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Mr. Jim Cunningham: The hon. Gentleman speaks of what was happening five years ago. Would he like to tell us what was happening seven years ago, under the previous Administration? What he has described is nothing new. I recall that the then Paymaster General was asked to investigate, and did not exactly deliver.

Mr. Walter: The hon. Gentleman rightly points out that the problem is not particularly new. I referred to what was happening five years ago because that was the example given to me by the publican. The revenues on tobacco duty that the Treasury is receiving are at best static, and fell dramatically in the last full financial year--1999-2000--as a result of smuggling.

Mr. Letwin: The point that my hon. Friend has just made is seminal. We argued year after year that the time would come when there was a crossover, and revenues would decrease. The constant refrain from the Government was that that would not happen for years, if ever. Now here we are, in the year in which it has happened.

Mr. Walter: My hon. Friend is absolutely right. Let me return for a moment to beer duty. Figures for which I asked the House of Commons Library show that, in real terms, the Treasury take from beer duty has not really moved in the past 10 years, although consumption of beer, wines and spirits has increased significantly. As my hon. Friend has pointed out, the Treasury take from tobacco duty has fallen, despite all the evidence that tobacco consumption has risen in the intervening period, while duties have risen as well.

May I now return to my publican in Cranborne, a delightful village? The villagers have not stopped smoking; that is not the reason for the fall in his off-sales. The problem is that the villagers now have another source, a man who can get whatever they want--cigarettes or tobacco--and at a fraction of the price. What has been the Government's response? Even in this Finance Bill, it has been simply this: blindly to increase the duty on cigarettes by 6p a packet, and to continue to line the pockets of the bootlegger.

Since May 1997, the price of a typical packet of cigarettes in the United Kingdom has risen from £3.12 to £4.22. That is more than three times the rate of inflation. From each of those packets the Chancellor collects £3.37 in excise duty and VAT--80 per cent. of the retail price, and a much higher amount than is collected in any other European Union country. In fact, United Kingdom cigarette taxation is the highest in the world.

The Chancellor lost potential tax revenue--excise duty and VAT--of almost £5 billion between 1997 and 1999, not because less tobacco was smoked but because the

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smuggling of cigarettes and hand-rolling tobacco has accounted for an ever-increasing share of the total market. As I have said, UK tobacco consumption has increased since 1997, following 25 years of substantial decline.

There is a root cause of all this: the exceedingly high and ever-rising level of tobacco taxation. The Government have estimated that in 1999-2000 total cigarette consumption was around 76 billion, of which 13.6 billion--18 per cent.--were smuggled. The Tobacco Manufacturers Association has estimated consumption in 1999 to be 84 billion, of which 21 billion were non-UK duty paid, and 17 billion--about 20 per cent. of cigarette consumption--were smuggled. Total consumption of hand-rolling tobacco, the equivalent of some 21 billion cigarettes, had doubled since the opening of the single market, and nearly 80 per cent. of that consumption was non-UK duty paid.

Liz Blackman (Erewash): Is the hon. Gentleman aware that the tobacco industries of countries such as Spain and Italy, where tobacco duty is considerably lower than in the United Kingdom, are being undercut by non-EU tobacco that is not subject to any duty? The logic of his argument would seem to be that he wants tobacco duty to be cut. Given the examples of Spain and Italy, his argument does not stack up.

Mr. Walter: Illegal imports into Spain and Italy, especially of counterfeit tobacco products, are another problem and the subject of another debate.

It has taken the Chancellor almost two years to take steps to attempt significantly to curb tobacco smuggling. His steps have been too little and too late. Over about three years, the extra financial resources made available to Customs and Excise have amounted to less than £300 million, compared with an admitted tax loss of at least £5 billion. The Tobacco Manufacturers Association anticipates that in the year 2000 the tax loss as a result of smuggling will be about £4 billion.

Even by the Treasury's reckoning, the measures that have been introduced are designed only to contain smuggling at a level of slightly below 20 per cent. of the market. Although the seizures of smuggled tobacco products in the UK are running at a higher level than they were in 1999, Customs and Excise still believes that what it knows about smuggling is only the tip of the iceberg. The industry believes that the iceberg is significantly larger than the Government admit. Whichever view we take, it is clear that the more effective policing of smuggling will not by itself be an adequate remedy. The root cause is tax, and that issue must be tackled as well.

In August 1999, the Chancellor commissioned a report from Martin Taylor on tobacco smuggling, and he claims to have implemented its recommendations. A recent Treasury Select Committee report deplored the manner in which the Government published only snippets of Mr. Taylor's advice that support the new strategy for dealing with tobacco smuggling. The Government refused to publish in any form Mr. Taylor's advice in full.

Mr. Letwin: My hon. Friend is developing a powerful argument. Does he agree that if what the hon. Member for Erewash (Liz Blackman) said was material,

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the Government would have had no trouble in publishing the full text of Martin Taylor's observations? Mr. Taylor would have acknowledged that the duty differential was not the cause of the problem. The Government's extreme reluctance to publish suggests that Martin Taylor was aware that the duty differential had a serious effect on the smuggling problem.

