Clause 1 - Rates of tobacco products duty

Finance Bill – in a Public Bill Committee at 8:55 am on 6th May 2004.

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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 welcome you to the Chair, Mr. McWilliam. It is a pleasure to serve under your co-chairmanship. I know from experience that you are fair and firm, and I look forward to seeing that twinkle in your eye to which my right hon. Friend the Chief Secretary referred earlier.

I also look forward to the scrutiny process that the Committee is about to embark on and to our debate with hon. Members on the Opposition Front Bench. I notice that the Liberal spokesman, the hon. Member for Yeovil, is virtually sharing the Front Bench. I trust that the physical positioning does not presage a political repositioning, even though the hon. Member for Arundel and South Downs might welcome it.

Clause 1 increases the excise duty on all tobacco products in line with inflation, raising the duty on a typical packet of 20 cigarettes and on a 25 g pack of hand-rolling tobacco by 8p, and increasing their cost by 9p when VAT is added.

The increase supports the Government's desire to reduce smoking prevalence by maintaining the real price of cigarettes. Smoking is the single greatest cause of preventable illness in the UK: it is responsible for the premature death of about 120,000 people every year.

The effects of tobacco are not restricted to smokers: a recent report by the British Medical Association entitled ''Smoking and Reproductive Life'' stated that studies showed links between smoking and fertility problems, cervical cancers, miscarriages and low birth weight. The report and its statistics underline the case for reducing the prevalence of smoking. As a result of the real terms duty increases introduced by the Government and previous Administrations, tobacco prices in the UK are at an historically high level. A decision this year to raise duties in line with inflation in the Budget will maintain their real price and thereby continue to encourage people to smoke less or to quit altogether, and to discourage children and young people from taking up the habit.

We believe that we can achieve those results without increasing smuggling, and since the introduction of the strategy to tackle tobacco smuggling three years ago, which my right hon. Friend the Chief Secretary played an important role in launching, Customs has succeeded in halting the growth in cigarette smuggling to the UK, and last year exceeded the target we set it yet again, restricting the illicit share of cigarettes still further to 18 per cent., compared with 34 per cent., the projected level of the illicit market if no action had been taken to counter the problem.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury 9:15 am, 6th May 2004

The Economic Secretary has mentioned that the Government have been successful in reducing the smuggled share of the market to 18 per cent. in 2002–03, which is a particular achievement when one considers previous trends. Does he have any projections for that share of the market over the next couple of years? Does he expect it to reduce further, or merely to stabilise at the existing level?

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

The hon. Gentleman may know that we have set a public service agreement target for 2006 for Customs to bring down further the illicit share of the market to 17 per cent. Compared with three years ago, when we were faced with a steeply escalating market share for illicit tobacco, Customs has succeeded in halting the rise, stabilising the level and now driving down the size of the illicit market. He may be interested to know that during the three years that the anti-smuggling strategy has been in place, Customs has seized 7.3 billion illicit cigarettes destined for the UK market, disrupted 190 tobacco smuggling gangs, and protected an estimated £3 billion of revenue for the public purse and the taxpayer.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

The Economic Secretary has rightly highlighted Customs and Excise's welcome successes in these measures. Can he confirm to the Committee that 27 per cent. of all tobacco consumed here is non-UK duty paid? The worry is that that masks hidden smuggling and counterfeiting.

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

The hon. Gentleman will find that the volume of illicit tobacco and cigarettes that finds its way into the UK with no UK duty paid is greater than 27 per cent. Our main tobacco smuggling problem comes not from travellers from the European Union, where they may pay duty at other EU member state rates, but from large-scale organised smuggling through freight. In most instances, the tobacco and cigarettes that are smuggled by freight have no duty paid anywhere before coming into this country.

I can confirm not only the progress that we have made to date but that we are seeking to reduce the illicit market share further in future years. We shall maintain concerted pressure on all aspects of the illicit market and take further measures where they become necessary to restrict the supply of illegal cigarettes. However, this duty increase continues the Government's twin track of maintaining the high real price of cigarettes while clamping down hard on the unregulated supply of the illicit market. Together, we believe that these measures will help to reduce smoking and lower the financial, social and personal costs associated with it. On that basis, I hope that the Committee will endorse and support the clause.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

I add my welcome to you, Mr. McWilliam. I shall not continue your embarrassment with references to your eye and whether it twinkles, but we know that you will be able to guide us when we stray from the straight and narrow. I also welcome the Economic Secretary. We have debated, one might perhaps argue too frequently in the past 10 days or so, but it is always a pleasure, and he is always determined to ensure that we have a full debate, which is to be welcomed. I also welcome the hon. Member for Yeovil

and his move to the right—if it is not political, it is certainly a physical move, although the former would be most welcome as well.

