Clause 5

Finance Bill – in a Public Bill Committee at 6:30 pm on 8th May 2007.

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Rates of duty on alcoholic liquor

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

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

May I welcome you, Mr. Gale, to the Chair, or more strictly welcome you back as the Chair of the Finance Bill after an absence of some four years? I look forward, as my colleagues do, to serving under your chairmanship during our proceedings.

Clause 5 increases the rates of excise duty charged on beer, wine, made-wine and cider in line with inflation. Excise duties on alcohol provide an important£8 billion annually to invest in essential public services. This inflation-only increase in duty, which, together with VAT, is equivalent to around 1p on a pint of beer and on a litre of cider, 5p on a bottle of wine and sparkling cider, and 7p on a bottle of sparkling wine, is necessary to maintain this important source of revenue to the public purse.

Photo of Adam Afriyie Adam Afriyie Conservative, Windsor

Will the hon. Gentleman make it clear whether this measure is an economic measure, to raise taxation on alcohol, or a social measure, to try to limit the harm that these products might cause?

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

It is a revenue measure, and one that is entirely consistent with the convention and the usual approach to excise duties, which is that, generally, this Government and previous Governments would, at first blush, look to increase duties in line with inflation, at least to maintain their real value.

This is a modest increase—a freeze in real terms—which comes after actual freezes in beer and still-wine duty in three of the previous 10 Budgets. In addition, cider duty was frozen in the previous four Budgets and sparkling wine duty was frozen in each of the previous six Budgets.

There have been concerns about alcohol-related harm, its social impact and the quite serious problems that it causes in some areas; that may have been what the hon. Member for Windsor was driving at, and I look forward to hearing any contribution that he would like to make to the discussion. As a result of those concerns, and as a proposed response to those problems, there have been calls for significant increases  in duty. However, the view that the Government take—it is the view that we have consistently taken in the Treasury—is that that sort of social harm and social concern is best tackled by social legislation and by working with the trade in self-regulation, rather than by taxation, which, in this circumstance, is an instrument that is not best suited to deal with the social problems that we are discussing. In fact, it wouldbe likely to penalise the vast majority of responsible drinkers rather than affecting the minority who cause us concern.

Photo of Julia Goldsworthy Julia Goldsworthy Shadow Chief Secretary To the Treasury, Treasury

Will the Financial Secretary concede that there might be one exception—super-strength lagers? People with significant addiction problems buy such lagers because they are the strongest and cheapest drink, so the price contributes to their decision. Generally, they are drunk by people with problems. Does he not think that changing the price might go a significant way towards tackling that specific problem?

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

Not entirely, because the generalcase for using taxation as a means of regulating consumption has not been made. It is not best suited to this area of policy. In addition, concerns have been expressed by some in the alcohol industry who argue that higher energy and raw materials prices, and their impact on consumer demand, have created a difficult trading environment for them over the past year. We recognise that the industry makes an important social and economic contribution to the life of this country. I would argue that the modest inflation-only increase in the duty on beer, wine and cider recognises those concerns, while providing the important stream of revenue that is necessary to maintain our commitment to public services.

Photo of Paul Goodman Paul Goodman Shadow Minister (Childcare), Treasury

May I make it clear at the start of my contribution that I have not changed gender today? I was about to add that I am not aware of having done so at any other time, but members of the Committee, being as sharp as ever, beat me to it. I have not crossed the Floor to join the Labour party today, or at any other time. Nor have I improved my looks and intelligence by a factor of at least 100. That was all by way of saying that I amnot the hon. Member for Bishop Auckland (Helen Goodman), in case any member of the Committee is in any doubt. She would doubtless have made a significant contribution to the Bill had she been a member of the Committee, because she makes very good contributions to debates.

I do not think that I have served under you before, Mr. Gale. In welcoming you to the Chair, may I say that I am sure that if you are ever told that you have joined the Labour party, changed your gender or improved your intelligence—not that I am willing to admit that that is possible—you will bear all those complimentary remarks with the fortitude that I associate with you?

Having welcomed you in that way, Mr. Gale, I turn naturally to the clause and to alcohol duty. As I do so, I think of last year’s debate, at which you were notable to be present, although other members of the Committee will remember it—the hon. Member for  Wolverhampton, South-West certainly will. Last year’s decisions were spread across two main clauses, one about beer and a separate one about wine. This year, the two of them are packed into one clause. I do not want to start the more serious element of my remarks on a pedantic note, but I am curious to know why they have been rolled together. Is there a significant reason for that? Although I suspect that there is not, perhaps the Financial Secretary will wish to clear that up later. [Interruption.]

