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Mr. John Baron (Billericay): Does the hon. Gentleman accept that if taxes are increased to such an extent that smuggling becomes prevalent, thus swamping the domestic market with under-priced cigarettes, consumption could increase? That is Conservative Members' main concern. We believe that the link between tax increases and reducing consumption has finally been broken, and we are greatly concerned about that.
Jon Trickett: I shall come to that point in a moment or two. I was trying to remind the Committee that we should go back to first principles and establish why the Treasury, for many years and under all Governments, has increased taxation on tobacco products.
In the past, the Conservatives adopted an inflation-plus policy; each year, revenue would increase beyond inflation. The Labour Government decided to change the rules and, because of smuggling, to increase the amount only by inflation—the issue raised by the hon. Member for Billericay (Mr. Baron). Like the hon. Member for Tatton (Mr. Osborne), I am a member of the Public Accounts Committee, which looked into the issue and found that most smuggling is carried out not as a small private enterprise by people in white vans but on a massive scale. Imperial Tobacco was, apparently, systematically exporting tens of millions of cigarettes and other tobacco products each year, which were later smuggled back to the United Kingdom. After careful consideration by Customs and Excise and the PAC, measures are being taken and a memorandum of understanding is about to be signed. That will make a substantial difference.
Rather than adjusting tax rates and, in effect, abandoning the consensus about taxing tobacco products for health reasons, we should be trying to tighten the activities of Customs and Excise and other enforcement authorities so as to reduce smuggling. That would secure our objectives for both health and revenue.
With those few points, I conclude my remarks. I await the rest of the debate with interest.
Mr. David Laws (Yeovil): The debate is extremely important and I am grateful for the opportunity to make some comments on the level of duties on a variety of tobacco products.
I share some of the concerns expressed by the hon. Member for Eddisbury (Mr. O'Brien), although I would not go as far as his proposal that the increase in indexation proposed by the Government should be reduced. The detail of the evidence given by the hon. Gentleman is not sufficient to allow us to make that move.
The amendment is a probing measure that invites the Government to reflect on their strategy for the taxation of a variety of tobacco products, and to consider whether it is working in the context of both the huge increase since 1996–97 in the share of smuggled tobacco products sold in this country and the changes that the Economic Secretary was forced to make last year to legislation on the single market. The changes reflect the fact that we are in a single market, so we cannot use some of the measures previously adopted by the Government to constrain people from legally importing tobacco products.
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The reason why we are focusing particularly on hand-rolled tobacco is that the greatest proportion of smuggling occurs in that market—a point made by the hon. Member for Eddisbury. I promise that I shall not go back over all the figures cited by the hon. Gentleman, but we need to consider the amazing proportion of the hand-rolled tobacco market accounted for by smuggling. The latest figures suggest that about 52 per cent. of that market is smuggled tobacco, which is extraordinary. Throughout British history, one can think of few other products where there was such a high proportion of smuggling. When we add to that the 17 per cent. of tobacco legitimately purchased across borders, we find that no duty is paid on almost 70 per cent. of the hand-rolled tobacco consumed in the UK.
When we consider changes in duty and the effect of the escalators introduced by the Conservative Government, which were escalated by the Labour Government for a period after 1997, we find that the consumption of hand-rolled tobacco has risen by about 47 per cent. since 1997. It currently accounts for 25 per cent. of UK cigarette consumption. The strategy does not, therefore, seem to have been especially successful.
We would have thought that the Department responsible for such matters—the Treasury, which is stuffed full of economists—would be cautious about maintaining its present policy, which is based entirely on trying to police the trade, as opposed to trying to deal
with some of the fundamental underlying problems: in essence, the vast duty differential between the UK and other countries, including those on the continent, which provides a massive incentive for individuals to engage in illegal activity as well as legally to bring across the channel huge amounts of goods on which duty is low or not paid at all.Our current policy on this matter reflects a change in the approach that we have taken for many years. I freely acknowledge that, some years ago, our party was in favour of increasing tobacco taxation and hypothecating it to the national health service, a policy picked up by Labour when it came into government. We acknowledge that the huge smuggling activity, across the channel and elsewhere, puts a cap on the extent to which we can increase tobacco duty in the interest not only of health objectives but also of revenue raising.
Mr. George Osborne: I am grateful to the hon. Gentleman for being so candid about the mistakes made by the Liberal Democrats in formulating their previous policy. Does he agree that if tobacco revenue was hypothecated to the health service, it would be extremely difficult for him to move an amendment to lower duty because that would be to cut money for the NHS?
Mr. Laws: I accept that it would not make sense to hypothecate all tobacco revenue, although it certainly could be done at the margin.
I am most grateful to the hon. Gentleman for referring to alterations from previous policies, as I was about to invite Members from other parties to acknowledge that their policies have also changed over time. I hope that brief reference will encourage Members on both sides of the House to reflect that such debate is worth while and that we should all be honest about our history.
The hon. Gentleman has been involved in politics long enough to know that the significant increases in tobacco taxation in recent times began in 1993, when the then Chancellor of the Exchequer, the right hon. and learned Member for Rushcliffe (Mr. Clarke), introduced his 3 per cent. escalator, over and above the rate of inflation and the indexation that we are discussing. In true style, the right hon. and learned Gentleman pugnaciously defended his approach in the Budget statement of November 1996, describing it as
- "necessary masochism in the wider public interest.—[Official Report, 26 November 1996; Vol. 286, c. 168.]
Other EU countries with high duty rates and prices compared with other countries have similar concerns to those that have been expressed in this country over the past couple of years. Canada and its experiences were mentioned in an intervention, but we should recall that Denmark voted recently to reduce tobacco duties and to bring that measure into effect later this year. I hope that the Treasury will follow the experiences of other countries in the EU closely. I hope that it will look at the evidence on which the decision in Denmark was based, and that it will also follow closely the experiences in Denmark after it reduces duties, to see whether the policy has the effects that the hon. Member for Eddisbury was suggesting.
We prefer to ask the Government to take seriously the arguments being made now about the huge duty differential between ourselves and other countries. We also ask the Government to consider seriously whether it will ever be possible to reduce significantly the market in smuggled tobacco while we have such duty differentials. We have had similar debates over recent years about the level of duties in the UK, many of which considered the evidence, whereas the hon. Member for Eddisbury appears to want to conduct an experiment without amassing the appropriate amount of evidence. One good example of that evidence-based approach was the previous Government's decision to reduce the taxation of spirits, which has to some extent been followed under this Government.
We therefore know why successive Governments have decided to maintain high duties on tobacco products. First, it has been as a consequence of medical concerns about the consumption of tobacco. Secondly, it has proved to be an extremely good way of raising money for Governments, which suggests some contradiction in relation to the first motivation. The increases since 1996–97 in the share of our market accounted for by smuggled tobacco and tobacco, on which no duty is paid, should give all of us in the UK reason to wonder whether the existing strategy is working and reasons to take the issue very seriously. I join the hon. Member for Eddisbury in regretting very much that when Martin Taylor considered this issue a few years ago, and produced what we believe was an extremely detailed report, which was rumoured to touch on the issue of duty differentials and whether they were too wide, the Government did not allow his report to be aired in public. They have been criticised for that a number of times in the House, including by the Treasury Committee.
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