It is a daunting task to consider clause 1, and the forthcoming 310 clauses and 574 pages of the Bill. I always feel that Room 10 is appropriate for us to consider it, because behind you, Mr. McWilliam, is a magnificent illustration of Alfred inciting the Saxons to prevent the landing of the Danes. Occasionally, as an Opposition spokesman dealing with the size of the Finance Bill, one cannot help feeling some sympathy for Alfred's position.

In this year's budget, as the Economic Secretary said, the Chancellor increased duty levels on cigarettes and other tobacco products by the rate of inflation. I think that it was the third or fourth Budget in a row in which such a change was made. The Minister explained to us the reason behind it, which is reaffirmed in a statement in the Red Book that accompanied the Budget:

''Smoking remains the greatest cause of preventable illness and premature death in the UK. Maintaining high levels of tax helps to reduce overall tobacco consumption.''

I doubt that any member of the Committee wishes to challenge the first of those two sentences. However, there is a serious question, which I hope we can consider in the debate, about the evidence that high duty levels have reduced overall consumption in any meaningful way.

Tobacco duties in this country must be seen in the context of the international tax environment. For our near neighbours in the European Union, a packet of 20 cigarettes generally costs between £1.85 and £3.40, depending, of course, on the brand; here, the equivalent packet costs about £4.60 to £4.75. The large price differential between neighbouring countries is worrying. It will, as the Minister said, continue to create significant opportunities for smuggling, fraud and counterfeiting.

The question, therefore, is whether high duties and increases cut consumption. We have to consider the industry figures and the Government figures to try to ascertain whether they do. Let us consider the industry figures in particular. The latest figures are for 1993 to 2003, and it is clear that there has broadly been stability. There was a small rise in 1999–2000. We are not sure whether that related to the millennium, but in 1993 the figure for consumption was about 99 billion cigarettes or their equivalent, and the figure is broadly the same this year.

The Committee will be interested to learn, however, that there was a much greater difference in the previous 10 years. In 1983, the figure was about 113 billion and it dropped to 99 billion. The 1970s saw the greatest change: in 1973, the figure was about 153 billion and it fell over the following 10 years to about 117 billion. I suspect that we have seen a natural reduction in the number of people smoking and are left with a hard core of smokers who are not likely to stop their habit. They may wish to change the way in which they consume the product, but they are unlikely to be deterred significantly. The figures produced by

Customs and Excise and the industry reinforce that assumption.

It is fair to say that duty rises over the past three or four years, including the one set out in the clause, have created stability in the sense of the tax revenue. In the past four or five years, the Government have pulled in about £8 billion in tax revenue. However, it is not clear from any independent evidence or evidence from the Government that the tax changes have made any significant difference in terms of cutting overall consumption. What has changed in the past few years with regard to supply is the counterfeiting—which of course is run by organised crime—and the level and nature of cross-border purchasing. It is difficult to know how to measure that and to judge whether the changes made by the Government have had an impact.

According to the Government's figures, there has been one interesting change, which the Committee will wish to note. The estimated revenue loss that the Government have endured has changed radically. In 1997, they were losing about £60 million in revenue; by 2002–03, the figure had risen to £1.41 billion. There has therefore been a big change in purchasing habits. As all members of the Committee will be aware, people are opting for cross-border cigarette purchasing, which is very different from what they were doing just seven years ago.

Equally, there has been a dramatic change in the nature of illegal activity, with a shift from smuggling to counterfeiting. The Economic Secretary referred to Customs seizures in his opening remarks, and last year some 41 per cent. of them involved counterfeit goods. In the previous year the figure was just 15 per cent, so there has clearly been a change in the nature of organised crime. I fully accept that some of the steps that Customs and Excise has taken on smuggling have had good results, and I am sure that the Committee supports that.

The problem with counterfeiting is that it means that, whether one's views on the totality of the product are positive or negative, consumers do not know what they are buying. The danger is that the carcinogenic elements, for example, may be far greater in the counterfeit product, but the consumer will not know. As such, there is a worry that the shift in the supply habits of organised criminals from smuggling to counterfeiting goods is serious for the consumer.

My point is that the tax rises in this Budget and the past few Budgets have done one thing: changed but not reduced habits. On the consumer side, smokers have not cut their consumption in the past 10 years. They are buying abroad, switching to cheaper brands and, by the sounds of it, willing to buy counterfeit goods. The point is that the total consumption is static, so the tax rise has not achieved the Government's apparent aims. At the same time, on the supply side, organised crime seems to have been just as active, but has changed its activity from smuggling towards counterfeiting. That is clearly a more sophisticated activity, but one that is nevertheless highly profitable.

