the public places smoking ban due to come into effect in the summer of next year. So the duty increase continues a well-established policy—a twin track of maintaining the high real price of cigarettes while clamping down hard on the unregulated supply of cheap smuggled tobacco. That will help to reduce smoking, and lower the financial, social, personal and health costs associated with it.

On the new clauses, I welcome the interest of the hon. Member for Wycombe (Mr. Goodman) in evidence-based tax policy decisions. I say to him and his colleagues on the Opposition Front Bench, we publish more information relevant to their new clauses than they might realise. In fact, we might publish more than they care to read. In relation to new clause 1 on tobacco, I gathered up on my way here a selection—not an exhaustive list—of the documents that we have published in the last 18 months.

“The Demand for Tobacco Products in the UK”, published in December 2004, is a detailed model for the elasticities of tobacco demand. The pre-Budget report 2004 included an update on our strategic approach to measuring and tackling indirect tax losses, including from tobacco, and in late 2004 we published an analysis of, and plans to deal with, counterfeit cigarettes. I have brought also a copy of a quarterly  publication that includes a tobacco fact sheet—hon. Members might or might not be aware of it—with data on tobacco clearances and duty, and on the state of the market. As I said, it is a quarterly publication and the hon. Gentleman might care to pick up the next one, which is out later this month.

In December 2005, as part of last year’s pre-Budget report, we published an analysis of indirect tax losses which took into account the impact of duty. This year we have published a detailed fresh analysis of how we will reinforce our strategies for tackling tobacco fraud and smuggling. Furthermore, of course, there are the Budget notices—once again I have brought only one copy with me—published alongside the Budget, which are legally binding, and which we attempted to write in plain English, setting out the changes announced in each Budget, how they impact, and on whom.

We make a considerable effort to assess the impact of tax regimes on specific industries and the wider economy. We meet regularly with and take into account the views of organisations with special interests. We frequently reassess the general design or specific aspects of the operation of areas of the tax system, and when we do so we run a public, open consultation process.

In each year’s pre-Budget report and Budget, we give updates on tax and wider policy, and each year we publish a pre-Budget report for the excise regimes—an analysis of the tax gap, the losses and the impact of the rates. Ours was the first finance Ministry to make such a systematic analysis of the operation of the tax system and the first to put in place comprehensive strategies for reducing the tax gap, and I believe that we are still the only Government to do so. In those circumstances, when we come to decide on whether the proposed new clauses should become part of the Bill, I hope that hon. Members of all parties will bear in mind the quantity and the quality of what we already produce.

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

It is a pleasure to see you in the Chair, Mr. O’Hara. Unlike the Financial Secretary, I have not had the pleasure of serving under your chairmanship before. Although I am sure that, in the course of these proceedings, the Financial Secretary and I will not agree on everything, he was right to pay tribute to your chairmanship, and I look forward to your guiding us in our transition through today’s clauses in a dignified, orderly and efficient manner.

The clause that we are considering invites us to approve the tax rise proposed in the Chancellor’s Budget. As the hon. Gentleman said, new clause 1 would have the effect of compelling the Chancellor to publish a review in relation to the effectiveness of tobacco duties. You, Mr. O’Hara, will be pleased to know that I do not intend to discuss the proposed review in detail, and the hon. Gentleman will be pleased to hear that too. I want to refer to what he said about the quantity and quality of the information already published by the Treasury; he was right to draw attention to that. The proposed new clause seeks to draw an assessment from him of how all those  documents come together in terms of the effectiveness of the Government’s strategy with regard to the duty.

We need to explore the effectiveness of that strategy in some detail. Any tax needs to be effective; it must achieve its aims. The Financial Secretary made it clear that the aim is to discourage smoking. That is an aim that we share. However, he did not mention the other aim of the clause, which is to raise revenue for the Exchequer—[Interruption.] He did. I apologise to him. We are covered so far as aims go.

The Financial Secretary will be mindful of that great law in relation to taxation and many other matters, the law of unintended consequences, as well as of the effect that raising a tax beyond a certain point might have on expected consequences, namely that it might not discourage the behaviour that it seeks to discourage. If raised beyond a certain point, it might raise less revenue than it would if it were not increased or if it were decreased. Raising it beyond a certain point could cause such unexpected consequences as evasion, in this case tobacco smuggling, which we shall discuss in more detail when we debate clause 2.

