Clause 1 - Rates of tobacco products duty

Finance Bill – in a Public Bill Committee at 10:45 am on 14th May 2002.

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Question proposed, That the clause stand part of the Bill.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

May I add my voice, Mr. Gale, to the Committee's chorus of approval and satisfaction at the privilege of serving under you during the course of our proceedings. I heard you say in response to a remark by the hon. Member for Kingston and Surbiton that it was for you to referee the Committee. We have heard a lot, not least from the hon. Member for Buckingham, about jousting. I must confess that I do not associate the hon. Members for Buckingham or for Christchurch so much with jousting as I do with the World Wrestling Federation and all that goes with it. Therefore, I fear that your skills as a referee may well be sorely tried in the course of the proceedings, but I have no doubt that you, who have wrestled with the best of them, will be able to keep us all under control.

I do not think that such refereeing will be necessary in relation to clause 1. It is an innocuous clause. Smoking is the single largest cause of preventable illness and premature death in the United Kingdom, killing about 120,000 people every year. Research has consistently shown that the price of cigarettes does affect demand, so maintaining the high price of tobacco encourages people to stop smoking and deters people—particularly the young—from taking up the habit. As a result of the large real-terms increases in duty under this, and previous Governments of all political persuasions, cigarette prices in the UK are now at historically high levels. Our decision to raise duties in line with inflation this year will help to maintain the real price, and will discourage people from smoking. I believe that the whole Committee would share that sentiment.

The clause increases rates of excise duty on all tobacco products by approximately 1.9 per cent. in line with inflation, with effect from 6 pm on 17 April 2002. The representations that we have received from health and anti-smoking groups in the run-up to the Budget made clear that they believe that

''greater emphasis should now be placed on raising prices through addressing the trends that tend to drive price down rather than increasing headline tax rates for cigarettes.''

Those trends include the supply of cheap, unregulated tobacco through the smuggling market. As hon. Members know, that problem had been worsening rapidly before the financial year 2000–01 and, without action, it was estimated that smuggling would account for more than a third of the market by 2003. Therefore, I am happy to report to the Committee that, as a result of action taken in our tackling tobacco smuggling strategy, we are now on track to put the smuggling problem into reverse by 2003. In our view, that will help to increase the average price that

consumers pay for cigarettes in the United Kingdom. There is, therefore, widespread support among health and anti-smoking groups for our duty policy on cigarettes and our so far highly successful efforts to clamp down on the unregulated supply of cheap, smuggled tobacco.

I hope that hon. Members will feel able to echo that support and take this concrete step to ensure that we continue to bear down on the problem and send a clear public health message to would-be consumers of this product. I commend the clause to the Committee.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport) 11:00 am, 14th May 2002

I, too, welcome you to the Chair, Mr. Gale. The Financial Secretary thinks that we are engaged in a wrestling match. I assure him that there will be nothing sham about what Conservative Members will do in the Committee: we will want to discover the facts and look at the evidence. On that basis, I have some questions that I hope he will be able to answer.

First, why does the Red Book projection for yield from tobacco duty in the coming year show a reduction of £100 million compared with the yield last year? Is that because there has been a reduction in tobacco consumption, or because the Government have not got as far as they would have liked in dealing with the problem of smuggling? What will the impact of the measure be on consumption?

The Financial Secretary says that the Government have been successful. I think that he said they are on track to put the smuggling problem into reverse. In 1996–97, smuggled cigarettes were 4 per cent. of the cigarette market. Now they are 21–23 per cent., and the loss of revenue is about £3.5 billion each year. This is a Labour problem. There was no problem on this scale when the Conservatives were in power, and I hope that the Financial Secretary will address that serious issue.

The evidence from the tobacco manufacturers is that, since 1997, consumption, which up to then had been on a decline since the early 1970s, has increased by about 5 per cent. Why is that? I suspect that it is because there is easy access, particularly by young people, to imported, illegally smuggled and cheap cigarettes, which are available at the school gate, and indeed inside the school ground in many places. Therefore, young people have access to much cheaper cigarettes than those available at retail tobacconists. As the Financial Secretary said, we have by far the highest tobacco tax, not simply in Europe but anywhere in the world. As a result of the clause, duty on cigarettes will be more than £3.50 out of a retail price of about £4.50.

I hope that the Financial Secretary can answer some of the questions that arise from the clause. Although we have not tabled an amendment seeking a freeze in tobacco duty this year, we are waiting for the information from the Treasury on the present situation. I understand that, normally by this stage in the year, the information on the impact of anti-smuggling measures has been produced. Perhaps the

Financial Secretary can tell us what progress has been made and whether there has been a reduction in smuggling in the past year or a continuing increase. Perhaps he can tell us whether consumption has gone up or down. Can he also explain why in countries such as Spain the smuggling level is 5 per cent., while in this country it is more than 20 per cent.? To what extent is that related to the level of tax that the Government insist on imposing on legitimate smokers? Has the Treasury now abandoned the belief that additional taxation has an effect on the level of smuggling? That seems to be implicit in the clause.