How does the Economic Secretary feel that the increase in price helps to tackle organised crime and cut total consumption? Those two aims are laudable, but it is not clear that the policy set out in the clause will achieve them. I hope that we will be able to have a proper debate about that. I look forward to receiving the considered thoughts of the Economic Secretary.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

I hope not to detain the Committee on every clause, but clause 1 covers a particularly important issue that merits consideration.

I start by saying to the Economic Secretary that I accept that the background to the debate is the long-term and considerable political consensus in this country that tobacco duties should be raised to reduce the incidence of smoking and to provide what has become a good revenue source for the Exchequer.

Looking at some of the, as ever, excellent briefing notes produced by the House of Commons Library, I note that the support for higher tobacco duties has been broad-based over the years. Debating the Finance Bill in 1994, the then Chief Secretary to the Treasury, now the right hon. Member for Kensington and Chelsea (Mr. Portillo), described the position of that Conservative Government:

''Our tax philosophy is to tax alcohol and tobacco at quite a high rate. That position has been shared across the parties over the years. In return, we do not extend our value added tax base as broadly as many other countries.''—[Official Report, Standing Committee A, 24 February 1994; c. 379.]

When the then Chancellor of the Exchequer, the right hon. and learned Member for Rushcliffe (Mr. Clarke), spoke in the 1996 Budget about the large increases in tobacco duty and the escalator that was introduced to continue those increases over time, he said that they were

''necessary masochism in the wider public interest''.—[Official Report, 26 November 1996; Vol. 286, c. 168.]

It is fair to say to the Economic Secretary that the policy that he is introducing and defending has been followed by all predecessor Governments for a considerable time. It is fair to note that neither the Conservative party nor the Liberal Democrats have tabled amendments suggesting that the rise in tobacco duty in line with inflation this year should not go ahead or that there should be a reduction in duty.

However, the comments made by the hon. Member for Hertford and Stortford, and those that I shall make in a moment, suggest that there is cause to consider whether the Government's strategy is still working and delivering the intended benefits, to what extent their strategy is being undermined by smuggling, which remains a large problem notwithstanding recent progress, and the fact that the European single market has widened with the recent accession of eastern European countries. In a market where it is more difficult to maintain barriers to trade, there is a major question mark about whether the Government's duty differentials can be sustained in a way that delivers public health objectives.

The Economic Secretary mentioned the extent of recent Government success against smuggling. There were concerns several years ago that smuggled cigarettes could account for one in three cigarettes consumed in this country. The Government have had success with their strategy, particularly in ensuring that the projected increase in the smuggled share has not been realised. However, I am sure that he will acknowledge that the figures showing the proportion of tobacco and cigarettes consumed in this country that are non-UK duty paid, because they are either smuggled or brought in through cross-border shopping, are dramatic and shocking. Even with the progress in the Government's smuggling strategy, 27 per cent. of tobacco consumption in the UK—more than a quarter—is non-UK duty paid.

On the basis of Government figures, which are open to debate, the share of smuggled tobacco is down to 18 per cent. That is still only a few percentage points below the high of 2000–01, and it is a higher share of the overall cigarette market than the 1999–2000 figure of 17 per cent. We do not know how successful the Government's strategy will be. The Economic Secretary said that there was a public service agreement target to reduce the smuggled share to 17 per cent. by 2006. That would be only a 1 per cent. reduction from the current share over a few years, which does not suggest that the Government are confident that they will be successful in driving down the smuggled share over the years ahead.

What is happening about the other part of the non-UK duty paid trade: cross-border shopping? That has significantly increased over the past few years, as one might expect in the context of an EU single market in which it is increasingly difficult for the Government to impose limits on the amount of tobacco and alcohol that people bring back across borders, not least after recent rulings. I remind the Economic Secretary that, according to my figures, although there has been a peaking out in the smuggled trade in cigarettes, the share of cross-border shopping has almost doubled from 5 per cent. to 9 per cent. over three or four years.

Given the recent publicity about the duty differential between the UK and other EU countries and the entry into the EU of eastern European countries with far lower levels of duty on cigarettes, one must assume that the share of the non-UK duty paid market will increase. Therefore, there could still be a rise in the share of the overall tobacco market that is non-UK duty paid. It would not take a very large increase in that share to get us to something like one in three cigarettes—one in three units of tobacco—evading UK duty. That is a pretty dramatic failure by anyone's terms to impose a UK duty on a UK product. It raises the question whether, in a single market, where barriers to trade are necessarily coming down, it is possible to maintain that strategy in the way that previous Governments desired.