At present, according to the Tobacco Manufacturers Association—which would like duties to be frozen, not unusually—smuggling increased between 2002 and 2004, the last few years for which the organisation has figures, resulting in a rise in revenue loss from£2.6 billion to £2.9 billion. The Minister will doubtless point this out when he replies, so I shall point it out for him: it is true that the cross-border element has fallen from £1.4 billion to £1.3 billion. However, when both figures are added together, the result is a rise from£4 billion to £4.2 billion. The Tobacco Manufacturers Association suggests that those developments threaten the Government’s smuggling targets. I am sure that the Minister will want to respond to that point too.

According to a Gallaher monthly pack swap survey, the consumption of counterfeits has risen slightly, from 2.4 per cent. to 2.8 per cent. of total consumption. It is worth standing back from the figures for a moment and looking at them in context. According to the TMA, cigarette prices in the UK are already the highest in Europe, and the UK’s excise duty burden is the highest in the EU. The rising number of freight movements and visits within the EU, good things in themselves, naturally increases opportunities for smuggling. There has also been a significant rise in UK consumption of hand-rolling tobacco.

Brooks Newmark (Braintree, Conservative)

My hon. Friend makes a good point about the influence of duty increases on smuggling, but I should be most interested to hear the Minister’s response to the point made earlier about the analysis of elasticity. What is the Government’s analysis of the effect on reducing smoking of each 1p increase in duty? It would be extremely interesting to hear that.

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

My hon. Friend has conveyed his request to the Financial Secretary through me, so I shall not repeat it. We look forward to hearing the answer.

I return to hand-rolling tobacco consumption. In 1995, £5.1 billion-worth of hand-rolling tobacco was  consumed. Last year, £10.8 billion-worth was consumed. The amount of non-UK-produced hand-rolling tobacco in particular has increased every year since 1995.

The Minister works on enforcement with the Tobacco Alliance, which represents some 17,000 independent UK retailers. I know that he sees the alliance regularly, and I am sure that he will join me in paying tribute to its work. The Tobacco Alliance is seriously concerned about the effect of smuggling on small shopkeepers’ livelihoods and on public health, given smugglers’ greater propensity to sell tobacco, particularly counterfeit tobacco, to children.

Last August, 83 per cent. of retailers surveyed by the alliance reported that smuggling had decreased their sales, 27 per cent. had cut staff—those are the two most serious figures—and 21 per cent. said that they were considering closing. Some 71 per cent. were aware of tobacco smuggling in their area, 35 per cent. were aware of counterfeit tobacco smuggling and 20 per cent. knew of smugglers who supplied underage smokers. A total of 90 per cent. thought that the Government were not doing enough to help retailers affected by smuggling—I suppose that when surveyed people always tend to think that the Government are not doing enough, but there it is—while 74 per cent. thought, perhaps unsurprisingly, that the Government should reduce or freeze taxes.

Yesterday, I received a letter from Ken Patel, a Leicester retailer and the chair of Retailers Against Smuggling, the campaigning arm of the Tobacco Alliance. The Financial Secretary will know him. What he wrote is important:

“Tobacco sales account for a large proportion of our footfall and when a customer comes in to buy their cigarettes, the chances are they will pick up something else, like a pint of milk or a newspaper at the same time. We shopkeepers are therefore losing out twice. We simply cannot compete with the smugglers who can undercut our prices by half.

Let me put to you a hypothetical situation: say I was the European head of a smuggling organisation who had to report in to my boss, the worldwide head of a smuggling organisation who wants profits and wants them fast. Where am I going to focus on to get the most profits as quickly as possible? Clearly the solution would be to focus on the country where I can undercut shop prices but still make the most profit—the place with the highest tobacco levels in the EU—the United Kingdom.

On top of that, the best thing about the situation”—

he is writing from the vantage of the imagined head of a smuggling organisation—

“is that the Government in Britain is going to help me out, by increasing tax every year and encouraging more people who smoke to buy their cigarettes from my street-sellers.

