Memorandum from the All-Party Parliamentary
The All-Party Parliamentary Beer Group, formed
as the Parliamentary Beer Club in 1993, exists to promote understanding
amongst Parliamentarians of the United Kingdom beer and pubs industries.
Over 300 MPS and Peers of all parties are in membership. Around
60 UK MEPs are honorary members of the Group, which is supported
by 50 individual brewing and licensed retailing companies, as
affiliated corporate members. An officially registered all-party
parliamentary group, the Group is the largest industry group at
The Group's objectives are to promote the wholesomeness
and enjoyment of beer and the unique role of the pub in United
Kingdom society, to increase understanding of the social, cultural
and historic role of brewing and pubs in the United Kingdom and
their value to tourism, to broaden recognition of the contribution
of brewing and pubs to employment and to the United Kingdom's
economy, to promote understanding of the social responsibility
exercised by the brewing and pub industries, to support the United
Kingdom's brewing industry world-wide and to promote a positive
future for beer and the pub.
1. The APPBG believes that beer smuggling
could be eliminated by a relatively small and consequently affordable
reduction in the UK rate of beer duty.
This is because the net margin for beer smugglers
is far smaller than the duty differential of 28p/pint. One estimate
suggests that the smugglers' net margin is nearer 8p/pint. This
implies that a duty reduction of only a few pence per pint could
be sufficient to eliminate beer smuggling.
The size of smugglers' net profits is therefore
of critical importance. We would suggest that interested parties
such as HM Customs might be invited to table and compare their
estimates of this figure.
2. There are well-documented case histories
of governments eliminating smuggling by reducing duty rates. We
would refer the Sub-Committee to the account of cigarette smuggling
published in The Economist in August 2000.
This suggests that smuggling and duty-paid cross-border
shopping are much more price-sensitive than previously thought,
and that volumes do not follow normal economic relationships as
to price elasticity.
The Canadian evidence in particular suggests
that the important value is not the total price of the goods,
but the size of the smuggling profit: and that relatively small
changes in duty rates can have major effects on smuggled volumes.
3. This fundamentally changes the net fiscal
consequence of a duty change. The benefit to the Exchequer of
higher duty rates on domestic consumption will be offset by higher
levels of beer imports, which evade UK duty and VAT.
This price sensitivity has not been recognised
by previous studies of the consequences of changing duty rates,
such as the evidence previously given by the IFS to the Sub-Committee.
However, other calculations suggest that the cost to the Exchequer
of increased imports is of the same order of magnitude as the
benefit from increased domestic revenue.
4. The IFS study assumes that smuggling
can be incorporated within the overall price-elasticity of domestic
consumption. This is wrong for two reasons.
Firstly, the price-elasticities of smuggling
and domestic consumption differ by an order of magnitude. Secondly,
the figure for price-elasticity derived by the IFS largely excludes
the effects of smuggling as the calculations relate to a time
period which mainly preceded the Single Market.
5. A second problem with the IFS report
is that it assumes that a 1p duty increase will increase retail
prices by 1p, with a consequent small reduction in consumption.
In fact, a duty increase of 1p results in a
2p increase in retail prices in pubs. There are a number of reasons
for this on which we have accepted industry evidence.
As a result the consequent reduction in on-trade
consumption is twice as big as estimated by IFS. The IFS therefore
grossly under-estimates the fall in on-trade consumption which
would follow a duty increase and the consequent loss of duty revenue.
6. The APPBG also believes that calculations
of the fiscal consequences of duty changes are of little value
unless they estimate the consequent primary and secondary economic
In the case of an increase to beer duty which
reduces beer consumption, the primary effects will include a reduction
in profits of brewers and pub groups and consequently of the profits
taxes paid by such groups.
Another primary consequence will be lower employment
in pubs, which will reduce the Exchequer's receipts from employment
taxes and increase the outgoings on unemployment benefits.
The secondary economic consequences of duty
changes have been estimated by a number of economic consultants.
Most notably, Oxford Economic Forecasting (OEF) used the Treasury's
model of the economy to estimate the secondary effects of a beer
duty cut. This study concluded that a cut in alcohol duties would
result in a reduction rather than an increase in the PSBR in the
The IFS does not attempt to estimate these primary
and secondary economic effects, although they acknowledge that
such effects will occur. The APPBG believes that these effects
must be quantified as some studies have suggested that the secondary
outweigh any benefit to the Exchequer of a duty increase.
7. Correspondence between the APPBG and
IFS has highlighted a number of further concerns about the IFS
In particular the APPBG believes that the IFS'
estimate of price elasticitywhich differs from the accepted
figures used by the trade and by HM Customsis unreliable,
because it is based on data from the FES which excludes a high
proportion of drinkers.
8. In summary, the APPBG believes that IFS
should be invited to refine their study to include the following:
Replacing the assumption of unity
for duty pass-through to reflect the fact that a 1p increase in
beer duty results in a 2p increase in bar price.
Estimate of the price-sensitivity
of smuggling and its consequences.
Inclusion of primary and secondary
fiscal consequences of duty changes.
Use of credible and generally accepted
values for price-elasticity of beer consumption.
The APPBG believes that these factors combine
to reduce if not eliminate the fiscal benefits of any increase
to beer duty. As a result only a small proportion of the extra
duty paid by drinkers benefits the Treasury. Raising beer duty
is an inefficient way to raise additional revenue, but a very
effective way to encourage smuggling.
9. Finally, the APPBG would submit that
the possibility of eliminating beer smuggling by a small duty
cut would have other very significant benefits:
Customs officers could be re-deployed
to more cost-effective tasks such as the prevention of drugs and
Police operations could be re-deployed
from detection and prosecution of beer bootleggers.
Reduction in the social problems
caused by the unregulated sale of bootlegged beer, including sales
to children as graphically described in the recent British Institute
of Innkeeping Report "Children at Risk".
Pubs would not be under-cut by bootleggers,
thus making it easier for marginal pubs to survive and to continue
to serve their communities.