When we look at some of the other figures for the non-UK duty paid market we can see how dramatic developments have been over a slightly longer time scale. The figures going back to 1993 show that the non-UK duty paid element of the overall market was pretty small: 3.5 billion cigarettes out of a total market

of 88 billion. In 2003 the figure was 20.5 billion out of a total of 74 billion, which is a massive percentage increase.

The figures in the hand-rolled market are even more striking. Some 10,000 tonnes of hand-rolled tobacco are consumed in the UK each year, and in 2003 70 per cent. of that was non-UK duty paid. The Government were unable to collect their duty on 70 per cent. of one product market. It is no surprise, as the hon. Member for Hertford and Stortford indicated, that the Government's strategy to reduce tobacco consumption is suffering because many people are able to bring in non-UK duty paid tobacco from other markets.

We can also reflect on the success or lack of success of the Government's policy on tobacco consumption when we look at the long-term figures for tobacco consumption in the UK over the past 40 years. There has been a marked decline in the post-war period. The graph that I am looking at has figures only since 1973. Between 1973 and 1992 there was a 50 per cent. decline which took place at a time when the affordability of tobacco went up by 60 per cent. because of the movement of income in relation to tobacco taxation. That is an indication of some of the non-UK duty and non-price factors affecting tobacco consumption. They may be far more significant than the Government's chosen weapon of tax increases.

After 1992 two different Governments brought in escalators on tobacco. In 1993 the Conservative Government introduced an escalator of 3 per cent. It came in after a period of massive downtrend in tobacco consumption. After its introduction, rather than falling tobacco consumption initially stabilised. When the present Chancellor increased the escalator to 5 per cent. in 1997–98 there followed the first sustained increase in tobacco consumption for many years. Bizarrely, at a time when tobacco taxes have increased by something like 58 per cent. in real terms, tobacco consumption has stabilised and even increased, so the strategy of relying on increases in taxation and price to reduce tobacco consumption seems to have been notably unsuccessful of late. One reason may be that the increase in tobacco taxation, instead of bearing down on consumers' demand, has precipitated a huge increase in smuggling and gone hand in hand with an increase in cross-border trade at a time when the European single market has allowed consumers to bring tobacco from abroad without having to worry about traditional trade barriers.

When one looks at the differential between UK tobacco prices and those in other EU countries, one understands the incentive to smuggle and the reason that consumers bring tobacco back from abroad. The average price in the UK for a pack of 20 cigarettes is around £4.65, and the EU average is closer to between £2.20 and £2.70. In the countries that are joining the EU at the moment, such as Poland, average prices are even lower, at around 74p a packet, compared with £4.65 in the UK. That is a massive incentive to smuggle in a single market, and we may be confronting the difficulty within a single market of nations running their own tax policies regardless of those in other countries. That does not lead me to say, as Labour

Members may try to tempt me to say, that we should harmonise taxes. In practice, it is refreshing tax competition, the effect of which helps to hold down tax levels in some countries when others have taxes that are way out of line.

I have read in the newspapers, even since the recent entry of the eastern European countries into the EU, a number of stories about disappointed consumers returning laden with tobacco from countries such as Poland and discovering that the Government, or perhaps the EU, had introduced measures to prevent them from bringing back the quantities that they can from other EU countries. No doubt, Customs has done good business and good work in preventing citizens who, deliberately or unintentionally, bring back quantities of tobacco in excess of the permitted amount, but one questions, first, whether that will lead to additional smuggling and, secondly, whether it will be a new factor that will put even further pressure on the Government's strategy on tobacco taxation.

When one looks at the policy in the round, one sees that during a long period after the war there was a decline in tobacco consumption despite tobacco becoming more affordable, but in recent years, when both Conservative and Labour Governments have increased tobacco taxes particularly rapidly, consumption has stabilised and even increased, indicating that those policies have not been very successful. That raises two questions. First, can we continue to rely on higher taxation and prices to deter consumers, or should we use different mechanisms, and should that include a bigger role for the Department of Health, rather than the Treasury?

The second question, on which I shall touch only briefly—I can see that the Economic Secretary is impatient to rise to his feet to respond to our concerns—is what precisely is the cost of maintaining the duty differential? Even if we assume that the Government's policy is still successful in raising more revenue than would be raised if they reduced tobacco taxation to the EU average, what is the cost of having to police the existing system and what is the lost revenue consequent on almost one cigarette in four or, in future, one in three being non-UK duty paid? What is the cost to the taxpayer and the policing services of the organised crime rings that are making a huge amount of money from such activities, some of which may be routed into other undesirable areas, including, for all we know, terrorism?