Mr. Walter: The reports that I have of the contents of Martin Taylor's report--I do not know whether I quote accurately because we have not seen the report--suggest that it would not be possible to halt tobacco smuggling into the United Kingdom without cuts in the high level of UK tobacco taxation.

In his pre-Budget statement in 1999, the Chancellor stated that he would form his Budget judgments on the appropriate level of tobacco duties, taking into account a wide range of factors. In his Budget this year, the right hon. Gentleman had the opportunity to demonstrate that even if he considers tobacco taxation to be a morality issue, he none the less recognises that the policy that he has pursued so far has not worked.

The Chancellor has seen revenue from tobacco taxation reduce. He has failed to reduce tobacco consumption, contrary to the Government's health policy targets. He has increased the level of criminality with the increased number of smugglers. Most important, he has failed to protect children, who potentially are the targets of indiscriminate selling by illicit traders.

The Chancellor should launch a full and independent review of the UK's tobacco market, the extent of illicit market penetration and the Government's tobacco taxation policy and its fit with other policy objectives. Such a review should be undertaken urgently and published. That would make it clear that a market, a significant proportion of which is in the hands of criminals, is out of control. Such a market cannot be regulated to control under-age smoking or fulfil the Government's health objectives.

The figures for liquor and tobacco suggest a law of diminishing returns. At a time of increasing consumption, the tax revenue is static or, in the case of tobacco, declining. That is nonsense.

8.40 pm

Mr. Eric Illsley (Barnsley, Central): I shall make a few short comments on the Bill. Some relate to those of the hon. Member for North Dorset (Mr. Walter) on smuggling, which I have raised in such debates in the past. He described it in considerable detail.

I warmly welcome much of the Budget. Many of the Bill's provisions are welcome in my constituency, especially the assistance for families and children, such as the working families tax credit and the children's credit. The reductions in fuel duties are also welcome. However, in the debates that we have conducted on fuel duty in the past few months, insufficient attention has been paid to oil companies' profiteering. We are debating differences of 1p or 2p in fuel duties while oil companies register record profits and the oil-producing countries meet to try to restrict oil production even further so as to increase those already obscene profits.

Although I warmly welcome much of the Budget, many of its benefits for my area will be eclipsed by one or two other matters that the Chancellor could have tackled.

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I pay tribute to him for his excellent stewardship of the country's finances, to which the moneys that we can provide for education and health are a testament. However, in the next few weeks, my area will suffer because of our local government settlement, which has again left us several million pounds short of our budget target. We are used to that predicament, because it began in 1990 under the present system for local government finance. My area was one of 20 that were capped by the previous Government when they introduced the poll tax and the standard spending assessment formula. The latter has always worked against my area, and the problem is therefore historical. If one starts from a low base, one will always be at the low end of the scale.

Benefits such as the tax credits and lower tax starting rate for people on low incomes--there are quite a few of them in my constituency--could be overshadowed by the fact that the local authority has to cut services or introduce charges for them because of the shortfall in its budget. It is saddening that, despite the excellent Budget and interesting Finance Bill, we face cuts in our local government budget for a different reason. That takes a little of the gloss off the Budget.

My local health authority is one of the lowest funded in the Trent region and the country. It has a shortfall of approximately £3 million, which will prevent it from fulfilling many of the important targets that the Secretary of State for Health has imposed on it. We have considered tobacco smuggling, about which I shall speak shortly. My area has high rates of lung cancer, stroke and heart disease. Reducing tobacco consumption is therefore vital. The explanatory notes to the Bill state:

I sign up to that and agree that, as well as educational programmes, one way of achieving that is to increase duty to dissuade people from smoking--basically, to make it too expensive. However, as the hon. Member for North Dorset pointed out clearly and in considerable detail, that policy has been undermined to some extent by the number of cigarettes brought in from abroad.

There are areas in my constituency where retailers, tobacconists and newsagents cannot sell legal cigarettes. The amount of smuggling that goes on in those areas makes it unprofitable for them to continue selling certain types of cigarette, if not all cigarettes. When I go out and about in my constituency, retailers, tobacconists and newsagents constantly complain that they cannot sell cigarettes in their area.

The hon. Gentleman went into great detail on the revenue losses and all the rest of it. I do not want to follow him down that path, but newsagents and tobacconists in my area can point to the points of delivery. Articulated lorries bring in a huge number of smuggled cigarettes. They are brought to one central point: an entrepreneur, for want of a better word, brings in the tobacco. He then sells on to a network of "runners". They will purchase the packs of cigarettes and sell them to an even wider distribution network. By using that system, the penetration within the local area is extremely deep, covering huge areas.

Last year, I raised the matter in the equivalent debate. A few months ago, a retail trade magazine decided to publicise smuggling to draw more attention to it and to

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reduce it in its own way. It was aimed not at those in the example that I have just quoted, but at newsagents and tobacconists who were selling smuggled tobacco: legitimate traders who had decided that the only way to make money from selling tobacco products was to go the way of the smugglers and to sell the stuff more cheaply from their own shops.

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