I hope that the Financial Secretary will be able to answer some of those questions and address the problem of the £3.5 billion of lost revenue. That is the total yield from national insurance contributions. An enormous sum is missing. It is feeding a black market involving criminal gangs on a scale unprecedented in this country. It is a serious issue on which to start the Committee's proceedings.

I lack the experience of many Committee members, having served on a Finance Bill Committee only once. That was in 1986 when I had a non-speaking part. I noticed that the then Opposition concentrated on speaking at great length because that was all they could resort to as a form of opposition. We intend to speak briefly, to the point and to try to persuade the Government to respond to the serious issues that we raise.

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

During the previous Parliament, we had many debates in this Committee on proposals to increase tobacco duty. The Liberal Democrats gave qualified support to the Government's proposals gradually to raise tobacco duties, and the Conservative party was against that. The hon. Member for Christchurch has not made it clear whether the Conservatives are against the measure, and said that that depends on the Government's reply to this debate. I look forward to their reaction to that reply. I want to put on the record that the Liberal Democrats remain in favour of the Government's policy of increasing excise duty on tobacco products, primarily for health reasons. Every year, 120,000 people die of tobacco-related illnesses, so the matter is serious.

During the previous Parliament, we had many debates on whether that policy was beginning to have the reverse effect of that intended and whether the proliferation of smuggling was resulting in children and adults having access to cheap tobacco and smoking more than they would have done if duties had remained unindexed or been cut. Those debates backed the Government's position, but gave them a warning.

We had a long debate on elasticity of demand, the tax elasticity of smuggling, cross-priced elasticity and revenue elasticity to duty rates. I shall not reiterate that debate, but the conclusion was that if the Government raised duties there would be a net gain to the Exchequer, so they are justified in continuing that policy. However, the hon. Member for West Dorset (Mr. Letwin) made a powerful argument about the social effect of undermining law and order with the increase in smuggling. He argued that unless the

smuggling were tackled, whether or not there was a revenue gain for the Government from increasing excise duty on tobacco, there would be an undermining of social order and that that should be costed into the Government's equations. He was right to make that point and he did so powerfully. That was the major reason for us saying loudly to the Government that their anti-smuggling policy must be shown to work and be continued with persistence and ferocity.

The pre-Budget report suggests that that policy is beginning to work. We were told that Customs and Excise seized nearly 2 billion cigarettes in 1999–2000 and nearly 3 billion in 2000–01, which clearly indicates that there have been greater seizures, although it also shows that smuggling is still there. I wonder what happens to those 3 billion cigarettes.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

It is important to be clear about the philosophical underpinning, if such a term can be used in relation to a Liberal Democrat, of the hon. Gentleman's position. His support for the Government's position is on the ground of health rather than that of revenue raising. For the avoidance of doubt, will he confirm that if—I am not saying that this is the case—the evidence were to show that the Government's policy was not effective in terms of health but only in terms of revenue raising, he would change his position?

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

I would indeed, and the Government would too. Like previous Conservative Governments, they have said that the purpose of raising tobacco excise duty is to reduce the demand for smoking. An awful lot of evidence from the World Health Organisation and other bodies not only in this country but internationally supports the thrust of their policy, and that of the previous Conservative Government, on tax duty. If that evidence were to change, it would be incumbent on all hon. Members to change their positions.

I refer members of the Committee to the pre-Budget report, which indicated that the Government's anti-smuggling policy is having an effect. The Financial Secretary said that the tide of smuggling may be turned by 2003, and the pre-Budget report suggested that it is currently stable. I am sure that he would agree that smuggling is still at a very high level because 21 per cent. of the UK market is believed to consist of smuggled cigarettes, which is a very large percentage. We need to see that figure pushed down even further.

I hope that the Financial Secretary will tell us what other measures are being taken and how he imagines that the measures that are already in place will continue to push down on smuggling, whether it consists of cross-Channel passenger smuggling, the white van trade or the organised crime part of the smuggling market. I hope that he can provide good evidence that Liberal Democrat Members are right to continue to support the Government in their dual approach of increasing duty on cigarettes for health and having an anti-smuggling policy to tackle fraud.

