Examination of Witnesses (Question Numbers
980-999)
MR EDWARD
TROUP
16 JULY 2009
Q980 Jim Dowd: Would that be just
a generalised approach to the issue or would it be in response
to a specific proposal? Suppose the Chancellor, for example, was
minded not to change duty rates at all, would that be put to the
Department and then they would be asked for their responsibility?
Similarly, if he or she was going to increase it by 10%, would
that be put to them?
Mr Troup: I do not want to go
too deeply into the minutiae of how individual policy decisions
are made. Normally tax policy decisions are matters for the Chancellor
where he will consider his options and take a decision in the
light of the advice which he has received. That is saying: no,
he would not look at half a dozen options for alcohol duty and
then tout them round Home Office, DCMS and Health and see what
they thought of them and then, in the light of that, decide which
one he liked, but he would consider options and he would consider
those in the light of formal and informal engagements with his
colleagues.
Jim Dowd: All right. Thank you, Sir Humphrey!
Q981 Charlotte Atkins: I am very
pleased that obviously the Treasury does engage with the Department
of Health. Therefore, do you accept the case made by the Chief
Medical Officer for the introduction of a minimum price for units
of alcohol?
Mr Troup: I am afraid that that
is not an issue for the Treasury to have the final view on but
obviously we have seen the proposal and we have considered it.
First of all, as you know, the Government's position is that we
are not proceeding with minimum pricing. The second point to be
made in relation to the Treasury objective and the Treasury contribution
is that it would have to be an extraordinarily large increase
in duty, even if you assumed it was fully passed through, to achieve
the impact on prices in the supermarket, which is an extremely
competitive market, as you know, the sorts of levels of minimum
price. If we were going to increase duty, we cannot because of
constraints of EU law, and to a large extent practicalities, differentially
increase duty for on-sales, supermarket sales, to which effectively
you would want a minimum price to apply, and on-sales in pubs.
If we were for instance, and I do not know what the figures are,
to triple duty in order to achieve a particular minimum price
in supermarkets and the supermarkets did actually pass that through,
which they might not, it would also have the effect of tripling
the duty in pubs. Coming back to Treasury concerns, and we have
concerns for the pub sector as one of the many sectors of the
British economy which we need to consider, pubs would understandably
be extremely aggrieved by that as a means of achieving minimum
pricing.
Q982 Charlotte Atkins: Are you saying
then that if you introduce a minimum price Sainsbury's could still,
for instance, sell eight litres of cider for £3.60, as they
did in 2008, which makes it 10.7 pence per alcohol unit?
Mr Troup: No, what I am saying
is that if the Government were to adopt a minimum pricing strategy,
the way to achieve that would have to be through regulation to
oblige the supermarkets to impose that price. It could not be
achieved, or it would be extremely difficult to achieve, through
tax changes because even if you put the duty up to a particular
level, you could not be sure that the full amount of that increase
would be passed through by the supermarkets and you would need
regulation to enforce that. Leaving aside the merits of a minimum
price, I think the Treasury view quite firmly is that duty increases
are not the way to achieve a minimum price, were minimum pricing
to be government policy.
Q983 Charlotte Atkins: Clearly a
minimum price would impact obviously on people on low incomes
and people who drink a lot. Do you think that the concern of the
Treasury is partly because they see it as being a regressive measure
or do you think it is because they do not want to introduce regulation?
At the moment, we have a situation where alcohol has never been
cheaper in terms of the sorts of loss leaders which irresponsible
supermarkets promote.
Mr Troup: The Treasury is not
the lead department on determining whether there should be a minimum
price. I think we certainly agree with the conclusion that is
being drawn that minimum pricing is not the way forward. In terms
of why we object to that, we are not objecting to the minimum
price but we would make the observation that even if minimum pricing
were the right way forward on health and social grounds, tax would
not be the right way to achieve that. I am sorry; I am not sure
if I have answered your question.