Photo of Michael Jack Michael Jack Conservative, Fylde 9:45 am, 6th May 2004

The hon. Gentleman questioned the current duty regime on tobacco products and suggested that an alternative way of controlling the problem of consumption of tobacco would be through the Department of Health. If, as a result of the proposal he puts forward, there were to be a revenue loss, what alternative means would his party adopt to raise the missing money?

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

That is a good question. It highlights the need for the Government not only to assess what the costs are but to evaluate the implications of reducing the taxation of tobacco. The right hon. Gentleman will be aware that, prior to 1997, the right hon. and learned

Member for Rushcliffe had to consider that issue in relation to the taxation of spirits. It was argued that that could be reduced without losing revenue, because it was so high.

At that time, organisations such as the Institute for Fiscal Studies supported the proposition that the tax on spirits could be reduced without losing revenue. As far as I know, the institute has not yet argued that a similar outcome could be achieved by reducing tobacco taxes. However, the factors that we are discussing—smuggling and cross-border trade—have begun to bear on the issue only in the past few years, and it is possible that the revenue implications of changes in duty might change rapidly while the debates continue.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Speaking from memory, I believe that in 1999 the province of Quebec lowered the excise on cigarettes because of cross-border smuggling, particularly from native people's reserves, and found that consumption of tobacco increased markedly. The province therefore put the excise duty back up because of the health implications.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

I shall not take on the hon. Gentleman on the subject of Canada, on which he is a world expert, and about which he speaks frequently in our debates. However, he should accept that the recent use of tobacco taxation in order to reduce tobacco consumption has not been a success in the UK under this or the previous Government. The Chancellor recognised that by ending the escalator on tobacco taxation. I am not trying to make a party political point, because I believe that that move was supported by all the political parties, including mine.

Photo of Chris Bryant Chris Bryant Labour, Rhondda

It seems to me that the hon. Gentleman's argument is a syllogism. If one were to reduce duties, as he suggests, to compete with other countries in Europe and to eliminate the trend—although he has not suggested a figure to which those duties should be reduced—that would incur the risk of significantly increased consumption, as pointed out by my hon. Friend the Member for Wolverhampton, South-West (Rob Marris). That is the element of the hon. Gentleman's argument that cannot be proved.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

The assumption that the hon. Gentleman appears to make has not been well borne out by evidence. Not only over the past decade, but over the past 20 or 30 years, significant declines in consumption do not appear to have been related to affordability. Recently, this Government and their predecessor have had an excellent opportunity to carry out an experiment in increasing taxation to reduce consumption, but that has been a notable failure. Consequently, the Government and all other political parties, including my own, have changed their policy of increasing the real taxation of tobacco. I suggest that hon. Members of all parties should come to terms with an economic situation that is different from that which we faced a decade ago.

I hope that the Economic Secretary will be able to say something in his response about the revenue that is

lost, the crime that is stimulated, the costs, which must be significant, of trying to police the smuggling, and the costs that are faced by legitimate businesses in the UK, particularly in the south-east, as a consequence of the fact that so much of the tobacco business is now non-duty paid. Those are new factors that any Government should take into account—the fact that neither the Conservative party nor the Liberal Democrats have tabled an amendment indicating that we believe that duty should be reduced by a particular amount shows that no political party has yet come to terms with the implications of those recent trends.

I suggest to the Economic Secretary, who I have no doubt will need to defend the Government's position, that the Government, in partnership with the Department of Health, take the opportunity over the next year or two to consider the issue of tobacco consumption, to see whether the tax policies that we have pursued for the past 10 or 20 years have been successful, to consider the implications of the single market on the Government's strategy in this sector, and to see whether we need a new strategy on tobacco consumption that is less dependent on maintaining duty differentials with other countries in Europe, which increasingly seems unsustainable without unacceptable criminal trade and unacceptable cross-border trade.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

I declare an interest: I am probably the only person present who has been smoking for more than 40 years.

The current strategy, which has been adopted by Governments from the two main parties, has run out of steam. No one is yet putting in place a new strategy and no one has modelled the effect on consumption or revenues of moving duty in the other direction. However, it must be acknowledged that the strategy has ended its useful life. From the figures, it is obvious that tobacco consumption has been unchanged for roughly a decade. It has not gone down. If anything, it might even have gone up a bit. The proportion of cigarettes and tobacco on which duty is not paid—either because purchases are made at cheaper duty rates in the EU or because of smuggling—has also remained roughly static at about 69 per cent. for hand-rolled tobacco and 27 to 28 per cent. for cigarettes. We are stuck in a groove.

