Select Committee on Treasury Appendices to the Minutes of Evidence


APPENDIX 13

Memorandum from the All-Party Parliamentary Beer Group


BACKGROUND

  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 Westminster.

  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.

SUBMISSION

  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 effects.

  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 medium term.

  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 calculations.

  In particular the APPBG believes that the IFS' estimate of price elasticity—which differs from the accepted figures used by the trade and by HM Customs—is 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 cigarette smuggling.

    —  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.

October 2000


 
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