Let’s take another hypothetical situation: that I smoke 20 cigarettes a day. I enjoy it and it is part of my life. I am not going to stop just because my pack has gone up over the £5 threshold. It could go up over the £6 threshold and it would not make me stop smoking. It wouldn’t matter that much because I know that if the cost of a pack of legitimate goes over a price barrier I might have subconsciously set, then I can go and get some smuggled from the street corner. It’s going to be quite a while before the cost of a pack of smuggled reaches that subconscious level I have set for a legitimate pack.”

I will not read the rest of Mr Patel’s remarks nor will I explore, in the manner of the Hutton inquiry, subconscious motives. However, I wanted to draw the letter to the attention of the Committee because it  represents the views of 17,000 retailers and Mr Patel makes some important points.

It is worth standing back from those figures for a few moments to consider which organisations are making profits from tobacco smuggling. Ministers do not know and cannot be expected to know all the organisations involved, but they do know, as the rest of us do, the names of some of the organisations. When we refer to smuggling gangs, it can be assumed that they are ordinary criminal gangs. However, they do include the Provisional IRA and loyalist paramilitary groups, which is plainly a serious matter.

Two months ago, Radio 4’s “File on 4” programme reported that the IRA is linked up with other criminal gangs and is behind the smuggling of millions of pounds of contraband across the North sea. It is perhaps significant that cigarettes were among the items seized when premises of the IRA’s reputed chief of staff, Thomas “Slab” Murphy, were sealed off in March, after an operation by customs officers, detectives and soldiers from both sides of the border.

Rob Marris (Wolverhampton, South-West) (Lab) rose—

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

I am delighted to see the hon. Gentleman here and I am sure he will contribute enthusiastically to the debate, just as all his other colleagues will.

Rob Marris (Wolverhampton South West, Labour)

I am grateful to the hon. Gentleman, who I know well from our time in Select Committee. Can he tell me whether he is talking to clause 2 or clause 1?

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

I am addressing clause 1, because as my hon. Friend the Member for Braintree said a moment ago, one of the phenomena that impacts on smuggling is price. Thus, the duties relate to price, so I am addressing clause 1. I am glad that he is following proceedings so closely that he can see that is taking place.

Gordon Banks (PPS (James Purnell, Minister of State), Department for Work and Pensions; Ochil & Perthshire South, Labour)

Will the hon. Gentleman give way?

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

I am very happy to give way to another hon. Member whom we also look forward to hearing from many times in Committee.

Gordon Banks (PPS (James Purnell, Minister of State), Department for Work and Pensions; Ochil & Perthshire South, Labour)

You mentioned the Northern Ireland situation? Do you not acknowledge that this year many tens of millions of cigarettes—

Edward O'Hara (Knowsley South, Labour)

Order. May we establish at the outset that remarks must be addressed through the Chair?

Gordon Banks (PPS (James Purnell, Minister of State), Department for Work and Pensions; Ochil & Perthshire South, Labour)

The hon. Gentleman mentioned the situation relating to Northern Ireland. Cannot it be accepted that tens of millions of cigarettes have been seized in Northern Ireland this year? That showsthat the Government are trying, and succeeding significantly, to get a grip on the issue.

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

If I deal with that point in detail, I am concerned that the hon. Member for Wolverhampton, South-West (Rob Marris) will accuse me of delving into clause 2. However, the hon. Gentleman is right; the Financial Secretary has reported progress in that field, and I am delighted, as I said earlier, that customs officers from both sides of the border were involved in the recent raid on the farm of Mr. Thomas “Slab” Murphy.

Stepping away from the issue of smuggling and the perils of becoming entangled in clause 2, we, like the Government, believe that it is right in principle to use the tax system to discourage smoking. It is also reasonable, in principle, to use taxes on tobacco to raise revenue. We also note that the consumption of tobacco continues to decline, albeit slowly, and that the Treasury has brought down revenue losses from smuggling.

Stephen Hesford (PPS (Rt Hon Baroness Amos, President of the Council), Privy Council Office; Wirral West, Labour)

Given that the Financial Secretary indicated that the rise is in line with inflation, I am not clear what point the hon. Gentleman is making. If there is some elasticity and the rise is the result of inflation, what other increase would he make? Would it be less than inflation?

