Clause 2 - Rate of duty on beer

Finance Bill – in a Public Bill Committee at 9:30 am on 15th May 2003.

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

Photo of John Healey John Healey The Economic Secretary to the Treasury

I look forward to serving on the Committee under your chairmanship, Sir Nicholas. You said that you were determined that it will be an ordered, structured and positive Committee and that every effort will be made to ensure that important matters are properly debated. My right hon. Friend the Paymaster General and I share your determination.

The right hon. Member for Fylde noted the number of Committee members from the north-west. As I look down the list, it strikes me that almost one in five of us are from Yorkshire, which will ensure a tough, gritty approach. It is probably appropriate that the first clause that we are to discuss concerns beer duty.

The clause increases the rate of excise duty charged on beer by 2.8 per cent., in line with general inflation. Excise duty and value added tax on alcohol provide a crucial £12.5 billion to invest in essential public services such as schools, hospitals and transport and in tackling crime. Beer accounts for more than 40 per cent. of alcohol duty receipts. This inflation-only increase in duty and VAT, which is equivalent to around a penny a pint, is necessary to maintain an important source of revenue. I remind the Committee that that modest increase, which is a freeze in real terms, comes after actual freezes in beer duty in three of the previous four Budgets. Since coming to power in 1997, this Government, unlike the last, have made no real terms increases in beer duty.

Some hon. Members may say that any increases in duty rates, even an inflation-only increase, will fuel the smuggling of beer and wine, the duty on which is increased in line with inflation in clause 3. The Government are absolutely committed to tough action to protect the industry against the effects of illegal smuggling and, as we announced in the pre-Budget report, Customs and Excise have continued to have a significant impact on cross-channel smuggling. The modest duty increases take place against a background, in 2002, of a 22 per cent. reduction in revenue evaded through beer smuggling and a halving in revenue evaded through smuggling of wine and spirits for the second year in succession.

I am aware of the pressures on brewers and the pub industry. They play an important part in our economy, our heritage and, for some of us, our leisure time. This modest inflation-only increase in beer duty recognises their concerns but, at the same time, maintains an important stream of revenue that is necessary to maintain our commitment to improving public services.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I, too, welcome you to the Chair, Sir Nicholas, and your colleagues, Mr. McWilliam and Mr. Gale. As one of the proliferation of Members from the north-west, and not least as a Cheshire Member, I find it a particular privilege to serve under your chairmanship.

I thank the Economic Secretary for his contribution in the Committee of the whole House, although we were disappointed that he was not minded to accept any of our amendments. The issues raised were given a fair time for debate, but deep regret was felt on the Opposition Benches, and by many professional advisers and those who take an interest in the City, that the operation of a knife at the end of the first day meant that we were not able to debate the important area of stamp duty. That was a serious omission, and stamp tax was a real victim of the draconian timetabling procedure under which we have to suffer. Having put those comments on the record, I take this opportunity—as it has not been mentioned so far—to wish the Financial Secretary to the Treasury well. I know that she is quite rightly on maternity leave, and we all hope that it proceeds satisfactorily so that she will be able to add to her happy, and already somewhat numerous, family.

Clause 2, as the Economic Secretary has said, provides for an increase in the rates of excise duty charged on beer in line with inflation at 2.8 per cent., which came into effect from midnight on 30 April, on the assumptions that the Committee feels minded to support that proposal and that it will receive the backing and support of the House in due course. Although that is a very important duty, it would be right, in taking account of the proper admonitions that you hope we will be mindful of and abide by, Sir Nicholas, to note that the arguments that we raised in some detail in relation to tobacco products, and the other issues that came up during the new clause debate on the Floor of the House, apply equally to smuggling and cross-border issues relating to beer.

I do not think that it would be proper use of the Committee's time to delve into those issues one more

time. We have gauged the Government's reaction to what I hope were seen to be considered and responsible proposals, which were an attempt to tackle a genuine issue that affects users, not least, and corner shop owners and others, whether we are talking about tobacco or beer or other drink. Finding where elasticity in approach should fall is an increasing problem.

We all wish to curb smuggling. There is of course the phenomenon of cross-border shopping. The reality of that activity for personal consumption has been recognised, and that has to be considered part of the principle of freedom to shop. The House has seen personal allowances for such shopping raised, but there is concern that the duties that continue to be applied to such products are not bringing about the Government's desired objective by curbing smuggling to the necessary degree.

I shall not seek to spend particular time on that issue, given that we have debated tobacco, especially the proposal for a comparative control group that could test how the Government's strategy is working in relation to smuggling, how we can link it to pricing and differentials to tackle smuggling, and how it connects to the attack on corner shops that the increase in cross-border shopping represents.