One specific measure in the clause surprised me because recent Finance Bills have frozen the duty on hand-rolling tobacco. The differential between the

price of hand-rolling tobacco in the UK and its price in Belgium, France and one or two other EU countries was far greater than the differential between the price of a packet of 20 cigarettes, which resulted in a greater propensity to smuggle hand-rolling tobacco. Indeed, hand-rolling tobacco became a substitute for rolled tobacco, and tobacco manufacturers experienced a major substitution from packets of cigarettes to hand-rolled cigarettes. I was therefore surprised to see a change in policy in the Budget to move from non-indexation of duty on hand-rolling tobacco to indexation. Previous Budgets have contained a real-terms cut in excise duty on hand-rolling tobacco. I wonder whether the Minister can explain why policy has changed and how the Government justify that.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

I add my welcome to your chairing of our deliberations today, Mr. Gale. I should probably declare an interest as perhaps one of the few smokers present.

Does the Financial Secretary have any estimates of the Government's objective in terms of reducing smoking? We know that the revenue objective is a reduction of £100 million, but we do not know what reduction in smoking they expect to achieve.

I shall, for what it is worth, fall in line with the general middle class view that smoking is a bad thing and must be discouraged at all costs, but what has taken place since 1997 is an example of political correctness achieving the wrong objectives. It is clear that a bell-shaped curve applies both to discouraging smoking and to tax revenues, and that there is at least a theoretical, optimum position on the tax revenue curve before one begins to encourage widespread smuggling—not just smuggling, but people going over to continental Europe in droves and buying what they are allowed to buy.

Secondly, there is a knock-on bell-shaped curve in relation to discouraging smoking: again, once cheap cigarettes become widely available as a result of smuggling, the price-demand effect goes into negative territory. On both curves there is a point at which the right price and the right duty tend to achieve the optimum on both fronts. What we are achieving is well to the right of that and down the other side of the curve, and the figures were quoted.

It is interesting that up to 1997 we were one of the most successful countries in reducing smoking, which fell by 37 per cent. between 1970 and 1997. Prevalence fell by 40 per cent. The policy of gradual price increases, without getting wildly out of line with continental European prices, worked, as no doubt did all the teaching that smoking is bad for one. However, the estimates are that smoking has gone up about 5 per cent. since 1997, particularly, as I think we are all aware, among younger ladies.

I dislike the regressive nature of this taxation. Let us be truthful: many tax credits will be spent on smoking. In view of the prevalence of smoking in society, it is the biggest regressive tax that we have. A prohibition mentality lies behind the good intentions, and the Government should step back, take stock and do their own analysis of revenues as well as of the

impact of pricing policies on smoking, including the interaction with anti-smuggling activities. Smuggling relates not simply to 21 per cent. of cigarettes and 70 per cent. of hand rolled, but to the 10 to 12 per cent. of people who buy their cigarettes outside this country. Therefore, the smuggling figures do not tell the whole story about the revenue that is being lost and what is being smoked.

The Government must admit that the results of all the effort and money spent on staffing Customs and Excise and so forth are pretty feeble. Even the Customs and Excise target—not that it necessarily expects to achieve it—is to reduce cigarette smuggling to 18 per cent. in 2004–05 from 21 per cent. today. Therefore, I cannot see how the Government can claim that all the cost and effort of greater Customs and Excise activity will have much impact.

What has happened to the hypothesised additional money from the smoking tax for the NHS, which the Chancellor boasted about in 1999? Do the falling tax revenues mean that the money the NHS would have received has also fallen? Has that been forgotten? Was it all just words and spin at the time? What are the numbers here? Is the policy still in place?

We have corrupted society. We have made many decent people participate in smuggling because they regard it as socially acceptable not to pay excessive prices, as I have commented in the past. Exactly the same happened with coffee in the 18th century. We have reduced tax revenues dramatically—the estimate is by about £3.5 billion a year, or some £10 billion since 1997—yet we have increased tobacco consumption by 5 per cent.

Is that a sensible strategy to have followed? To me, it sounds crackpot on all fronts. Merely to recite the chant that we must put up prices because smoking is bad for people, while not considering the effects of what is being done, seems hypocritical and wrong to me, even if the primary objective involves health through reduced smoking. I should like to know the relevant figures.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury 11:15 am, 14th May 2002

I am grateful to my hon. Friend for giving way, as he provides a learned disquisition on his subject. The Committee must consider important issues of health improvement and raising revenue, but I was struck by what he said at the outset about bowing down to the middle class consensus on the subject. For the avoidance of doubt, I put it on record that although I gave up cigarette smoking on 25 June 1986, following an especially trying meeting of Lambeth borough council's women's committee, I strongly believe in freedom of choice. I defend passionately my hon. Friend's right to continue to smoke cigarettes, if that is his choice.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

I thank my hon. Friend. Perhaps I shall give up one day, but to return to wrestling, I am glad to say that I can still wrestle pretty effectively.