Q984 Charlotte Atkins: You would
have to have to have regulation. Clearly the problem at the moment
is that just by increasing taxation on alcohol as a way of trying
to deal with one of our biggest public health issues, that would
not in fact achieve its desired outcome in terms of supermarkets
because supermarkets can just choose to put in a loss leader—sell
high alcohol ciders at less than the cost of water. Given that
we have a real health challenge here, an epidemic really of alcoholism,
there has to be a way by Government to deal with this. Clearly
taxation will not do it. What sorts of things can the Treasury
do to impact on drinkers?
Mr Troup: I am afraid the answer
is "probably very little" for the reasons I have given.
Simply because it is so difficult to ensure path-through and because
this is in a sense a minority problem with one particular section
of retailers and the Treasury's levers are very broad levers that
apply across the products and across the retail and all the outlets
for alcohol, we have very few levers which can actually address,
as Gerry Sutcliffe said, a very targeted problem. I very much
agree with the comment he made when he said, and I jotted it down,
that we have to focus on the problem areas and not take a general
approach. I am afraid the Treasury's levers are very general in
the way that they can work.
Q985 Charlotte Atkins: Presumably
you do some sort of analysis of the impact of taxation on different
sorts of drinkers. Do you routinely do that sort of analysis?
Mr Troup: We probably would not
but we would and we do see the Department of Health's work on
problem drinking and we have had a lot of engagement with them
over the years on the impact of drinking on crime and binge drinking
on health. We do not do the work ourselves but, yes, we do see
the work, and that feeds into the advice which we give ministers.
Q986 Charlotte Atkins: Do you actively
work with other departments to assess the impact of the taxation
measures you are taking in the general field of health?
Mr Troup: Yes, we do. The only
reason I hesitate "actively" is that we have fairly
limited resources, so there is a limit to how much we can actually
put into actively working on any particular policy area, but we
do actively engage with other departments, Health, the Home Office
and the Ministry of Justice, on this particular issue.
Q987 Dr Naysmith: Mr Troup, why do
the current price elasticities used by the Treasury to calculate
revenue yields from alcohol taxation differ from those made by
the Sheffield Study and studies done by the industry itself?
Mr Troup: As you know, elasticities
are quite complicated things and there is an awful lot of economic
metrics work that goes behind them. There are two things I would
like to say. One is to try to explain why there are different
answers and, secondly, to give you some indication as to how well
we think our elasticities have performed.
Q988 Dr Naysmith: If you think yours
are better, you tell us why.
Mr Troup: The point is that they
are better for our purpose. We use our elasticities for the purpose
we need elasticities, which is to forecast the public finances
and to forecast revenues. We are not, for instance, interested
in consumption of units of alcohol within bands of wine because
within the band of wine we get the same amount of duty whatever.
If consumers have traded down from stronger wine to weaker wine
within a particular band, we will get the same amount of duty.
Our models are not interested in that but the Department of Health
quite rightly is interested in that because it is interested in
units of alcohol. One of the differences between the Sheffield
work and the HMRC work is that the Sheffield work did focus on
units of alcohol, which as I say, although it does have a bearing
on revenue yield, is not actually the direct determinant of our
revenue yield because of the banding system. That is one of the
explanations that we can see for the difference between the Sheffield
conclusions and our own conclusions. In a sense, you can sort
of understand that because we could do things which might have
quite an impact on our revenues but people have avoided trading
down in the amount of units of alcohol they drink by too much
and so, from a health perspective, it might not have achieved
the elasticity that we would have liked. You can see the difference
there.
Q989 Dr Naysmith: Do you think that
the Sheffield Study underestimates the effect of prices on consumption?
Mr Troup: It certainly gives lower
elasticities broadly, although not I think in every case, than
our own work. Looking at the other end, at the British Beer and
Pub Association work and the Oxford Economics work, without being
too simplistic about it, that is focusing on the elasticities
within products, and particularly within beer. What is clear from
the HMRC work is that there are what are called cross-elasticities:
if you put up the duty on one product, there will be an impact
on the consumption of a different product, so that when you are
doing your rather complicated equations—and I am not the
person who does these, so please do not ask me too many difficult
questions on this—if you start trying to work out what the
elasticities are, if you have more factors in, you may be less
likely to get an accurate answer for one factor than if you only
focused on that factor. We think that that explains why the Oxford
Economics work gives slightly higher elasticities in most cases
than ours. That is a rather qualitative explanation of the differences.