The figures that I have seen for loss of revenue put it in the order of £4.4 billion per annum. There are projections that need to be done. Would moving somewhere else on the duty supply and demand curve lead to an increase in consumption, as in Quebec, and would the change be more than offset by a decline in the volume of non-duty-paid tobacco?

My major concern about setting the price higher and higher is that it is incredibly regressive. A large proportion of smokers are single women, and in particular single mothers, who are often the least best placed to afford to pay huge sums on tobacco. It would be worth having a study into where the concentrations of smokers are, but I am aware that among young people there is a rising trend for girls, more than boys, to take up smoking.

We are kidding ourselves if we think that putting up duty, even at the rate of inflation, is a strategy that will work. That strategy is five—perhaps even 10—years past its sell-by date. Although none of us has an alternative to suggest, it is unwise to continue with the current approach when it is no longer achieving its objectives.

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

We have had a useful and measured debate, but the arguments have been somewhat overstated by the hon. Members for Yeovil and for Arundel and South Downs. They claimed that there has been a breakdown in consensus that has existed over the past couple of decades about the role of high prices in helping to drive down and constrain consumption, and declared that the role of duty levels, and therefore of price, as part of a strategy is past its sell-by date.

There is little serious doubt that, under Conservative and Labour Governments, high duty levels have played a part in high prices and that they have helped to reduce the prevalence of smoking from about 35 per cent. of the population in the early 1980s to about 26 per cent. now. Clearly, as the proportion of the population who smoke is reduced, gains become increasingly hard to deliver. Nevertheless, there has been a fall of about 2 per cent. during the past 10 years, continuing a slower but general trend. Common sense and our modelling indicate that consumption would rise if we were to cut the price by cutting the duty, as hon. Members have urged. That would run counter to health objectives, on which I believe there is still consensus.

I reject the argument that the strategy is at the end of its useful life, as the hon. Member for Arundel and South Downs said. I made it clear that it is not the only answer but that it plays a part in maintaining pressure on the level of consumption. It also plays a part in our overall approach, particularly the strategy that that the hon. Member for Hertford and Stortford welcomed and said was successful, to clamping down on smuggling and the illicit marketing of cigarettes and tobacco on which duty has not been paid.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General

It is important to tease out answers on the efficacy of the policy, because the end aims, particularly in respect of illegal supply, are crucial. It is not clear from what the Economic Secretary just said whether it is the confident view of the Government that continuing to increase the duty on UK-purchased tobacco products cuts overall consumption. That assertion was made in the Red Book that accompanied the Chancellor's decision, but we have not heard it from the Economic Secretary.

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

The provisions will increase the duty on tobacco by the rate of inflation. They do not increase the high rate but maintain it. In other words, they are part of maintaining, not increasing, the price and thereby maintaining pressure on the level of consumption. That is only a part of our strategy for dealing with the health risks and damage from smoking and the problem that we faced in severe form three or four years ago of increasing levels of smuggling and, therefore, criminal and illicit market activities, and of loss of revenue to the Exchequer.

It is important to distinguish between the nature and scale of the illicit market in tobacco and cigarettes and the nature and scale of products that are legitimately purchased in other EU member states by UK consumers. We are absolutely clear about, and strong in our support for, the right of EU citizens to shop for and bring back as much tobacco as they want for their personal use without paying UK duties.

It is important to bear it in mind that we are not alone in using cigarette duties and prices to achieve health objectives that we share with other Governments. Since January 2002, prices have risen in Australia by 11.6 per cent., in Belgium by 20 per cent., in France by 39 per cent., in Germany by 20 per cent., in Ireland by more than 21 per cent., in the Netherlands by nearly 30 per cent. and in Portugal by more than 19 per cent. In that same period, the UK's duty rates and prices have been constant in real terms. The equivalent price rise in the UK has been just 8 per cent.

The other important conclusion to draw is that the increased cross-border shopping that has taken place during that period is not necessarily driven, as hon. Members argued, by an increasing differential in duty rates between the UK and other EU states, because the differential has reduced in EU countries where shopping is most prevalent.

Photo of Mark Prisk Mark Prisk Shadow Paymaster General 10:00 am, 6th May 2004

Will the Economic Secretary enlighten the Committee as to what has driven that process? In relation to cross-border shopping, tax revenue loss has increased from £60 million in 1997 to £100,410 million. That is a huge change. Is he going to argue that that is simply a consequence of cheap flights? What analysis have the Government carried out on the subject?