I seek the Government's assurance that they will give detailed consideration to the impact of inflationary duty increases on smuggling and cross-border shopping. We are concerned that much information behind the advice given to Treasury Ministers is not being made broadly available, and not to those of us who have to scrutinise the Government's policy. There is a genuine need to protect the revenue raised from those products. I look to the Minister for those assurances so that we may have a detailed commitment to a programme of report on the elasticity of prices, duty and differentials between marketplaces. That would be particularly helpful.

It would also be helpful to ensure that the Government's assessment includes a proper analysis of the effect of duty increases on consumption, particularly in relation to tobacco. Let us not forget alcohol, too, which, while a pleasure in moderation, can result in a serious and damaging condition for some people. The health issue must genuinely be borne in mind with beer, as with tobacco products, about which there has been much fuller discussion.

I would be grateful if the Economic Secretary would share with us any detailed analysis that has been done or ensure that such analysis will be done. I would like to know about any commitment to a continuing programme that supports the fairness of the decision to increase duty on beer and wine, the effect on consumption—taking into account commercial and health issues—and, above all, where the elasticity factors range for each product in respect of smuggling and cross-border shopping.

Photo of John Baron John Baron Conservative, Billericay

Welcome to the Chair, Sir Nicholas. I shall keep my comments brief, as I appreciate that time is short.

In spite of all the Economic Secretary's comments about being fair to the domestic brewing industry and the consumer, I put it to him that beer duty is much higher on this side of the English channel than it is on the continent. That is unfair and wrong for several reasons. There is a great deal of talk about how Customs and Excise is coping and doing a great job on smuggling, but the increase in the price differential between this country and the continent encourages smuggling. Unless we can really get to grips with smuggling, as was pointed out on the Floor of the House yesterday in respect of tobacco smuggling, the increasing price differential will significantly harm our domestic industry.

The higher duty is also unfair on the 15 million beer drinkers in this country. I must declare an interest because I am one of them, in moderation. I ask the Economic Secretary what justification he has for the ever-increasing price differential on beer between this country and the continent. Will the Treasury put in place some long-term strategy or policy on taxation? At present, we seem to live hand to mouth, from year to year, never quite knowing where we are with taxation on alcohol. It would help the Committee, and the country as a whole, if we had some better indication of what might come in the years ahead. It would certainly help our domestic brewing industry to make investment plans for the future.

Photo of Jonathan Djanogly Jonathan Djanogly Conservative, Huntingdon

It is important to say something about real ale. The industry is not happy with the proposed rise and has hit out against the penny increase. Mike Benner, head of campaigns and communications for the big consumer group, the Campaign for Real Ale, stated:

''We understand that the Government needs to raise extra cash in this Budget, but increasing beer duty is a flawed strategy. As people only have so much cash to spend in pubs and bars, increasing duty reduces average consumption which in turn reduces revenues from beer duty. This increase is a blow for consumers after freezes in the last two budgets indicated a more sensible approach from the Government.''

That ties in with what my hon. Friend the Member for Billericay said. It is all very well to crack down on smuggling—indeed, we must do so—but at the same time we must put the price of beer in this country in the context of the price in the rest of Europe. Most people do not have to indulge in smuggling. They can legally go to the continent and purchase alcohol at a rate that is vastly reduced in comparison with rates in this country. That is why I fully support the proposal of my hon. Friend the Member for Eddisbury, who said that it would be helpful if the Government were to provide comparative figures for other European countries so that we could see what we were talking about.

Yesterday, on the Floor of the House, we discussed the duty on Scotch whisky. As part of that debate, comparisons were made with the duty on beer and wine. I remember the Economic Secretary saying that he was happy that the duty had been kept constant for a number of years and that it would have been bad for

whisky if there had been increases over those same years. However, he did not go on to give a rationale for the Government's strategy of freezing duty on whisky, other than to imply that that had been done on a year-by-year assessment basis.

Comments made yesterday are relevant to the debate. It would help the industry if some sort of strategy were put in place, so that it could be debated as an issue and put in an overall context. Has the Government's policy over recent years been to equalise the duty on whisky vis-à-vis the duty on beer and wine? The Economic Secretary never addressed that in the debate yesterday, so it would be helpful if he addressed it today.