I would point to as the reason why we feel our elasticities are
pretty good is that in the—
Q990 Dr Naysmith: That is for your
purposes?
Mr Troup: For our proposes, absolutely,
and we are only doing—
Q991 Dr Naysmith: There is no questioning
of the figures; they are just compiled for different purposes.
Mr Troup: There is no right or
wrong here. This is statistics and forecasting. There is more
or less fit for purpose.
Q992 Dr Naysmith: Can I change tack
just slightly? I have been listening very carefully to your answers
since you started and you have been putting out a view that tries
to suggest that really tax has very little effect on the consumption
of alcohol or is likely to have very little effect, so therefore
is not really appropriate if you are talking about health matters.
Mr Troup: I think what I have
been trying to say is that it is very hard to predict the effect
at a specific level. We do know, or what we believe we know, is
the effect at an aggregate level, but again I do not want to keep
coming back to Gerry Sutcliffe's points.
Q993 Dr Naysmith: What I do not understand
is why it is so different from tax on cigarettes where there is
very clear evidence that you put the tax up, the manufacturers
pass it on to the consumer and there is a reduction in consumption.
Why is alcohol so different?
Mr Troup: At an aggregate level
it is probably not that different but the consumption market for
alcohol is quite different. There is the pensioner who will buy
four cans at the supermarket; there is the young professional
couple who will buy half a dozen bottles and drink them slowly
through the week. Both of those are consumers who will be affected
ultimately by increases in duty.
Q994 Dr Naysmith: But if we do the
same thing for tax and ensure by regulation as well as unit pricing
that the tax is passed on, then it should have the same effect
as tobacco, should it not? As long as the retailers are not allowed
to under-price a unit of alcohol, then there should be this direct
link as well? Do you have any reason to think there is not?
Mr Troup: I am not sure that we
could intervene in the markets. Without putting in quite a lot
of minimum pricing up and down the whole chain, which we are probably
not allowed to do, I am not sure that we could achieve a direct
pass-through of alcohol duty into every product into every outlet.
The substantive point is when you come back to health harm, it
is not clear where you want to tackle the price for health harm.
Is it that you want to get it through the binge drinkers? I do
not know and this is very much a question for this committee.
We are clear that we cannot see any direct way in which duty can
tackle those particular areas. Can I just finish off on the elasticities.
The point that I was going to make, and I will not make in detail,
is that, since 2003, our forecasting revenues has been much more
accurate using the 2003 HMRC elasticities than it was before.
We do see them as fit for purpose because they actually seem to
be doing quite a good job.
Q995 Stephen Hesford: That was my
question. I was going to ask Mr Troup how accurate his work on
an annualised basis was from what the projection was to what the
revenue is?
Mr Troup: In the four years before
we introduced the new methodology it was all shortfalls. We had
managed to get in wrong in the wrong direction every year and
in one year it was 6.5% out, which is outside what we feel comfortable
with. Since 2003 we have had three years of shortfall and three
years of overestimation and all of those figures have been below
4% and the statisticians tell me that that is pretty good for
judging the fitness for purpose of elasticities.
Q996 Stephen Hesford: If I were the
Chancellor making not the detailed calculations but the broad
policy decisions and someone like you said to me, "This is
where we think we can go. Chancellor," what would be my tolerances
either way? If I came back you to and said, "Right, Mr Troup,
you have got to save this plus or minus," what would you
expect your figures to do?
Mr Troup: What we are saying is
4% on the aggregate revenue figures subject to uncertainties about
economic determinants which obviously can affect things as they
have this year on top of the pure forecasting uncertainties.
Q997 Stephen Hesford: That seems
quite large.