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

I do not know what rise, freeze or reduction my hon. Friend the Member for Tatton(Mr. Osborne) will propose when he introduces his first Budget in 2009, but I hope that the hon. Gentleman will recognise that there is a relationship between the level at which a duty is set and smuggling. If the Government were not concerned about smuggling or about the level of the increase, we would hear the first noises in Committee from the Economic Secretary to the Treasury, whom I congratulate on his promotion. I am glad that his hon. Friends are as enthusiastic about the issue as I am; doubtless he is, too.

Brooks Newmark (Braintree, Conservative)

Is not one of my hon. Friend’s key points the fact that our tobacco price is among the highest in the European Union? That high price is driving the smuggling industry and putting many shopkeepers out of business.

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

My hon. Friend is right. We are considering the relationship between the high price, smuggling and counterfeit goods. That is the best answer that I can give to the hon. Member for Wirral, West (Stephen Hesford).

Before the Government Back Benchers became so enthusiastic, I was moving on to make a point in the Government’s favour. Although losses from smuggling rose last year, they fell to £4 billion in 2002-03—from £4.2 billion in the previous year and £4.3 billion in the year before that. It is at least possible to believe that HMRC will begin to reduce the figure in future years. For that reason, while we want to hear what the Financial Secretary says, we have no plans to oppose the tax rises in line with inflation that are proposed in clause 1. However, we would like him to address the questions about the rate of duty, and to tell us whether he accepts that there is a point beyond which, if the tobacco duty were raised, revenues would fall and  smuggling would increase. Given the high prices and duty levels to which my hon. Friend referred, we would like the Financial Secretary to give us an indication as to the Treasury’s thinking about how close we are to that point.

Philip Dunne (Ludlow, Conservative)

I, too, would like to express my enthusiasm about serving on this Committee under your chairmanship, Mr. O’Hara, and that of Sir John Butterfill.

I declare that I have a prejudicial interest that is not shown in the Register of Members’ Interests. I am a fervent and passionate anti-smoker. If that colours my remarks on the clause, I am sure that Committee members will at least understand. I am curious about the increases in the rates of duty, because they are somewhat at odds with the Government’s stated policy. I welcome the proposed increase in line with inflation, but I am concerned. Recently, we in the House have advanced proposals banning smoking in public places on grounds of public health, and the Financial Secretary has argued that duty rates are being increased to discourage smoking on the same grounds. Why, then, are the Government limiting themselves this year to an increase in line with inflation alone?

I have done a bit of research into the increases in tobacco duty under this Government. I understand that between January 1998 and March 2006 tobacco duty has been increased from 131.9p per 20 cigarettes to 210.2p, which is a rise of 59.4 per cent. in nominal terms and an increase of 14.9 per cent. in real terms using March 2006 prices. However, we are presented with no increase in duty in real terms, despite the Government’s stated intent.

In trying to understand what may be lying behind this modest increase, I have considered the incidence of smoking under this Government. In the 2004 general household survey, published in December 2005—the one most recently available from the Office for National Statistics—table 8.6 refers to the prevalence of cigarette smoking in Great Britain between 1978 and 2004 in persons aged 16 and over. The incidence of smoking across the population as a whole has declined from 27 per cent. in 1998 to only 25 per cent. in 2004, which is a modest decline given the Government’s ambitions.

The table helpfully goes back to 1978, the period immediately before the last Conservative Government, so I should like to set the issue in context. I remind the Committee that at that point the proportion of adults smoking was 40 per cent., but that declined to 27 per cent. in 1998. That was during a period of the Conservative Government who were clearly more successful in bringing down smoking for a number of reasons. I am not claiming that tobacco duty is the sole reason why the incidence of smoking declined. None the less, the previous Government had a more successful record. I invite the Financial Secretary to comment on the elasticity of demand for cigarettes related to duty and why the Government are being so modest with this measure.

Colin Breed (Shadow Minister, Treasury; South East Cornwall, Liberal Democrat)

The hon. Member for Ludlow(Mr. Dunne) has said much of what I was going to say about the strategy behind the rates of duty.

Duty can be lowered, frozen or raised. Raising it in line with inflation would perhaps be the minimum amount that a Chancellor could do to preserve the amount of revenue received. However, it is the Government’s desire and wish—and the wish throughout the House—for this duty to contribute to a general reduction in smoking and, let us hope, to discourage young people, in particular, from starting.