It is a great pity that the Government suppressed the key parts of the Taylor report. The strategy followed since 1997 has, very clearly, been to up the duty and up the price of cigarettes by more than is

sensible if the aims are to discourage smoking and to have regard to tax revenue.

Photo of Mr Iain Luke Mr Iain Luke Labour, Dundee East

On behalf of the newer Members here, who have not served before, may I say how much I have appreciated your chairmanship of Committees, Mr. Gale, and how you have guided us through the intricacies of parliamentary debate? I hope that you keep us in touch with what we should and should not do in this Committee.

I take the points made by the hon. Member for Arundel and South Downs, but smoking is bad for, and affects, people's health. Even if the marked effects of this tax increase are marginal, it will certainly save someone's life and have a good effect on people's health throughout the country. Every family knows of, or is affected by, the abysmal habit of smoking. I am a non-smoker, so I can take that Presbyterian, Calvinist view but, at the end of the day, what the Government are doing must be promoted. We must look at the matter in the round. The recent Bill to restrict or abolish tobacco advertising would have saved the health service £40 million a year and saved 3,000 of the 120,000 lives that we are discussing.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

Does the hon. Gentleman really believe that such a measure would reduce smoking? The crucial point is that smoking has increased due to the higher prices of the past five years and the resultant impact on smuggling. I have asked the Minister what he expects the outcome to be. Will the angle that the hon. Gentleman advocates be counter-productive?

Photo of Mr Iain Luke Mr Iain Luke Labour, Dundee East

I shall return to the Customs and Excise situation, but I believe that many hardened smokers who have smoked all their lives cannot give up because they have been hooked for so long. I speak from experience, because my father was such a person and he unfortunately died of cancer. However, the incremental effect of taxes on younger people, who are not yet so involved in the habit, may be positive and they may be deterred from taking up smoking. I am not being critical and I am happy to acknowledge a personal freedom to smoke, but passive smoking has become a big issue in legal and medical terms. I hope that the overall effect is that the number of people who smoke is marginally reduced, people's health improves and costs to the health service reduce.

I take the point on Customs and Excise. This week, much concern has been raised in the Scottish press on Customs and Excise coverage in remote northern and north-eastern areas of Scotland. It has been run down so badly that smuggling of different types of banned goods has increased. I hope that the Treasury focuses on Customs and Excise having balanced coverage to ensure that smuggling and its ill effects—rlspecifically, those of tobacco—are countered.

Photo of Michael Jack Michael Jack Conservative, Fylde

I congratulate the Financial Secretary on his introduction of the clause, which showed his keenness for debate and his awareness of the facts. I am sure that we shall hear more during the debate.

I follow hon. Members on both sides of the Committee in probing the Government further on the reason for the clause. In table A.1 of the Red Book on page 155, the straightforward assumption is that the proposed revalorisation will have a zero revenue

effect. If that is so, it brings into question note five of the notes on clauses, which states:

''Research has consistently shown that the price of cigarettes affects demand.''

The hon. Member for Kingston and Surbiton said that we have previously discussed the demand elasticity of tobacco products; perhaps we should discuss it again. I am not a smoker, but I am aware of the struggle by smokers to give up. I am also aware, from inspection rather than from objective proof, that more young people are starting to smoke. It would be helpful to have the facts before us. We do not know what effect a 6.3p increase per packet will have on a young first-time smoker as opposed to a more established smoker who has taken a personal decision on the risk. That argument follows the one on tobacco advertising.

People in the tobacco business closely follow proceedings in Parliament on this matter. It has always been argued that tobacco advertising does not persuade people to smoke, but shifts them between brands. One can make of that argument what one wants, but in the context of price, is the Government strategy designed to raise revenue, to dissuade newcomers from starting to smoke or just to make life difficult for those who have already discounted their exposure to the health risks of tobacco? I suggest that if one wants to dissuade people from smoking, one might go beyond simple revalorisation. If one is looking for a method of raising money, one might adopt a different strategy.

The clause and its notes do not make clear the strategy that the Government are following. We do not even know whether we are into the world of diminishing returns because, in many cases, indirect tax has almost become part of the tax firmament—every year a revalorisation will take place not only for tobacco, but for alcohol products. Whisky can reach a point of diminishing return for revenue, and the Chancellor made great play of a reduction in which he was involved, just as my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) did.

The notes on clauses do not conduct us through a cost-benefit analysis, which the hon. Member for Dundee, East (Mr. Luke) started to do. The Treasury could say that we do not have a hypothecation of tax, but last night, on Second Reading of measures connected with national insurance, we got as near to a gigantic hypothecated tax as we have been for a long time.