Mr Troup: It is quite large and
forecasting revenues, as I am afraid we have seen over the last
year, is quite difficult.
Q998 Dr Taylor: I am going to ask
you to sum up because I am feeling desperately depressed really.
We have got to tackle the huge numbers of people who are hazardous
and harmful drinkers who are responsible for £25 billion
of the total alcohol market of £33 billion and these are
the people drinking harmfully and hazardously. You have said that
the Treasury agrees with the Government that minimum pricing is
not the way forward. You have rather implied that increasing tax
is not going to help either. What are we left with? Is there any
way the tax system could be changed to address the problem of
these hazardous drinkers?
Mr Troup: I do not say definitely
no. We do want to use tax policy where it can—consistent
with also trying to raise money which is quite important—support
other objectives. At the moment we do not see any way that the
tax policy can play directly into this. We do think that increasing
alcohol duty year on year is important, both in terms of a signal
and because, as Mr Naysmith said, it does reduce overall consumption
which must be helpful in terms of the harm factor, but we do not
think at the moment that it can play a more specific role in addressing
something which may or may not be a minority problem amongst the
very large number of the population who do buy alcohol quite properly
and without harm. We always want to keep these things under review
and if this Committee or the Department or anyone else came up
with a proposal which did help, we will certainly look at it.
At the moment I am afraid that I will have to leave you slightly
depressed.
Q999 Dr Taylor: If we came up with
a recommendation that the tax should increase rather more steeply
than you are planning to increase it, you would look at it?
Mr Troup: Absolutely. We look
at all rates of increase as we come up to budgets. I may then
end up facing the Scotch Whisky Association or the Beer and Pub
Association and having to explain why we think this is good given
the rate of closure of pubs or whatever it is. We obviously would
look at a proposal. We have of course over the last year, as you
have seen, put up alcohol duties quite significantly and when
the VAT reduction comes off at the end of the year that will itself
result in a 2.5% increase in all prices of goods subject to VAT,
including alcohol, and it is 2.5% on the retail price, not on
the per unit of alcohol price, so that will be an across the board
increase.
Q1000 Dr Taylor: I think you said
early on that the number of pubs closing was not related to the
rate of duty.
Mr Troup: We do not think so,
no.
Q1001 Dr Taylor: We could go up on
the duty without fearing that sort of aspect.
Mr Troup: I would like you to
get a member of the Beer and Pub Association along here and ask
them that question because I suspect they might not agree with
me.
Q1002 Dr Taylor: We have certainly
met the Scottish whisky people. I am left with a feeling of pretty
severe hopelessness because the analysis of the top five proposals
from the health lobby includes increasing duty and minimum pricing
and you are pointing to huge disadvantages of both of them.
Mr Troup: Certainly increasing
duty is difficult and we do not believe that it is going to target
the point that you are concerned with.
Q1003 Chairman: Have you done a study
at all on minimum pricing and the effect on the pub trade? My
information is that if we had minimum pricing coming in for lager
and beers, it would affect pubs inasmuch as it would increase
the boxes of lager that you trip over when you go into supermarkets
for your weekly shopping. Have you looked at how that would affect
the pub economy?
Mr Troup: No is the answer to
that. That is not really within the Treasury's remit because the
minimum pricing policy is not a Treasury policy. We would be interested
in it, as we are interested in anything which has some impact
on the economy.
Q1004 Chairman: Because we have current
levels of taxation on cider you would look at the effect on the
rural economy and jobs in the cider industry.
Mr Troup: Yes.
Q1005 Chairman: You have not looked
at this yet then?
Mr Troup: I am not aware that
we have looked at what the impact of minimum pricing would be
on the pub industry. I may be wrong, but I do not think the Treasury
has. I assume that somewhere within one of the Whitehall departments
it has been looked at because I am sure the pub industry will
have been very interested in it and will have engaged, but so
far as I am aware the Treasury have not looked at this specifically.
Chairman: Thank you very much indeed
for coming along and helping us with this inquiry.
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