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

There are three contributory factors. One is the change in travel patterns, the second is the change in shopping and consumption patterns and the third is the move that we made as part of the second phase of our tobacco strategy in October 2002 to raise the minimum indicative levels—the guideline levels—for tobacco and cigarettes that UK citizens can bring back to the UK from other EU states. Customs will use those guideline levels in making a judgment about whether people are bringing back excise goods for their own use. That has helped Customs to distinguish between the genuine shopper and traveller, and the regular smuggler and bootlegger.

I now turn to the issue of counterfeit cigarettes, which the hon. Gentleman rightly raised. He rightly detailed the recent rise in the trade of such cigarettes. Counterfeit cigarettes pose the problems he suggests. They may carry increased health risks, and are generally completely untaxed and unregulated. There is some evidence—he cites Customs' own operational evidence and figures—that organised criminal gangs are increasingly switching to the smuggling of counterfeit cigarettes rather than legitimate goods with no duty paid.

We are working closely with the UK industry. Understandably, it shares our concern about counterfeit goods. They undermine the brand integrity and identity of the companies and their

markets. We are now targeting gangs that are beginning to smuggle counterfeit cigarettes. We disrupt their supply chains where we can and try to increase their costs and reduce their profit margins. We are targeting the source countries where such goods are produced and we are using our overseas network of Customs officers to tackle the problem.

The hon. Member for Yeovil tried to argue at one point that the success of the anti-tobacco smuggling strategy during the past three years demonstrated that it was not ambitious enough in the first place. In doing that, he undermined the seriousness of the problem that we face and, therefore, the importance of putting the strategy in place.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

Even with the success of the Government's smuggling strategy, by 2006, over a quarter of the tobacco market in the UK will still be non-duty paid. Given that the Government have acknowledged that we are in new circumstances and have moved away from the tobacco escalator as a consequence, is there not an argument—without prejudice—for the Government to investigate the issue during the next couple of years? The Treasury could do that in partnership with the Department of Health to consider whether we have the right strategy and to see whether it can be sustained in the new circumstances of a large single market.

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

I will come to the point that the hon. Gentleman wishes to introduce about EU duty rates, but tries to qualify with the words ''without prejudice'', in a moment. As he would expect, we are refining the modelling that we use to analyse the dynamics of this complex set of factors. We are continually analysing that with academics. It is clear that, if you significantly reduce the duty level and therefore the price of tobacco or cigarettes, you will reduce the revenue to the Exchequer and inevitably impact on consumption levels, which will increase.

The hon. Gentleman tried to say that our PSA target of a 17 per cent. share for the illicit market in cigarettes by 2006 was somehow unambitious. That target was set at the start of the current spending review period. If we had taken no action, the projections are that that share would have reached 34 per cent. last year. It was set when we were facing a rapidly escalating illicit market share, and it was generally viewed as a pretty tough, not soft, target for Customs.

As the hon. Gentleman would expect, publication of part of the current spending review in the summer will include new PSA targets for Customs for the year ahead, and as part of that process we are examining the question of illicit tobacco and cigarette market share and the scale of smuggling.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

May I press the Economic Secretary on the need for a joint inquiry with the Department of Health? Although his models indicate that, if you reduce the price of tobacco, you will increase the demand for it in the short term, they have to be set against the fact that many other EU countries with far lower tobacco taxation and prices have far lower

tobacco consumption. That may indicate that factors other than price and taxation are more important in the long term.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Order. ''You'' means me in this Committee, and I have no intention of increasing or reducing anything.

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

I will come on to the points that the hon. Gentleman raised earlier and tried to raise again in an intervention.

I do not accept the argument for a joint inquiry with the Department of Health into the matter. I refer the hon. Gentleman to the recent report by Derek Wanless, which, with its careful scrutiny, makes an important contribution to the issue.

The hon. Gentleman, in his argument about Europe and European prices, is trying to have his cake and eat it. That is pretty typical of the Liberal Democrats. Whatever he says without prejudice, it is clear that he makes strong arguments for tax harmonisation across Europe.

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

The logic of the hon. Gentleman's arguments and his critique of the problems that we face lead us very easily to see him as a tax harmoniser.

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

No. Let me finish this point. The hon. Gentleman asked about the price of cigarettes in other European countries. It was a shame that no one from the Front or Back Benches of his party was in Committee last week when we considered the question that he now asks about the position of the 10 accession countries that have just joined the European Union. We considered price levels in those countries and—he obviously is not aware of this—the basis for maintaining quantitative cigarette restrictions on travellers from eight out of those 10 countries.