If the Government's objective in raising revenue through national insurance is substantially to increase national health service funding, it is correct to ask precisely what is the relationship between revenues raised from the variety of tobacco products in subsection (1) and the associated health costs. That debate involves not just health costs, but revenue loss to the economy due to people who are ill as a result of smoking-related diseases and who are not productive. I could go on, which is why a cost-benefit approach may be the right one. It would be helpful to know the elasticity factors on which the Treasury bases its proposals. Do they vary with the age of the smoker or potential smoker?

It would be useful to have information about the measurable effects on smoking trends in the United Kingdom; Government and Opposition Members have made points about that. It would also be helpful to contrast that with information about other European countries with different tax regimes, which, in their own way, have given rise to some smuggling. The Treasury is taxing through an indirect and, by definition, regressive tax. Therefore, it is important to know the justification for the Government's proposals, so that the Committee might have a proper and well-informed basis on which to judge what it may be asked to support.

Photo of Mr Roger Casale Mr Roger Casale Labour, Wimbledon 11:30 am, 14th May 2002

I welcome you to the Chair, Mr. Gale, and look forward to serving under your chairmanship. This is the first time that we have come into contact. On occasion, because of the similarity of our names, our post has been misdirected, but I hope that no one in Committee confuses our identities.

I speak as one who gave up smoking some years ago. I am not the kind of reformed smoker who tries to persuade everyone else to give up. Nevertheless, I succeeded in quitting, but not as a direct result of price increases, although they had an indirect effect, as family members noticed that the cost of my habit was eating up more and more of the family income. A serious point that has been well made is that the smoking tax has a disproportionate effect on people on lower incomes, and the cost of cigarettes represents a substantial part of some families' budgets. We must bear that in mind when we consider measures such as clause 1.

Nevertheless, I welcome the measure, which will result in more revenue for the Government. It will also help to reduce cigarette consumption, which is good for public health. Most importantly, it will generate more income that can be invested in the NHS. However, we must be aware of the social impact of the tax, which is different for different sectors of the population. To counter the disproportionate effect, perhaps we ought to make more help available by offering, for example, nicotine replacement treatment through GPs and the NHS to those who genuinely wish to give up smoking.

In previous Finance Bill debates, we have discussed the influence of smuggling—it has been mentioned today—and how it can decrease revenue. However, there is an error at the heart of the argument. Many things cause people to smuggle cigarettes, alcohol and other goods, not least increased freedom of movement and greater ease of shopping in other European countries using technology such as the internet. Of course, we must be aware of smuggling's effect, but we cannot blame it all on increased tobacco prices. A balance must be struck that considers the objectives of raising revenue, protecting public health and counteracting smuggling. In the fight against smuggling, the Government have invested many new resources to increase the number of Customs and Excise employees and, through the Home Office, to clamp down on criminal activity.

The hon. Member for Christchurch contends that the indexation of cigarette prices was not a Tory policy. We all remember that, under the Tory Government, there was not only indexation of tobacco prices, but the introduction of the escalator that created above-inflation cigarette price increases. To strike a proper balance between protecting public health, raising revenue and discouraging smuggling, we have removed the escalator, but it is still right to have an inflationary increase this year.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport)

The hon. Gentleman misrepresents me. I said that under the Conservatives, the incidence of smuggling was less than 5 per cent. of cigarette consumption. Now, it is well over 20 per cent. Under the Conservatives, tobacco and cigarette consumption were falling, but they have increased by about 5 per cent. over the last five years. Those two changes have come about since the election of a Labour Government. The hon. Gentleman may think that they have nothing to do with the Labour Government, but surely someone should take responsibility. I suggest that the Government should.

Photo of Mr Roger Casale Mr Roger Casale Labour, Wimbledon

It is a long time since we had a Tory Government, and I hope that the next Tory Government are a long way in the future. However, several other factors have changed in the meantime. The increase in smuggling is a general phenomenon and we must do something about it. If the hon. Gentleman is so concerned about smuggling, I hope that he favours the extra measures and investment that will counter it.

Photo of John Bercow John Bercow Shadow Chief Secretary to the Treasury

The omens from the 1997–2001 Parliament are not auspicious for the hon. Gentleman's thesis that excise duty rises will lead to decreased tobacco consumption. Can we please have it on the record, therefore, whether he predicts that tobacco consumption will be lower at the end of this Parliament than it is today, as a result of increased excise duties?

Photo of Mr Roger Casale Mr Roger Casale Labour, Wimbledon

The laws of economics are such that if the price of a good is increased, demand is reduced. On smuggling, price is one of several factors that we must take into account. If the hon. Gentleman is so concerned about smuggling and thinks that the only way to reduce it is to reduce tax, he must pursue that argument to the end and say that we should have no tax on cigarettes, or only very little.

