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Mr. Stephen O'Brien: I am grateful to my hon. Friend for making that important point. It is quite clear that the absence of any such modelling at official level in the Treasury must reinforce the argument for looking at the proposals in the amendments. There must be some form of ability to test whether the strategies for smuggling and cross-border shopping are having an effect in the way that most of us desire.
Mr. Osborne: I am grateful to my hon. Friend for making that point. It is, of course, normal practice in this place for the Opposition to do the Government's work for them by trying to work out what would actually work. As the debate has gone on, I have watched as the Government Whips and Treasury Ministers have spoken to each other. I am an optimist. Perhaps they will accept the amendment. That would be a good thing.
It would be interesting to know what work has been done. As the hon. Member for Yeovil said, clearly some thought went into the issue when the Government stopped the escalator effect on cigarette duty. They must have known or guessed what impact that would have had. It would be interesting to hear from the Economic Secretary what the Laffer curve effects—if I can cite another economist—would be on reducing duty. Would that increase revenue?
Pete Wishart: Is the hon. Gentleman seriously asking the Government to determine their fiscal policy on the basis of trying to deal with smuggling?
Mr. Osborne: I am asking the Government to tell me whether they would further their objectives for improving the health of the nation, for cracking down on problems of law and order and for raising revenue by reducing the duty. That suggestion may be counter-intuitive, but we have shown in other areas of taxation how that can work.
Mr. John Bercow (Buckingham): Will my hon. Friend give way?
Mr. Bercow: I am very grateful to my hon. Friend for giving way. I fear that his optimism about the Government's reaction to the amendments is positively Panglossian. However, at least his position is not obscurantist or neanderthal, something to which the stance of the Scottish nationalists bears a striking resemblance. Can he tell me what proportion of the cost of a packet of 20 cigarettes is now accounted for by tax and excise duty? When I introduced a ten-minute Bill covering the matter nearly three years ago, the figure was more than 79 per cent.
Mr. Osborne: I cannot give my hon. Friend a precise figure, but 80 per cent. is the figure that I have seen. That is extremely high and certainly higher than in any other country in the EU and I imagine anywhere else in the world.
My specific question is about Imperial Tobacco, which was raised earlier in the debate by a fellow member of the Public Accounts Committee. It may
astonish the Committee to learn that half of all the smuggled cigarettes in this country are Regals or Superkings. A huge proportion of the smuggled products are produced by Imperial Tobacco. When we examined the issue, we found that a third of its exports went to five places: Latvia, Kaliningrad, Afghanistan, Moldova and Andorra. Indeed, when the hon. Member for City of Durham (Mr. Steinberg), who is also a member of the Committee, asked the chief executive of Imperial Tobacco whether
- "you honestly believe that the 2 billion cigarettes that you exported"—
- "were going to be smoked by the people of those countries",
For all those reasons, Customs and Excise was unable to conclude a memorandum of understanding with Imperial Tobacco even though it had concluded a memorandum with Gallaher and British American Tobacco. It has been reported in the press recently that Customs feels that Imperial Tobacco has made huge progress and is close to signing a memorandum. It would be interesting to hear the Economic Secretary say something about that.
Mr. Baron: I welcome you to the Chair, Mrs. Heal. I want to focus on the adverse effects of tobacco smuggling in support of one or two previous contributions, most notably that made by my hon. Friend the Member for Tatton (Mr. Osborne). Smuggling will increase because of the measures in the Bill, and there are many dire effects of that.
Clause 1 sets out the new rates of tobacco duty, which increased by 2.8 per cent. from 9 April, in line with inflation. Conservative Members share the Government's desire to reduce tobacco consumption in this country. No one disputes the harmful effects of smoking—it is the single largest cause of preventable illness and premature death in the United Kingdom. As we have heard, it kills approximately 120,000 people every year and causes 85 per cent. of deaths from lung cancer. The Government have confirmed that tobacco is the only legal product that kills one in two people who use it.