Photo of Michael Jack Michael Jack Conservative, Fylde 9:45 am, 15th May 2003

I want to follow the line of my hon. Friend the Member for Huntingdon and take the Economic Secretary through one or two arguments on which I would be grateful for his comments. Every time the Government of the day return to the hackneyed old favourite of raising money by revalorisation—on this occasion, of the duty on beer—we hit a problem. I had not realised that one of the effects on the product itself was a potential downgrading of some of our better known beers. I declare an interest. I am principally a wine drinker, but occasionally I like to go into The Taps in Lytham, which is an excellent community pub, and enjoy a pint of Boddingtons beer. I had thought that it was a good north-west brew of traditional style, but I discovered recently that instead of containing good English-grown hops, the beer is being reformulated to contain hop oil. Those who like their beer brewed the traditional way will reflect on the fact that a range of hops and the contribution that whole hops make to the flavour of beer will be denied them. What many traditional beer drinkers would think of as an inferior product will be the one that is available.

Brewing and the retailing of beer are under considerable pressure on the margin and returns that they give, so manufacturers reformulate the product to try to sustain their financial returns against a background of rising prices. That background is occasioned by the clause. I am concerned because there are potential knock-on effects on agriculture. If brewers adjust the formulation, in the light of the rising price of the product, the net result will be that hops grown in the United Kingdom will suffer. The Government have made great play of their policies on the importance of rural Britain and sustainability. The inch-by-inch increase of the price of beer occasioned by the clause acts against the Government's professed interest in sustaining rural Britain and its communities.

That brings us back to where we started: namely, in the pub. The Countryside Agency's recent report on rural Britain places strong emphasis on the important role that the pub plays as the centre of rural communities. However, the inexorable rise in the price of beer has its effect on depressing the viability of not just rural pubs, but pubs in general. There is a circularity to the argument. The more the Government carry on increasing the price of beer, the more they affect not only the returns to the landlord, but also the quality of the product.

The Economic Secretary did not comment on another aspect. The increase in the price of beer is not the same as the increase in the price of duty. Retailers of beer will take a retail margin on the extra tax, so the percentage increase that he mentioned will be multiplied by the retail margin, especially in the case of supermarkets, off-licences and other purveyors of alcoholic drinks. That raises the question of how much analysis the Treasury has undertaken of the knock-on effect of what seems on the face of it a modest proposal. Can the Economic Secretary enlighten the Committee on what will happen?

Beer is deemed a natural beverage. Many would ascribe to it health-giving properties. I contrast that with many of the comments made on, for example, drinks available to children—fizzy pop, to give the generic term—which are high in sugar content. They can bring all kinds of problems, such as the onset of type 2 diabetes, which results in a cost to the national health service. However, such drinks have so far remained untouched by the Government in terms of taxation. It proves an interesting contrast that a natural beverage, beer, is continually under price pressure from the Government while other beverages that may have health disadvantages remain untouched.

Rob Marris (Wolverhampton, South-West) rose—

Photo of Nicholas Winterton Nicholas Winterton Conservative, Macclesfield

I call the hon. Member for Wolverhampton, South-West (Rob Marris), who, I believe, represents the home of Wolverhampton and Dudley breweries.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

You almost took the words out of my mouth, Sir Nicholas, and may I say what a remarkable pleasure it is to serve under your chairmanship? I should declare an interest that is not registrable: Banks's, the Wolverhampton and Dudley breweries, which is headquartered in my constituency, is the landlord of my constituency office—at an open-market rent, I hasten to add. It makes the excellent Banks's mild bitter as well as Banks's bitter, as I am sure that all hon. Members know. It used to be available in the Strangers Bar.

Banks's is the largest independent brewer in the United Kingdom and is responsible for some 1,600 public houses. It is a major brewer, and I can briefly tell my hon. Friend the Minister that I have quite close contact with Banks's, not only because my office is its tenant, but because it is literally a stone's throw from the brewery that is its headquarters. I saw Ralph Findlay, the chief executive, fairly recently—before the Budget—and discussed many things with him, including the Licensing Bill. I cannot recall that I have had any representation from Banks's brewery—the largest independent brewery in the UK—on the rise in the rate of excise on beer proposed in the Budget.

Photo of John Healey John Healey The Economic Secretary to the Treasury

I welcome the strong support that a number of Members have given for particular local brewers and breweries in their constituencies. It reinforces the quality of insight brought to proceedings in this House and in Committee when we can make such direct links between our experience of local interests and more general national policy

issues. I particularly welcome the comments of my hon. Friend the Member for Wolverhampton, South-West.

I have to say to the right hon. Member for Fylde that although I drink Boddingtons, I do not submit it to the chemical analysis to which his comments treated us. I found them especially interesting.

Photo of Michael Jack Michael Jack Conservative, Fylde

The ale in The Taps pub that I mentioned is brewed with hops. I should be delighted to share a pint of that fine brew with the Economic Secretary.

Photo of John Healey John Healey The Economic Secretary to the Treasury

I look forward to that opportunity, although a visit to Fylde is not in my diary at present.