I have found in the comments that we have heard this morning a reluctance to accept such tax. Again and again, we hear arguments against particular taxes, but perhaps what lies behind them is a general antipathy to any tax at all. The Government have struck the right balance. We must take account of the need to discourage smuggling, and we were right to come off the tobacco price escalator. The measure is the right response, and I support it.

Photo of Mark Hoban Mark Hoban Conservative, Fareham

I add my welcome to those of other hon. Members, Mr. Gale, and I look forward to working under your chairmanship in the weeks ahead. I tackle my first Finance Bill with some trepidation, having had occasion from time to time, as

an accountant, to bemoan its predecessors for their impact on the clients that I dealt with.

On cigarette duties, I hope that the Government explain in more detail how they have come to consider the revalorisation of excise duties on tobacco. Valid points have been made about the impact of the increase on smuggling. It would be valuable if the Financial Secretary explained what process the Government went through and their thinking on the balance between the impact of increased tobacco duties on smuggling and on consumption in respect of those who buy tobacco from normal outlets. That is an important issue, although I wish to avoid a debate on elasticities that I last encountered as an economics student at university. There are important trade-offs to consider here.

As the hon. Member for Wimbledon (Roger Casale) said, in addition to the more normal smuggling routes, such as white vans crossing the channel, there is now the internet, which facilitates more efficient and perhaps more anonymous cross-border cigarette transactions. In the context of the Government's tobacco smuggling strategy, what action are they taking to reduce the internet's impact on smuggling and importing cheap tobacco to the UK to avoid the very high duty rates incurred in this country?

The hon. Member for Dundee, East alluded to the resources available for Customs and Excise to tackle smuggling, referring to north-east Scotland. Will the Financial Secretary outline what additional resources will be available to Customs and Excise to tackle any smuggling increase and to ensure that we claw back some of the lost revenue to which my hon. Friend the Member for Christchurch referred? Tackling smuggling is important, but my concern is that Customs and Excise is under-resourced for that, so I should be interested to hear in more detail what plans there are to tackle it. If we increase tobacco tax, that will increase the incentive to smuggle to avoid the high duty. We must ensure that counter-measures are in place to restrict that.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

We have had an interesting debate, with a parade of smokers and non-smokers—past and present, reformed and unreformed, repentant and unrepentant and, in the case of the hon. Member for Christchurch, deep-dyed blue and unreconstructed. If that is the tone and nature of the contributions that we can expect from that quarter in the weeks ahead, we shall have a very interesting time indeed.

I turn straight to the—

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I would not choose to use that word; I would prefer to use the word hub.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I shall refer to the hub of the proposition made by the hon. Member for Christchurch—that this is, somehow, all Labour's fault. I suspect that, whatever we are debating, we shall hear from the hon. Gentleman that it is all Labour's fault. [Hon. Members: ''Hear, hear''.] That

is the level of intellectual engagement with the Finance Bill that we shall have to tolerate in the weeks ahead.

On reflection, the hon. Gentleman might want to revisit that argument. Why people smoke, why they give up smoking and why people's inhibitions over breaking the law when it comes to cheating the Excise are, perhaps, lower than in other areas of law-breaking are interesting questions raising complex issues. Over smuggling, there is a misplaced romantic notion of baccy for the parson, brandy for the squire. [Laughter.] I see that the hon. Member for Arundel and South Downs, no doubt of the squire class, thinks that that is rather a good idea, but for some of us, who do not aspire to the lofty heights of the squirearchy, the breaking of the law is not to be sanctioned under any circumstances. I know that the hon. Gentleman accepts that; I am just pulling his leg.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

I greatly thank the Financial Secretary for giving way and I endorse what he said. However, does he therefore think that it has been a good idea to follow tax policies that have led to large numbers of people thinking that it is okay to break the law?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I shall come to that. I do not think that an examination of the policies on tobacco, or on anti-fraud and avoidance strategies generally, that Labour Governments have pursued since 1997 bears that interpretation. I do not want immediately to get into the hurly-burly of party political debate, but I feel that I must respond to the suggestion that we are soft on smuggling. My hon. Friend the Paymaster General had responsibility for that area way back in 1997 and has a very long institutional memory. When she assumed her responsibilities, one of the first things that she had to do was to reverse a cut of 300 front-line staff that had occurred during the tenure of office as Financial Secretary of no less a person than the right hon. Member for Fylde. The Conservative Government had cut 300 staff and were going to cut another 300. She had to reverse both of those cuts.

That fact says something about the priority that has been given to the issue of smuggling. I should not suggest that all smuggling prior to 1997 was the fault of the Tories because that would be grotesquely simplistic. As the right hon. Member for Fylde knows, the matter is not as simple as that. It is not, however, fair to suggest that we are soft on smuggling because we have sought to bear down on it by taking the necessary measures.