Like the hon. Gentleman, I ought to declare an interest, because I have never smoked anything. I am not certain whether that makes me anti-smoking. Nevertheless, I think that we all want to reduce smoking, because of the health effects.

Bearing in mind that the Government have, as the hon. Gentleman said, introduced with a huge amount of support in the House and the country the measure for no smoking in public places as a drive to reduce smoking generally, perhaps it was a surprise that the duty on tobacco products in the Budget was raised only in line with inflation. Paragraph 8 of the explanatory notes states:

“The estimated revenue yield from these changes is nil against an indexed base.”

I assume that that is because it has been raised only in line with inflation. However, given the Government’s proposals for driving down levels of smoking, which have been largely supported, one might have assumed that in the next year levels of smoking would reduce and that therefore fewer cigarettes would be purchased. That, in turn, would reduce the tax revenue. That might well be considered a success.

The Government could have considered combining different legislation. For instance, the Scottish Parliament has banned packs of 10 in an attempt to make certain that young people, who are one of the principal purchasers of packs of 10, are unable to buy them and therefore have to spend more money on packs of 20. The hope is that that will reduce the numbers of young people smoking. There is alsothe idea of increasing to 18 the age of purchase. So the Government could have reinforced their proposals with other measures.

As has been said, price is a main driver. As it goes up, fewer people will want or be able to purchase cigarettes. That could spur reduced consumption. Perhaps the Chancellor might have been a little more ambitious by increasing duty further, but we support the overall contention of maintaining the real value.

As has been pointed out already, the real problem is that as we drive up the price, we almost encourage continued smuggling. I am sure that we will discuss that in much greater detail during consideration of the next clause, but a year or two ago, I and other hon. Members visited a business in Belgium that dealt exclusively in what I suspected were smuggled tobacco products. The man who ran the business told me that all he needed for his business to thrive was for the Government over here to keep driving up the price of cigarettes.

Until we can get agreement on the way in which tobacco is taxed, particularly in other parts of the European Union, that problem will continue. The Government should not be deflected or bow down, but should try to stop the smuggling. Certainly, we do not  want to give smugglers any encouragement, even if we are going to increase the price.

Rob Marris (Wolverhampton South West, Labour)

To take the hon. Gentleman back a couple of sentences, is he suggesting tax harmonisation?

Colin Breed (Shadow Minister, Treasury; South East Cornwall, Liberal Democrat)

I am not suggesting that at the moment, but it ought to be considered over time. There is smuggling from all sides in Europe and certainly there is a great deal that could be done in France, Belgium and elsewhere to prevent some of the smuggling into Britain. At the moment, there seems to be a rather laid-back effort. Of course, if other countries in Europe shared our views on the health aspects of smoking, they might be encouraged to increase their prices too. However, if we are not careful, I suspect that harmonisation would end up with us substantially reducing our duty, which I could not possibly accept. It is somewhat fanciful to think that they might harmonise up to our level immediately but, over the next few years, their broad strategy ought to be to recognise the associated health problems. A French person’s lungs are as likely as those of an English person to be affected by the consumption of tobacco.

I expected a modest increase in duty beyond inflation. However, we can look at that again next year and assess the effect on smoking levels and tax yields of the duty rise and the ban on smoking in public places.

Brooks Newmark (Braintree, Conservative)

I shall try to be brief and focus on the effectiveness of duty and its impact on the elasticity of demand and pricing.

We have heard already that we have the highest duties in the EU. As always, the hon. Member for Wolverhampton, South-West makes a very interesting point on tax harmonisation. However, a synthetic tax harmonisation is effectively occurring because of the impact of smuggling, which was mentioned by my hon. Friend the Member for Wycombe. Although in reality taxes are not coming down, the tax take may ultimately come down as prices increase. The tax take is becoming a synthetic tax harmonisation, and we need to be concerned about that.

My second point has to do with the analysis of elasticity of demand and pricing, which the Financial Secretary probably has in hand in one of the documents that he was waving about. Action on Smoking and Health has quite correctly pointed out that tobacco price rises are key in discouraging individuals from smoking, but the problem with price rises, as my hon. Friend said, is that they encourage more and more smuggling. I should like to focus, however, on that elasticity of demand.