I hear a remark from a sedentary position about the length of the tax code. I do not think that I should like to comment on that. I would, however, like to comment on the issues that face Ministers in deciding the balance of duties. They have to take into account a number of considerations. The duties have to be high enough to raise the revenue necessary to fund public services and all the causes that Ministers traditionally commend to us, but low enough to ensure—as with tobacco, about which we heard so much last year and I am sure we will hear more as the Committee goes on—that the law of unintended consequences does not apply. In other words, they must ensure that smuggling is not encouraged and revenue subsequently threatened. They also have to take into account the needs of domestic producers and have to be as fair as possible across the different drinks. It can also be argued—a case made by my hon. Friend the Member for Windsor—that duties on alcohol should play a part in improving public health.

The Financial Secretary said that such mattershad been treated in the same way by the previous Conservative Government as by the present Government and that taxation may not be best suited to bringing about the health results to which my hon. Friend referred, and that the case had not been made. It would be fair for him to be a little puzzled by that in principle because, after all, taxation is used in several other circumstances to encourage or discourage behaviour. Perhaps he may wish to contribute to the debate later on that point when we shall listen carefully to what he has to say.

I am not saying that the objectives are easy to reconcile. Having made it clear that we are not inclined to oppose the increases on the basis of what we know, I wish to ask the Financial Secretary specific questions about beer and some general questions about the Government’s strategy as a whole. Casting my mind back to last year’s debate, I recall that he referred to concerns in the wine trade, which was arguing at the time that demand for wine was beginning to weaken. He referred specifically to that point.

Noting that duty on beer had fallen by 6 per cent. in real terms since 1997, the hon. Member for South-East Cornwall said that there was

“clear evidence that alcohol, particularly beer, plays a large part in some of the antisocial behaviour, not least binge drinking, that we experience from time to time.”

I raised that issue not to disagree with or criticise what the hon. Gentleman said, but to give the Committee the flavour of last year’s debate. Although that debate was brief, it is fair to say that it was rather more sympathetic to the cause of wine than to the causeof beer.

The context this year is a bit different. The smoking ban in pubs and clubs is due to come into effect in July. The British Beer and Pub Association argues that the ban will have a disproportionate effect on beer sales and, in particular, on smaller, more traditional and out-of-town and city centre pubs for which beer represents a larger percentage of sales. Members of the Committee will have received representations from the association and their local brewers in the same vein.

The argument put forward by the association is worth considering in some detail. Beer is mainly a home-grown product; 90 per cent. of the beer drunk in the United Kingdom is made in the UK. The brewing and pub industry contributes more than £28 billion to the UK economy—some 2 per cent. of GDP—and exports more than 1.5 million pints of beer a day to more than 120 countries, generating nearly £300 million in export revenues. It employs roughly 20,000 people directly and creates more than 600,000 jobs indistribution, pubs and bars; 45,000 landlords run their own businesses and brewers buy more than 40 per cent. of the malting barley crop, thus helping to sustain the rural economy and rural communities.

None the less, the case that the industry has made this year—rather more vociferously and with more force than it made last year when the clause on beer went through pretty quickly—is that beer is under some pressure from rising energy costs that drive up the direct costs of beer production and distribution, and from changing consumer preferences, including some for products that are mainly imported. The example of wine is almost too obvious to state, but I shall do so none the less. The industry is also under pressure from changing patterns of consumption, such as the trend towards drinking cut-price beer that is available from supermarkets at home. Since 1997, beer consumption is down by 11 per cent. and continues to fall; 35 British breweries have closed in recent years with the loss of about 5,000 jobs. The association says that the total profits of Britain’s four biggest brewers fell by 50 per cent. last year, which is a considerable fall.

The question therefore is whether, as the association claims, the industry will soon be hit by a double whammy of the effects of those pressures plus the effects of the smoking ban. In Ireland, sales fell by7 per cent. in the aftermath of the ban, and I should be interested to know whether the Financial Secretary has a more up-to-date figure. Does he know whether the Treasury has made any calculations as to the combined effect on beer sales of the forthcoming ban together with the rise prescribed by the clause? Has it made specific studies of the experience in Ireland or elsewhere, and what is the combined effect on pub closures of the ban and the rise set forth in the clause—particularly in relation to the smaller, out-of-town or out-of-centre, traditional pubs to which I referred earlier? Furthermore, what assessment has the Treasury made of the effect on pubs of the availability of cut-price beer from supermarkets?