The hon. Member for Kingston and Surbiton called for the ferocity required—I think that those were his words—to deal with the issue. His contribution was interesting and I appreciate his constructive approach. I must say that I heard a different story from a deputation of Liberal Democrat MPs from the south-west.

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

Ah yes. Those MPs came to see me in the Treasury and said that our measures were too draconian. [Interruption.] I know—I was surprised. They said that far too many white vans were being stopped. However, the contribution by the hon. Member for Kingston and Surbiton will be there for all to see in Hansard, and I shall draw it to the

attention of the next deputation from the Liberal Democrats that makes its way to the Treasury. His contribution was, nevertheless, important and I accept his analysis. It is important to have an appropriate focus on the problem. The approach taken by Customs and Excise has been described in the High Court as reasonable and proportionate, and is a reasonable response to a menace that undermines legitimate trade.

Had we not taken tough action to tackle tobacco smuggling, according to estimates confirmed by the National Audit Office, the market share of smuggled cigarettes would have reached 25 per cent. in 2000–01 and risen to 35 per cent. in 2003–04. Instead, as a result of our anti-tobacco-smuggling strategy, the market share of smuggled cigarettes was 21 per cent. in 2000–01 and early indications are that Customs has reached its key target of reducing the market share of smuggled cigarettes to 20 per cent. by 2003–04, which is 15 per cent. lower than it would have been without the necessary action. As part of the routine annual publication of figures and estimates, we shall publish the detailed outcome of the strategy for this year in due course.

Photo of Michael Jack Michael Jack Conservative, Fylde 11:45 am, 14th May 2002

For the benefit of the Committee, will the Financial Secretary tell us the retail value of the one fifth of the cigarette market to which he referred?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I will certainly drop the right hon. Gentleman a line to give him the exact figures on the value of one fifth of the market. If he will excuse me, I do not have that figure immediately at my fingertips.Given the strong upward trend in smuggling before the strategy was implemented, reducing the smuggled market share by 2003–04 was an ambitious target and meeting it would be a considerable achievement. We do not underestimate the scale of the problem. Right hon. and hon. Members who have drawn attention to the corrosion that such lawlessness causes to the social fabric of our country make a good point. We must roll it back and we are determined to do so.

The hon. Member for—

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

The hon. Member for Fareham made an interesting point about tobacco smuggling through the internet. It is important always to be one step ahead of those who engage in such fraud and as part of our strategy for tackling it, Customs and Excise has developed a co-ordinated response involving increased operational activity designed to seize as many cigarettes as possible, advertising on the internet to inform would-be purchasers that cigarettes bought through the internet are subject to United Kingdom duty and VAT and that cigarettes purchased without UK duty would be seized, contacting the websites to inform them of the correct legal procedures for supplying tobacco over the internet, contacting internet service providers to ask whether those websites conform to their conditions of trading, and working with other Government Departments and enforcement agencies in the UK and abroad to identify what further action can be taken against those

websites. The hon. Gentleman was right to identify the problem and we are determined to stay ahead of those who seek to use the internet to break the law.

Photo of Mark Hoban Mark Hoban Conservative, Fareham

On internet smuggling, will the Financial Secretary outline the locations that have been used as a base for suppliers of cigarettes through the internet? Will he explain whether they are based in Europe or outside and what co-operation exists with European Union agencies to tackle the matter?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I am able to say that some are in the EU and others are outside. There is a concerted EU strategy on smuggling and there is real concern among our partners in Europe to find ways of working together. I and my hon. Friend the Paymaster General have been in contact with other Ministers and the European Commission. China is a source of much tobacco from outside the EU and we have good relations with Ministers and Customs and Excise in China in bearing down on the problem from that end. The problem is one of international criminality and the criminals involved are determined and ruthless, and operate at various levels.

I am grateful to my hon. Friend the Member for Dundee, East for drawing attention to the problem in Scotland with its islands and remote coastal areas. We have developed a flexible and mobile UK response that is intelligence-led and can move to areas under assault to provide a determined response to those who try to breach frontiers. At any one time, we have a cutter in Scottish waters that can intercept illicit contraband that is being taken to Scotland's shores. The problem involves not just the supply on estates and from the back of vans, but bringing the stuff in along the coastline. Therefore, it is a national problem. I was asked about the level of new resources applied to tackling it. Some £209 million has been invested in a strategy to tackle the problem, and we are confident that that will help to deliver challenging targets.