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

Does my hon. Friend agree that it is also possible, if not likely, that there is a floor beyond which consumption cannot go? In other words, no matter how high taxes are raised, it is impossible to reduce consumption below a certain level, although no one can be sure what that level is. No matter how high  Governments attempt to raise the tax, they cannot remove that floor. It also encourages smuggling, as he said.

Brooks Newmark (Braintree, Conservative)

As always, my hon. Friend makes an excellent point. As a member of the Select Committee on Science and Technology, I know that there is an addictive element to smoking cigarettes. I believe that increasing prices will encourage those with extremely addictive personalities—or, I should say, those who are affected more strongly than others by cigarettes—to go to the black market to buy their cigarettes at a price below the market price effectively set by the Government. That will encourage a larger and larger black market to satisfy the needs of a core minority of people who need their tobacco fix. I am interested in what the Financial Secretary will have to say on the Government’s analysis. For every 1p increase in tobacco duties, what reduction do we see in consumption, at least down to the rock bottom mentioned by my hon. Friend? I am curious to hear a little more about that analysis.

As Imperial Tobacco has said, smuggling into the UK is the direct result of the differential in excise duties. We want to clamp down on that smuggling or prevent it from happening. Small shopkeepers in my constituency are no different from the shopkeepers of Leicester mentioned by my hon. Friend, or indeed from any of the 17,000 retailers in all the constituencies represented in this Committee. We must be sensitive to their interests.

Clearly, the health of the nation is paramount. As a non-smoker, like the previous two speakers, I want to discourage smoking as much as possible. However, we need to deal with the tension of duty increases and their effect on the black market and smuggling. I shall be interested to hear from the Financial Secretary what analysis the Government have done on the link between the reduction in smoking and the increase in the tax take. What numbers can he give us to show that the tax take is increasing, even with the inflation-linked increase in duty?

John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)

Let me respond to the hon. Member for Wycombe (Mr. Goodman). I know Mr. Patel. I met him before the Budget and wished him well. He has recently taken over as chair of the Tobacco Alliance, and I discussed with him the Government’s interest in working with him and his network of small retailers to see how we can improve the public information that warns people about the dangers of counterfeit cigarettes and smuggled tobacco. Having published the Budget, we will do that work jointly with his organisation. As the hon. Gentleman said, small shopkeepers such as Mr. Patel are concerned, because cigarettes and tobacco bring into their shops people who then buy other things—the footfall, as Mr. Patel puts it. That trade is affected by the availability of illegal, smuggled tobacco. One of our principal reasons for giving such priority to the anti-smuggling strategy is that legitimate, honest businesses are undermined by the bootleggers and smugglers who make available cut-price cigarettes and tobacco.

Small retailers also face a number of other trends, not least the increasing range of retail products available at garages, and the patterns of shopping that, increasingly, take people to supermarkets and out-of-town centres, rather than to their local high streets and corner shops.

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

The hon. Gentleman is right. However, I just want to be sure that he acceptsMr. Patel’s key point, which is that there is a relationship between the rate of duty and smuggling.

John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)

I shall come to that point. Thehon. Members for Ludlow and for Braintree(Mr. Newmark) both tried to probe the relationship between price—underpinned in part, but not entirely, by duty—patterns of smuggling and patterns of consumption. That is clearly complex, but I shall deal with it when I refer to the detailed modelling that the Government economic service has done.

In addition to the Tobacco Alliance, the hon. Member for Wycombe mentioned the Tobacco Manufacturers Association. We work closely with that organisation. Our analysis is that the illicit market trend is consistent, but the precise figures sometimes differ. The counterfeit figures—I am not sure whether they were the TMA’s—that the hon. Gentleman cited certainly differ, and we believe that the anti-fraud measures that we have put in place are making a great impact.