There was no Liberal in that Committee. We had a full debate as it was a very serious issue, and it dealt with some of the questions that the hon. Gentleman has raised this morning. For his information, we discussed the fact that in Latvia the current price of a packet of 20 cigarettes is 40p; that in Lithuania it is 55p; and that eight out of those 10 countries have taken advantage of a derogation that allows them to avoid setting the minimum duty rate for tobacco, which European rules insist upon, for a period in which they bring their own levels up to the European minimum. The hon. Member for Hertford and Stortford played a very important part in the scrutiny of that measure.

That Committee discussed and agreed that the UK was right. Indeed, other member states from the original 15 have taken advantage of an agreement that allows us to maintain quantitative restrictions on the number of cigarettes and the amount of tobacco that people bring back from those countries until they meet the minimum duty levels.

The hon. Member for Yeovil asked for figures on cost. If the UK were to reduce our tobacco duty levels to that of the EU 15 average and not include the 10 accession states, the cost would be between £2 billion

and £2.5 billion. As the right hon. Member for Fylde put it so succinctly, it is down to those who advocate that move to explain where revenues would be raised from to compensate for the revenue that was not available for the public purse.

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

I will give way to the hon. Gentleman if he is going to answer that question and I look forward to his answer.

Photo of David Laws David Laws Shadow Chief Secretary to the Treasury

It is a perfectly legitimate question. I am grateful to the Economic Secretary for raising it. Is he willing to publish the research that underlies the figure about the expense of reducing tobacco tax to the European average? Will he also publish his assumptions about the implications for other costs, including policing costs? I think that that would allow us to have a more sensible debate about what is not an easy issue.

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

The figures that I draw on to make those calculations are clearly available.

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

The calculations are not that difficult. The hon. Gentleman needs only to look at the duty rates levied in the other 15 EU states and the duty rates levied in this country and make his own calculations. It is fairly straightforward.

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

No. I am going to finish.

On the question of policing costs, I am not sure that the hon. Gentleman is sure what he is asking. The Government invested £209 million in the strategy to tackle the funding problem that we had three years ago. Having brought the share of the illicit cigarette market down from what it would have been last year—34 per cent.—to 18 per cent., we are determined to drive it down further still.

That is money well spent, because it safeguards and protects £3 billion to the public purse, reduces illicit and criminal activity in this country and helps to protect legitimate traders such as newsagents and retailers, whose livelihood in part depends on their ability to continue to sell licit duty-paid tobacco products.

Photo of Mr Howard Flight Mr Howard Flight Shadow Chief Secretary to the Treasury

Is the Minister saying—and is the present position—that the overall policy on duty on tobacco should be to optimise tax revenues?

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

I think that I have been clear. As with a number of decisions about tax policy, concerns about revenue and protecting the public purse form a part of the decision, but important concerns about health and levels of smoking are part of the decision that the Chancellor makes each year about duty levels on tobacco. We are concerned to take into account the potential impact on smuggling and criminal activity. It is a judgment based on an assessment of those factors, with a number of objectives in place for the Government, not simply a question of revenue to the public purse, important though it is.

Photo of Richard Bacon Richard Bacon Conservative, South Norfolk

I did not realise how much fun the clause was going to be. If it is any augury of what is to follow, I look forward to

the collective chance to poke fun at the hon. Member for Yeovil, especially from a sedentary position. Before my hon. Friend the Member for Arundel and South Downs intervened, I was about to ask the Economic Secretary a similar question. If, as a consequence of the clause, people such as my hon. Friend have to pay through the nose for cigarettes, is not the issue mainly about getting the cash?

Photo of John Healey John Healey The Economic Secretary to the Treasury 10:15 am, 6th May 2004

The hon. Gentleman asked the same question as the hon. Member for Arundel and South Downs and I refer him to the answer that I gave. We are determined to drive down levels of tobacco consumption in this country. I look forward to the personal contribution that the hon. Member for Arundel and South Downs will make to that decline in due course.

My hon. Friend the Member for Poplar and Canning Town was not impressed by the hon. Gentleman's suggestion that the debate on this clause may somehow set a precedent and pattern for the remaining clauses. My hon. Friend would be concerned about our progress if it did. On that basis, I hope that the Committee will support clause 1.

Question put and agreed to.

Clause 1 ordered to stand part of the Bill.

Photo of Mr John McWilliam Mr John McWilliam Labour, Blaydon

Before we move to clause 2, I should point out that it has been drawn to my attention that the clock is not working. To avoid any doubt, we will go by the time on the House of Commons Annunciator rather than the House of Lords Annunciator—they are not always in synch.Clause 2 Rate of duty on beer