The association has got into the business of trying to calculate what happens to revenue, and claims that further tax rises will raise little extra money but willhit the industry hard. It says specifically that price elasticity of demand, a key measure of how price affects sales, is minus 1.5 per cent., and that that is three times higher than the Treasury estimates. In  summary, it says that duty rises produce falling consumption and less revenue. It cites an alleged so-called “black hole” of £70 million to £100 million in Treasury finances. The Financial Secretary furrows his brow, but the figure is on the association’s website and I should be grateful if he would clear the matter up in due course.

When the Financial Secretary spoke last year about the long-running freeze on spirits, he said:

“The reason for the decision on beer duty compared with that on spirits”— in other words, the freeze—

“is that spirits are significantly more heavily taxed than beer and we have in place a long-term policy of a fairer balance of taxation across all alcohol products.”——[Official Report, Standing Committee A,9 May 2006; c. 56.]

The reference to a fairer balance of taxation over a period of time suggests equivalence: taxing drinks solely on alcohol content. That would imply a continuing increase in duty on spirits, and an increase in wine duties. New world wines are stronger than old world wines, because the alcohol content is higher,so arguably a revision of wine duties would be necessitated. Is that what the Financial Secretary meant by a fairer balance? If so, has the Treasury calculated the effects of such a rebalancing on public health?

To return to this year’s changes, duties on sparkling wine were, as the Financial Secretary said, raised by3.4 per cent., having been frozen since 2000-01. Duties on cider and perry have been raised by 3.4 per cent, having been cut by 2 per cent. in 2003. Those are quite significant changes. After what was effectively quite a long period without any change in duties on sparkling wine, there has been an increase and, after a cut in the duty on cider and perry in 2003, there has now beenan increase on them too. That seems to be quite a considerable change of approach.

The Financial Secretary said last year that

“sparkling wine is the most heavily taxed of all alcoholic drinks. That is part of the reason why the decision that we took in previous years to freeze the duty on sparkling wine was taken again this year.”

One is inclined to ask: what has changed in the year since those comments? He went on to say, in a moment of levity that he might—who knows?—regret:

“There may be some champagne drinkers among the officials who support me on the Bill because I have a note that says the freeze on the duty on sparkling wine will affect not only the traditional champagne products to which the hon. Lady”— the hon. Member for Falmouth and Camborne—

“referred, but the excellent sparkling wines from Britain.”——[Official Report, Standing Committee A, 9 May 2006; c. 56.]

He went on to list two.

I do not know whether his team of officials has changed—they look much the same to me—or whether they have simply given up champagne as a result of the current atmosphere in the Treasury. However, I would be grateful for the Financial Secretary’s comments on what changed his officials’ drinking behaviour in a year.

Finally, on smuggling, the Government published their UK alcohol strategy on spirits in 2005. It aimed to reduce the illicit spirits market to 3 per cent. by this financial year compared with a range of 0.8 per cent. in 2004-05 and 9 per cent. in 2001-02. HMRC figures duly showed the illicit spirits share smoothly declining in each year since 2001-02 and the estimated tax loss falling from £1.1 billion to £300 million. There has been a steady decrease, but the figures are not easyto reconcile with the fall in the amount of spirits seized. We learned from a parliamentary answer that the amount fell from 2.1 million litres in 2000-01 to 0.24 million litres in 2004-05. For wine, the amount fell from 0.61 million litres in 2000-01 to 0.29 million litres in 2004-05. Again, I would be grateful for the Financial Secretary’s comments.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 6:45 pm, 8th May 2007

I have some brief remarks. I commend the hon. Member for Wycombe on his thoughtful comments. I was not contacted by the brewers, although one of the country’s largest brewers is headquartered in my constituency. It used to be called Banks’s, then Wolverhampton and Dudley Brewery and is now Marston’s. It is known to many hon. Members, and is led by its excellent chief executive, Ralph Findlay. It has been very successful and its profits have gone up markedly in recent years. However, I note from the explanatory notes that the duty on beer, wine and cider has been raised this year in line with inflation, but the duty on spirits is frozen and, in fact, is 27 per cent. lower than it would have been if it had been increased in line with inflation since 1997. The corresponding fall for beer is 3 per cent. in real terms; for cider it is 19 per cent.; for still wine it is 3 per cent.; and for sparkling wine it is 16 per cent. Can I tempt the Financial Secretary to say a little more about the fair balance, as he did last year?

I am faced with having a major brewer in my constituency who brews excellent beer, as many hon. Members know, yet the rate in the past 10 years has risen relatively a lot more compared with the rate for spirits.

Debate adjourned.—[Kevin Brennan]

Adjourned accordingly at two minutes to Seven o’clock till Thursday 10 May at Nine o’clock.