It is important to consider—as the hon. Gentleman encouraged us to do—the modest measure of retaining the real value of tobacco duty in clause 1 in the wider context of the anti-tobacco smuggling strategy, which we launched in 2000-01. Between then and 2003-04, we succeeded first in halting the rapid rise, then in stabilising it and then in beginning to reduce the illicit market. By 2003-04, the illicit market was still too big, but it was down to 16 per cent. Since the launch of the anti-tobacco smuggling strategy in March 2000, the number of cigarettes smuggled into this country each year has been reduced by more than 5 billion, and we have cut the illicit share of cigarettes by a quarter and protected almost £6 billion in revenue to the public purse. Without that action, and the investment that we have been prepared to put in, the illicit market would be not 16 per cent. but 36 per cent. We still have to do more to clamp down, because smuggling gangs change their tactics and their methods very rapidly. Part of what we have to do, and which we set out in the publication “New responses to new challenges: Reinforcing the Tackling Tobacco Smuggling Strategy”, published alongside the Budget, is to deal with the increasing levels of counterfeit cigarettes and the persistently high levels of smuggled hand-rolling tobacco.

Brooks Newmark (Braintree, Conservative)

What analysis does the hon. Gentleman have that lies behind those projections, which show that the number would have been 36 per cent. as opposed to the 16 per cent.? What is the detailed analysis behind that differential?

John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)

The hon. Gentleman brings me neatly to one of the documents that we published about18 months ago. I will send him a personal copy.

Dawn Primarolo (Paymaster General, HM Treasury; Bristol South, Labour)

Signed.

John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)

I am not sure that the hon. Gentleman wants me to do that. The publication is the most rigorous attempt to model and assess the often complex combination of inter-relationships in which the Committee is interested. It contains much of the information for which he and the hon. Members for Ludlow and for Wycombe have been asking. If the hon. Gentleman has time, I suggest that he study it.

The model’s main findings show that, with tobacco, we are close to the revenue maximisation point with cigarette duty. That means that any large real increase in duty rates would increase smuggling and start to reduce, not increase, revenues. Duty cuts wouldnot produce proportionate reductions in tobacco smuggling. Only a large cut in duty would be likely to have any significant impact on the behaviour of consumers and suppliers. The Government economic service tobacco model—this is the answer to one or two of the points that the hon. Gentleman has made—shows that a 1 per cent. real increase raises, in revenue terms, only about £5 million pounds.

Philip Dunne (Ludlow, Conservative)

I am most interested in what the hon. Gentleman is saying. If possible, may I receive a copy of the document? Will he look back at the historic impact of the real increases in the past and explain how effective they were in raising revenue versus the increased smuggling?

John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)

I shall be delighted to ensure that the hon. Gentleman receives a copy. If any other Committee members would like a copy, it is available through the Vote Office.

According to our calculations, a 4 per cent. increase in duty would increase smuggling by about 1 per cent. It would have a negligible impact on consumption. The assessment suggests that it would hit consumption by 0.2 per cent. only. It would increase revenue by only about £10 million pounds and that is the point at which we would reach the revenue maximisation point on cigarette duty.

Brooks Newmark (Braintree, Conservative)

I very much appreciate the analysis that the Financial Secretary has explained. However, there is a slight contradiction, or perhaps, if he could clear it up for me, it is not a contradiction after all. He said that a 1 per cent. increase in duties would increase tax take by £5 million pounds. However, he also said that there is a point of diminishing returns; that one cannot keep increasing duties ad infinitum. I am curious about the analysis in that document. What is the actual tipping point? Are we there now or do we need to increase duties by another 2 to 3 per cent.? Clarification would be helpful on where that tipping point is and the point at which we meet those diminishing returns?

John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)

I do not want to repeat myself. Perhaps the hon. Gentleman did not catch my words when I said that we are very close to the revenue maximisation point on cigarette duty at present? Were we to increase the duty on cigarettes by 4 per cent., we would raise  only an extra £10 million or so. We believe that that is the level at which we would hit the revenue maximisation point.

In his intervention and his contribution, the hon. Gentleman argued that our smuggling problem is principally a product of the fact that our tobacco duty rate is high compared with that of our European Union counterparts. I do not really wish to refer him to other documents, but if I did he would see that the vast majority of illegal cigarettes are smuggled into the UK in freight from outside the European Union. No duty is paid on those cigarettes anywhere, let alone in the European Union, so to concentrate on the difference in duty between Britain and Belgium, Spain or France is to miss the point. It is misleading as a focus for analysis. I am not sure whether the hon. Gentleman advocates cutting the duty in the UK to a rate that is comparable with those that prevail in the rest of the world, but his Front Benchers might be interested in that proposition financially—because it would cost billions of pounds—and in terms of health, because it would lead to an increase in smoking.

