Select Committee on Scottish Affairs Minutes of Evidence

Examination of Witness (Questions 420 - 439)



  420. Would the converse be true, that if whisky taxes were lower it would create employment because you stop killing the golden goose? Would the converse be true?
  (Dr Crawford) It would. It depends on how price responsive demand was. If you could get 200 per cent increase in demand for a 5 per cent reduction in price, you would expect quite big increases in employment.

Sir Robert Smith

  421. You talked about the job impact of increased beer and wine duty as a negative option for beer and wine. Would there be any positive for spirits in terms of people still desiring alcohol.
  (Dr Crawford) There would. It depends on the pattern of complementarity of the substitute. If an increase in the price of beer reduce beer demand, it might well increase the demand for other things, spirits, socks, you name it.

Miss Begg

  422. In your memorandum you suggested that there was no difference in the price responsiveness of UK consumers before and after the introduction of the European Single Market in 1993. You also found no difference in the price responsiveness between the South-East of England and the rest of the UK. To what extent has the introduction of the Single European Market made any difference in the price responsiveness of alcohol consumers in the UK?
  (Dr Crawford) We could not find any statistically significant responsiveness. By statistically significant we do not mean big. Things can be significant—I mean there could be a big response but it may not be significant statistically. It is a fine point. What we have here is a sample of households and they tell the Office of National Statistics what they spend on various things. It is not the entire population, it is 120,000 people. That is quite a lot but it is not the entire population. So it is like opening the front door and stopping the first 20 people you see in the street and asking whether they are left or right-handed. You would probably find that they were all right-handed and that would be significant in terms of the large majority, but it would not be statistically significant because you have not sampled very many people and they might not be representative of the whole population. What we did find were some significant possibly effects demands for various alcoholic goods. But those were not statistically significant. So they could have been generated by chance during a random sampling process of data. You look less happy than when I started.


  423. What if you asked the first 20 people and they were all left-handed?
  (Dr Crawford) If you did not have a thorough grounding in statistics you would assume everybody in the UK was left-handed. But what you would then do is work out the standard error which is something like 20 divided by the population of the UK.

Miss Begg

  424. The next question seems a bit irrelevant now. Why are there apparently no significant regional variations in price responsiveness within the UK?
  (Dr Crawford) Well, there might be, but we were unable to find it in our data. What that means is, if we re-sampled our data 100 times, we would expect to get the same answer with no difference 95 times out of 100.

  425. Assuming your data is correct, what do you read into the fact that you are not detecting any regional variations? Does that mean you can put up the price of alcohol and people will still buy it?
  (Dr Crawford) We did not identify price responsiveness; there was no change before and after the single market. When we first came to this we thought before the single market, if price went up what could people do? Not very much. They could continue to consume as much as before or reduce their intake. Now they seem to have an extra option. They can go to France and buy it or buy it round the back of the bike sheds or wherever you buy bootleg alcohol. So we would have thought the price responsiveness would go up, but we just did not find that.

  426. You would expect to get boot-legging in England but that is not an option in Scotland.
  (Dr Crawford) It is not.

  427. But that is still not showing up in the statistics.
  (Dr Crawford) No. We looked at various regions. We looked at people a long way away from the Channel ports and people in the South-East of England and just did not find any particularly catastrophic drop in their demands after the introduction of the single market.

Mr Sarwar

  428. There are significant differences in the duty rates levied on different types of alcohol. For example, duty accounts for about 62 per cent of the price of a bottle of whisky but only 51 per cent of the price of a bottle of wine. Do you think that there is any justification for the differences in duties between competing alcoholic drinks? What are the economic consequences of such differences?
  (Dr Crawford) I do not think there is any evidence that could support that difference. Speaking for myself I think alcoholic drinks should be taxed on the amount of alcohol they contain and that that should be constant across all forms of alcohol. The effect of having relatively high taxes on spirits as compared to wine would be a reduction in demand for spirits compared with wine.

Mr Clarke

  429. In relation to the external effects of alcohol, do you think that the UK's current alcohol tax regime adequately reflects the negative social consequences caused by excessive alcohol consumption, particularly those related to health and crime?
  (Dr Crawford) The answer to that question is that I do not know. The reason I do not know—I suspect nobody does I would say in mitigation—is that what you need to do is balance the revenue you get from these taxes with harm done by over consumption of alcohol and evaluating the harm done is very difficult. I know that people in the University of York and the Centre for Health Economics up there have tried to do this but I am not aware of exactly how much value they put on it or whether the estimates they have come up with are very robust. So all I can say is that, given there is some harm done by the consumption of alcohol, taxes on alcohol should be higher than they are on other goods and should try and reflect that. But the exact level is hard to know because I do not know exactly the value of the harm done.

  430. The current thinking is that lowering tax on alcohol will increase consumption and there will be an increase in poor health and the crime rate. That is the argument of people usually who are teetotal; in other words, the holy willies.
  (Dr Crawford) That is true. It does not necessarily mean it would be a bad idea to cut taxes on alcohol. If you cut taxes on alcohol you might get an increase in crime and an increase in health costs. Whether or not it is a bad idea depends on how big those increases are and much those health costs are. If they were very big then it would be a bad idea than if they were very small and if there was a big increase in jobs then it might be a good idea.