I know that hon. Members do not want me to go on at great length about the issue of elasticity, but I cannot ignore it completely. Customs and Excise estimates that a 10 per cent. real increase in price results in a 3 per cent. decline in consumption. The right hon. Member for Fylde will be interested to know that Customs and Excise does not make, as I suspect that it did not do in his time—he may be able to share his experience with us—separate estimates for different age groups. Perhaps that should be considered a useful piece of work, if it could be done at reasonable cost. We know from other research, as I recall from my time in the Department of Health, that young women, in particular, are taking up smoking much faster than young men. We do not know why. It will not be enough for the hon. Member for Christchurch to say, ''It's all down to a Labour Government'', and I am sure that even he would not suggest that. We do not know why, but they are doing so. That requires a response and it may be well be that, as part of that response, we should commission research into the effect of a price rise on that section of the market.

This year's inflation-only increase is designed to meet our historically higher level of taxes, with the expectation that demand will not increase. I was asked why there was a reduction in the Red Book for next year. Revenue receipts are forecast to decline slightly next year as a result of a range of factors, including an estimated small decline in consumption. Recent estimates show that the proportion of the population who smoke has fallen a bit. Again, we do not know why, but we welcome the fact that it has fallen from 28 per cent. in 1998 to 27 per cent. in 2000. That makes about 12.55 million adult smokers in the United Kingdom—still too many. I give way to one.

Photo of Mr Howard Flight Mr Howard Flight Conservative, Arundel and South Downs

Could the Financial Secretary make it clear whether the 27 per cent. figure is for recorded cigarette sales or whether it includes an allowance for the expected assessment of smuggled tobacco?

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

I believe, and I shall be corrected if I am wrong, that it includes an allowance for the expectation of smuggled tobacco. I sense from movement to my left that I am right in that belief.

This is a complicated and complex issue. We believe that we have got the balance right. My hon. Friend the Member for Wimbledon (Mr. Casale) was spot on—

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

As usual, as my hon. Friend, who sadly must be silent through these Committees normally, says from a sedentary position. The Government of whom the right hon. Member for Fylde was a member introduced the tobacco duty escalator, which ensured above-average inflation price increases. It was 3 per cent. in 1993 and it was increased to 5 per cent. in 1997, when the right hon. Gentleman was Financial Secretary to the Treasury. We abandoned that in November 1990, although there was, as has been said, the 5 per cent. increase in Budget 2000. That has historically been the pattern of taxation in this country, as the right hon. Member for Rushcliffe—

Photo of Mr Paul Boateng Mr Paul Boateng Financial Secretary, HM Treasury, The Financial Secretary to the Treasury

The right hon. and learned Member for Rushcliffe—although it has been some time since he practised the arts of the law. He has always been an inveterate practitioner of the arts of politics—and a smoker, too, which I suspect some in his party might have wished he had given up, but he has given up neither of those activities. He pointed out with a great deal of force that

''traditionally, for I think about 200 years, we have always raised far more revenue from alcohol and tobacco. We are entitled to make our choice; it is our national pattern of taxation and it always will be''.—[Official Report, 8 December 1994; Vol. 251, c. 486.]

That is what the right hon. and learned Member for Rushcliffe said in December 1994, and it is what I say now. On that basis, I commend the clause to the Committee.

Photo of Christopher Chope Christopher Chope Shadow Spokesperson (Transport) 12:00 pm, 14th May 2002

I am grateful to the Financial Secretary for being so open with the Committee and giving us much of the information for which we asked. I am convinced that the Government wish to get tough on smuggling, but I am less convinced that they are

prepared to get tough on the causes of smuggling. Conservatives are concerned that one of the main causes of smuggling may be that we have the highest tobacco tax in the world.

The right hon. Gentleman said that, according to information from Customs and Excise, a 10 per cent. increase in price leads to a 3 per cent. reduction in consumption. For the legitimate market, the price of cigarettes has gone up by about 45 per cent. since 1997, yet consumption has gone up by about 5 per cent. That suggests that the rules that normally apply, which are used by officials in Customs and Excise, are not operating in the UK market. In 1997, a child who wished to smoke cigarettes would have bought them at £3.12 for 20. Today, because of the enormous market in illegally imported cigarettes, a child can buy cigarettes at £2 or £2.50 for 20. That is a concern. We shall consider the right hon. Gentleman's comments in deciding whether we wish to come back with a specific amendment on Report.

Photo of Edward Davey Edward Davey Shadow Chief Secretary to the Treasury, Shadow Minister (Olympics and London), Liberal Democrat Spokesperson (Olympics and London), Liberal Democrat Spokesperson (Chief Secretary to the Treasury)

The Financial Secretary failed to answer my question about the change in policy on excise duties for hand-rolling tobacco. I hope that he will write to me about it if he is unable to take the opportunity to answer now.

Question put and agreed to.

Clause 1 ordered to stand part of the Bill.