Brooks Newmark (Braintree, Conservative)

On a point of clarification, I would never make any suggestion that would contradict my Front Bench, or the aspirations of my fellow Opposition Members.

John Healey (Financial Secretary, HM Treasury; Wentworth, Labour)

I think that we have heard the first public job application from the hon. Gentleman. I wish him well in supporting all the positions that his Front Bench takes during the course of these proceedings. If he does not disagree with the hon. Member for Wycombe, he certainly does with the hon. Member for Ludlow. While he was arguing that rates should be lower, the hon. Member for Ludlow said that the price of cigarettes and the duty on them should be higher. There is clearly an interesting discussion taking place behind the hon. Member for Wycombe. All hon. Members will be interested in the fact that the UK has long maintained high levels of duty so as to keep prices relatively high in order to try to affect consumption. Other countries in Europe, such as France, Germany and Ireland, are beginning—both for public health reasons and for revenue reasons—to follow our lead.

As part of his contention that we should increase tobacco duty in real terms, the hon. Member for Ludlow is rightly concerned, as all hon. Members will be, to bring about further reductions in smoking in this country. It has been the policy of successive previous Administrations and this one to use duty rates to maintain high cigarette and tobacco prices. That has undoubtedly been a significant factor in the reduction in the number of smokers in the population, which has dropped from 35 per cent. in the early 1980s to some 25 per cent. now.

As the proportion of the population who smoke reduces, further gains are harder to achieve. While duty rates were never low—they were never the single club in the policy bag—a number of other measures are needed. That is why I mentioned in my opening remarks that, through the NHS, we are making a large investment in programmes to help people who want to  quit smoking. Hon. Members will be aware that 70 per cent. of smokers say that they would like to quit. The cessation programmes that we have put in place through the NHS are important in that respect. Given our experience in Ireland and Scotland, we believe that the ban in smoking in public places is likely to have a further impact on the overall level of smoking in this country.

I welcome the support of the hon. Memberfor South-East Cornwall (Mr. Breed) for the Government’s policy of a comprehensive smoking ban in public places. I am not sure that his hon. Friend the Member for Twickenham (Dr. Cable), as the Liberal Democrats’ shadow Chancellor, will be quite so keen, but he will certainly be interested in his approach to tax harmonisation.

Let me end by saying that any members of the Committee who believe that there is merit in any of the four new clauses should have a word with me and I shall undertake to let them have copies of all the documents that we have published recently that cover the relevant territory. Hon. Members may take that as a promise or a threat, but I hope that it will help them to come to the right decision when we finally vote on the new clauses, not just on whether clause 1 should stand part of the Bill.

Paul Goodman (Shadow Minister (Childcare), Treasury; Wycombe, Conservative)

As I explained earlier, the new clauses were primarily an attempt to elicit from the Financial Secretary an up-to-date summary of the effectiveness of tobacco duty. He has thoroughly outlined the Government’s thinking, particularly on the revenue maximisation point. It was useful to hear him explaining the Treasury’s position that there is a point beyond which, if the duty were raised, it would almost certainly not drive consumption down, but it would drive smuggling and counterfeiting up. He was also right to say that duties are only one club in the bag, albeit an important club, and to give us details.

We have been given two pointers. One is the point that was raised by the TMA that the Government might miss their smuggling target if present trends continue. The other relates to the Financial Secretary’s kind offer to shower us with documents. While, as I said earlier, the Government’s anti-smuggling strategy succeeded in reducing the revenue loss for two successive years from 2001, it rose again last year. I should be glad—goodness knows why I am exposing myself to more documents in this way—if the Financial Secretary would point me towards the sections of the document that explain clearly and straightforwardly why that occurred. We do not intend to oppose the proposed rise in duties and will not press the new clauses to a vote.

Edward O'Hara (Knowsley South, Labour)

Order. The new clauses have not yet been moved. At the appropriate time, the hon. Gentleman may decide not to move them.