  431. You realise that that is the difficulty we have as legislators in a situation of making recommendations to our Government. On the one side we are being pressurised to level down to stop importing and smuggling, but on the other hand you have these people saying, no you cannot do that.
  (Dr Crawford) You need to find somebody who can tell you what the value of alcoholism is to the economy. Nobody knows. On the industry levelling down, I think everybody agrees—well your question earlier as to what we should about cross-border shopping and harmonising with France, well harmonising with France, although it is a nice word, it means cutting. Harmonisation itself will not do anything apart from reduce cross-border shopping. It will not of itself reduce the incentive to smuggle. If you harmonise at the very high rate, the incentive to smuggle becomes the difference between the pre-tax price and the post-tax price. If you harmonise up you would solve cross-border shopping but probably increase the level of smuggling. If you harmonise down you would probably do both. But you have to distinguish the two types of harmonisation and most of the people earlier this morning were for harmonising down.


  432. You did say it would be possible to get estimates of the cost in terms of health and crime. But there are estimates in relation to smoking and there have been campaigns to ban smoking. Do you see similar campaigns taking place in relation to alcohol and do you have any views on that?
  (Dr Crawford) I do not know. I imagine those campaigns are already underway by the holy willies. I do not have any particular views on that.

Sir Robert Smith

  433. The other effect of duty that the Scotch Whisky Association has long argued and the Gin and Vodka Association would probably agree, is the signals that our duty levels send to other countries who we are trying to export to. Would you agree with those associations that the high UK alcohol taxes provide other countries with a reason to adopt a prejudicial fiscal approach to UK-produced spirits? If we are saying our spirits should be taxed higher, does that send a signal to the other countries that we approve what they do?
  (Dr Crawford) I can certainly see the argument. It is a slightly odd thing for a country to do, actually, to impose such a high rate of tax on imports. I can see the argument but whether or not it actually has an effect, I simply do not know.

  434. But you think it is unusual to tax your unique product and penalise it in your home town?
  (Dr Crawford) Yes. I am sure the reason for the structure of alcohol taxation that we have got at the moment is historic.

Mr Welsh

  435. One effect of the disparity in alcohol duties between the UK and other EU countries has led to smuggling and smuggling seems to involve individuals as well as organised criminals. Do you think that alcohol smuggling will continue to be a problem so long as EU duty disparities are sufficiently wide? Could you identify any other steps, aside from extra policing, that the authorities might take in order to reduce smuggling?
  (Dr Crawford) Well, on the first part of your question, the main incentive for smuggling as opposed to legal cross-border shopping is to do with the difference between the pre-tax and post-tax prices in the country to which you are smuggling. So the profit that the smuggler would make in the UK would be by selling whisky for the price without the tax essentially. That is not really affected by the price of the tax rate in Finland, for example. So it is not so much to do with differences. Smuggling is a question of the difference between the pre and post-tax price in the UK rather than differences between different parts of the European Union. Differences between the different parts of the European Union are more to do with having more effect on legal cross-border shopping or possibly illegal cross-border shopping where you go and buy in France, pay your duty then bring it into the UK and tell the Customs officers that you are about to have a massive party or a wedding and in fact you flog it. I think that is relatively small compared with serious kind of smuggling.

  436. What other measures could be taken, ruling out increasing the policing. Obviously we would like to see that, but aside from that?
  (Dr Crawford) If an economist was going to do something illegal, they would weigh up the benefits and risks. So policing increases the risk; reducing the level of taxation in the UK reduces the benefit. Those are the two main things. So if you did not want to increase the probability of catching somebody, the only other way to do it is to reduce the level of tax. I have to say that tax on alcohol in the UK, you probably know and it will not come as a surprise, are not the only taxes that are avoided. Lots of taxes are avoided and it is only in the case where it becomes absolutely catastrophic to the tax base or the tax base disappears entirely. It is commonplace economics that as soon as you try and tax an activity, that activity seems to mysteriously disappear. Some will be avoidance and some will be people thinking, "I am not going to do this any more because it is too expensive". Typically it has not been the case for most sources of taxation. People pay their income tax. Putting up income tax does not stop them working.

  437. If you reduce the tax disparity would you be able to resolve the problem?
  (Dr Crawford) In the absence of being able to do anything about the police?

  438. Let me put this question. What, if any, are the economic distortions that such duty disparity causes?
  (Dr Crawford) As far as the structure of tax in the UK is concerned, it means we are drinking too much beer and wine and not enough whisky because the price of beer is less compared to whisky because of the tax. So far as international flows are concerned, it means we are wasting a lot of effort going over to France and shopping and then coming back. It is a classic deadweight loss of tax distortions.


  439. You referred to people having a large party and filling up their cars or their vans. My understanding is that you are allowed to bring in what is reasonable. But could or should that change to a fixed amount, which would eliminate any uncertainty and do away with the point about parties? A reasonable amount for personal use would substantially reduce the amount coming into the country. Could and should that be done?
  (Dr Crawford) I do not know whether it could be done. It may be illegal. It is not in the spirit of the single European Market to stop people over the border buying something and bringing it back.

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