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Mr. Heathcoat-Amory: I shall summarise our position for the hon. Gentleman. We have a failed health policy and we want a successful one. We have a failed criminality policy and we want a successful one. We have

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a failed revenue policy and we want a successful one. The Government's response is to make a bad situation worse by opening up the duty differential, which will make all those problems worse.

Mr. Davey: For a second I thought that the right hon. Gentleman was in a time warp and was describing the record of the Conservative Government. I do not want to defend this Government's overall record on health. Indeed, my colleagues and I have criticised it. It is difficult to criticise overall their record on finances because there are huge surpluses which are growing by the day. Their record on criminality is certainly questionable, especially in terms of numbers of police officers. However, given the previous Government's record in these areas, the right hon. Gentleman has a nerve. He failed to address earlier whether the Conservative party is arguing that a cut in excise duties will increase revenue. If the Opposition are advancing that argument, the Committee is entitled to know on what basis they are doing so. The evidence from Canada and from the independent economically literate study produced by the Institute of Fiscal Studies suggests that what is being said by those on the Opposition Front Bench is completely wrong.

One might be tempted to suggest that the Opposition are being slightly opportunistic and that, during a week when there will be elections, they are trying to be populist, as their Leader has tried to be populist on various other areas of policy. The Leader of the Opposition has failed, and I believe that the Opposition will fail tonight because they have failed to make their point.

I do not have a study to quote from when we come to consider whether reducing duties on tobacco would increase revenue. I do not know of a study that has gone into the various own-price and cross-price elasticities that need to be computed if we are to work out the effect of reducing duties. Does the Minister know of a study that has considered own-price and cross-price elasticities and the effect of a cut in the duties on tobacco in terms of the overall tax yield from tobacco? If such a study does not exist, does the Treasury intend to commission one? Such an independent study would be important in informing the debate. If we have reached the top of the curve or gone beyond it in excise duties on tobacco, and if a cut would yield more revenue, my right hon. and hon. Friends and I might well reconsider our position. We are not dogmatic about it. If a cut in duties would have a beneficial effect all round for health policy and revenue raising, for example, we would be more than happy to support such a move, but there is no evidence to suggest that that would be the effect.

Mr. David Ruffley (Bury St. Edmunds): Will the hon. Gentleman clarify one point? Is he saying that the Government of this country should base their tax and excise duty policies on the work of Crawford, Smith and Tanner?

6 pm

Mr. Davey: I am certainly not saying that, but I am advocating that the Government base their tax policy on objective, independent, well-founded and economically literate analysis. We have not had that from those on the Conservative Front Bench.

Dr. Palmer: Is the hon. Gentleman not being a little optimistic in thinking that a further study would help to

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clarify the debate? As we have heard from the interventions of Conservative Members, even when there is an independent report, they do not want it. They want an independent report whose conclusions they like and, if they get one whose conclusions they do not like, they ask for another report.

Mr. Davey: The hon. Gentleman has a point, but I do not want to rubbish independent and objective reports. We need more of them, because this is an important social, economic and fiscal issue. The Government, and the previous Government, reacted to the initial findings on the effect of cutting duties on alcohol by freezing the duty on spirits and by keeping the increases in excise duties on beer and wine to the rate of inflation. That is a sensible policy that evidence from independent and objective studies seems to back up.

However, at the moment, I do not have to hand a similar study considering the price elasticities of demand for tobacco, and such a study is necessary for this debate. It could provide it with some rigour and a framework, so that we do not have to clutch figures from the air or make wild assumptions. Surely, given the brilliance of economists and the civil service in this country, we can try to obtain the facts and publish them, so that the debate focuses on the correct issues.

Mr. Bercow: At the start of his speech, the hon. Gentleman appeared to suggest that he accepted that a large differential would tend to favour the smuggler. He therefore dissociated himself from the position advanced by the hon. Member for Workington (Mr. Campbell- Savours), whose continental meanderings were enjoyable but, I fear, no substitute for empirical evidence. The hon. Gentleman now appears to be telling us that he does not know what the empirical evidence is. Therefore, can we establish beyond doubt the Liberal Democrats exact position on excise duties on tobacco as of 2 May 2000? Does he think that they should be higher, lower or stay the same? When will he learn to play his cards right?

Mr. Davey: The position is simple, and I will answer the hon. Gentleman directly. In the Lobby tonight, we will support the Government's position on increasing excise duties on tobacco and alcohol. I hope that that answer helps him with his troubles. However, he has mixed up two points. I agree with him that a larger price differential provides a greater incentive to smuggling. That is a law of economics, as the hon. Member for West Dorset (Mr. Letwin) said. However, it does not follow from that--the evidence is not yet forthcoming--that a reduction in duties would lead to an increase in revenue or that we should back an ill-thought-through and ill-considered policy that would be bad news for the health service, our schools and the police.

Mr. Bercow: I am deeply disappointed by the hon. Gentleman's reply. I had hoped against hope--oh, naive soul that I was--that he was a genuine libertarian. The late John Stuart Mill, for one, would be ashamed of him.

Mr. Davey: May I refer the hon. Gentleman to John Stuart Mill?

If a study on the price elasticities of tobacco were carried out so that the debate was rather more informed than it has been in some quarters, we might find that a

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cut in duties might increase revenue yields. However, we might still decide that we wanted to increase the duty because of other factors such as health policy. As the hon. Member for Erewash (Liz Blackman) pointed out, the evidence from countries with low rates of duty is that, because of sophisticated organised crime, smuggling will continue even if the differential is quite small. There is bound to be a differential with other countries, and particularly with those outside the European Union, and organised crime will arbitrage on the differential between the different tax rates and will try to exploit it.

Whatever the policy on reducing duties, we might decide that our first priority should be to invest in anti-smuggling devices such as the national network of scanners to which the Government are rightly committed. We might decide that we need more Customs officers and that we would not want to cut their numbers as the Conservatives did when they were in power. We have not heard them apologise for doing that and for reducing the resources available to Customs and Excise, but perhaps they should have done so.

Policies other than cutting duties can be used to reduce smuggling. If they are successful--we should all hope that they are--there might be an increase in the revenue yield. The policy of fiscal marks on cigarettes appears in clause 14, so I shall not dwell on it. However, it may be a useful aid in the attack on smuggling. It is possible that we shall want to debate the details of the policy's implementation, but properly marking the packs on which duty has been paid is a sensible way forward. Making the punishments for smugglers appropriate and seizing their assets is another approach. When organised crime is involved, custodial sentences should be available to punish the criminals properly.

I have concerns about aspects of the Government's policy. In particular, I am concerned about the speed of implementation. Several reports have been produced, but we are waiting for more officers and for the scanners. The Government have been in power for three years and they should be getting on quickly with anti-smuggling proposals, monitoring their efficacy and helping the debate by producing objective reports that provide an economic analysis that is stronger than that we heard from those on the Conservative Front Bench. Such reports would enable us to assess the effect of cutting duties on the Exchequer.

Liberal Democrats will, at least for this year, support the Government's approach to tackling smuggling. We support the measures that I have outlined and will ensure that the Revenue's tax base is protected. However, over the next year or two we want the Government to consider the duties' effects in more detail than they have to date, so that, when we revisit this issue this year and the year after that, the debate will be rather more informed than it has been tonight.

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