The right hon. Gentleman tried to take the Government to task for adding duty pressures to the state of the brewing and pub industries. I remind him that he served in the Administrations between 1979 and 1997, which raised beer duties by more than the rate of inflation in nine out of those 18 years. In introducing the clause, I acknowledged the pressure on the brewing industry and pubs. That is one reason why we have introduced the small breweries relief scheme, which I know that he recognises as being particularly valuable to small brewers. For three of the past four years, we froze beer duty. This year, we propose an inflation-only freeze on beer duty—in other words, a real terms freeze.

The hon. Member for Billericay cited alcohol duty as an unfairness in the UK tax system. I do not know whether the hon. Member for Spelthorne pricked up his ears at that, because the hon. Member for Billericay may be emerging as a European tax harmoniser. Reducing alcohol duty to the French level would be prohibitively expensive because it would cost more than £5 billion in lost excise and VAT, which would be broadly equivalent to a 1.5 per cent. increase in VAT across the board or a 2 per cent. rise in the basic rate of income tax.

It is important not to examine excise duty and taxation in isolation. A large proportion of cross-border shopping for alcohol by British people is done in Belgium, the Netherlands and France, and it is true that those countries generally have lower rates of alcohol excise duty than Britain does. Each of those countries, however, has a higher rate of VAT and a higher rate of corporation tax than Britain has. The Organisation for Economic Co-operation and Development has shown that the UK is still a relatively lightly taxed economy. We have one of the lowest total tax burdens in the EU, and it is far lower than the EU average.

Photo of John Baron John Baron Conservative, Billericay

Although I accept the Minister's point about the possible loss of revenue if taxes were harmonised across the continent, tobacco smuggling has cost the Treasury £15 billion since 1997. Beer smuggling and alcohol smuggling have also cost sizeable sums of money. To argue that we cannot reduce taxes because we would lose revenue is to examine the problem the wrong way. We should concentrate on stopping smuggling, which would be a revenue earner for the Treasury. That would allow us to reduce taxes on alcohol. The tax on alcohol in Britain is much higher than it is on the continent, which is grossly unfair.

Photo of John Healey John Healey The Economic Secretary to the Treasury

The hon. Gentleman jumped in prematurely and repeated his earlier remarks. He said that we should get to grips with smuggling. In the last year—I also said this earlier—Customs and Excise has managed to cut the beer duty lost to cross-channel smuggling by more than one fifth and has reduced the loss of duty on wine by a half.

The hon. Member for Eddisbury also discussed curbing smuggling, which we are doing. I shall address the two points on which he specifically sought reassurance. We are monitoring the impact of smuggling on industry, the market, consumers and Government revenues. In the Committee of the whole House, we discussed the need for better data and better analysis to inform better policy debates and better policy decisions, and I shall repeat my remarks in Committee. We are currently completing work on improving the model that we use to analyse demand and elasticity in the alcohol market. In particular, we are improving it to take account of the distinction between on-trade and off-trade beer. With the completion of the single market, we will have better data to analyse and track cross-border shopping.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury 10:00 am, 15th May 2003

When the model that the Economic Secretary said the Treasury is refining is completed, will he contemplate making it available to the outside world and the private sector?

Photo of John Healey John Healey The Economic Secretary to the Treasury

The hon. Gentleman may have missed my detailed explanation yesterday when I said that interaction and data on demand, elasticity and the new factors will be set out in a Government economic service working paper. We aim to publish that shortly, and I am confident that it will help to inform our future debates.

Photo of Stephen O'Brien Stephen O'Brien Shadow Paymaster General

I have noted what the Economic Secretary said and will pick up any points when we come to the next clause, because the same will apply.

May I take the hon. Gentleman back to a comment that he prayed in aid about the relative position of tax in other countries? I am sure that he will recall that at paragraph C60 on page 261 of the Red Book chart C3 shows the tax-GDP ratio. For the record and given that the Economic Secretary referred to it, it is proper to draw the Committee's attention to that chart. Committee members can refresh their memories by obtaining a copy from the Vote Office. The Government's own document shows that the percentage of tax is projected to escalate phenomenally to 38.5 per cent. during the period to 2008–09 from the current position which they claim is around 36 per cent. The trend is looking very unfavourable.

Photo of John Healey John Healey The Economic Secretary to the Treasury

I made the point clearly that the figures from the independent Organisation for Economic Co-operation and Development show that Britain's economy is one of the most lightly taxed in the European Community. As I draw my comments to a conclusion, I trust that that answers the points that have been put to me and I hope that the Committee will approve clause 2.

Question put and agreed to.

Clause 2 ordered to stand part of the Bill.