I urge the Government to think carefully about how they intend to address one of the main drivers that affects tobacco consumption in Britain, especially among the more vulnerable groups in our society: tobacco smuggling. There is a flourishing trade in black-market tobacco products in the UK and one cannot escape the fact that that is caused, to a large extent, by the substantial price differential between cigarettes sold in the UK and in other European countries. A packet of 20 cigarettes is about £2 cheaper in France than here. It is little wonder that the National Audit Office has estimated that the number of cigarettes smuggled in 2001 rose from 14 billion to 17 billion and that more than one in five cigarettes consumed in the UK are smuggled. The proportion of consumed cigarettes that are smuggled has increased from 3 per cent. in 1997 to 21 per cent at present. That is a phenomenal increase.
There are two profound consequences of that. First, there is a tremendous loss of revenue to the Exchequer. As my hon. Friend the Member for
Eddisbury (Mr. O'Brien) said, the combined effect of a steep rise in smuggling and cross-border shopping means that about 28 per cent. of cigarettes and 69 per cent. of hand-rolling tobacco do not attract UK duty. Estimates suggest that the total revenue lost since 1997 is something like £15 billion. Indeed, the NAO recently published a report claiming that Customs and Excise is losing up to £7 billion a year owing to fraud and lost taxes and that half that is lost owing to tobacco smuggling. That sum of money is enormous. How many hospitals could be built and how many extra doctors and nurses could be recruited with that money? That is certainly worth thinking about.Secondly, the increase in smuggling has been a major contributor to the fact that the long-term downward trend in cigarette consumption has been broken. Indeed, one could argue that consumption might be on the rise and that the problem is underestimated. For example, a survey published in the British Medical Association's journal "Tobacco Control" at the end of last year revealed that one in five children aged under 16 are regular smokers, which is twice the Department of Health's original estimate.
There is little point increasing taxes and thus creating an ever-larger differential with prices across the channel if we do nothing to stop the smuggling that undoubtedly ensues from that. It is a silly policy that is costing this country many billions of pounds in lost revenue. The policy is contributing to the increase in cigarette consumption, especially among our young, because cheaper smuggled tobacco products and cigarettes are now so prevalent in the UK. In other words, because smuggled cigarettes are so much cheaper, they are swamping the market and consumption is rising. That is the exact opposite of what we are trying to achieve.
The Government should take the issue more seriously and re-examine their assumptions. Without a real clampdown on smuggling, the policy of ever-higher taxes will lead to a market that is increasingly supplied with cheaper smuggled cigarettes. That will encourage a long-term increase in consumption, although I believe that that has already started, and a consequential loss of life. I hope that the Government will re-examine their policy.
2.45 pm
Mr. Djanogly: Many of my hon. Friends have discussed in detail loss of revenue owing to smuggling and I shall not go over all those arguments again. They made sophisticated arguments, and none more so than my hon. Friend the Member for Eddisbury (Mr. O'Brien), and I thought that it would be more appropriate to make a more basic observation.
The tax increases will hit the poorest members of our society disproportionately. Taxes that are paid on things always attack the poorer members of society but the tobacco tax is especially disproportionate. We must face the essential point that people who cannot afford to go on a booze cruise are likely to be the people who will be induced to buy smuggled goods off a barrel in the street. The impact of the measure is doubly disproportionate toward poorer people.
The hon. Member for Hemsworth (Jon Trickett) said that he was surprised that our party was talking about
Europe, but this is not a question of what my colleagues or I say about other countries. The fact of the matter is that this country's policy is to dig its head in the sand. It is no wonder that hundreds of thousands of people go abroad to buy cigarettes from our European neighbours every year because they are less than half the price of those sold in this country. It is a straightforward and unsophisticated argument.The amount of revenue lost was mentioned earlier in the debate and I said that I was always dubious about the figures that are bandied around. I have seen a figure of £3.5 billion cited as the amount of lost revenue, although I heard my hon. Friend the Member for Billericay (Mr. Baron) cite a figure of £7 billion. I am not sure which figure is true, but that confirms my view that we do not know how much is being lost, although I am happy to accept the figures that my hon. Friend mentioned. Additionally, when we talk about lost revenue, we do not discuss the hundreds of millions of pounds that we also spend on extra customs officials, special equipment and operations to root out smugglers.
The Government receive significant revenue from tobacco but by setting the tax rate so high that British people increasingly buy legally from the continent—that has nothing to do with smuggling—they will lose out on the potential tax take while doing nothing to improve public health in this country.
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