Memorandum from Professor Leighton Vaughan-Williams
THE CONSEQUENCES OF GAMBLING DEREGULATION
IN THE UK: A CRITICAL REVIEW OF SOME THEORY AND EVIDENCE
The Gambling Deregulation Impact Study:
Final Report (2003), prepared by Pion Economics, in conjunction
with Professor Neville Topham, presents an assessment of the economic
impact of impending gambling deregulation in the UK. The report
employs standard economic impact analysis, notably input-output
analysis, in order to estimate under given assumptions the potential
impact of impending gambling deregulation in the UK on the gambling
industry and the wider economy.
The study estimates that, after taking account
of displacement elsewhere in the gambling sector, 40,000 net jobs
will be generated in the gambling industry and a further 77,000
jobs in the wider economy. Estimates are also given of the impact
on gaming yields, additional investment in the gambling sector,
duty yield and public finance contributions. Central to the validity
of the conclusions are the assumptions that are made. This difficulty
is properly highlighted by Pion when considering visitor additionality
and import substitution.
"There is no secure basis on which to assign
scale to these parameters." (Pion, p 16).
This is an admission which has wider relevance
for all the key assumptions made. For example, what is the likely
size and nature of displacement effects, in particular as these
impact on the difference between the number of gross and net jobs
created? What is the extent to which new gambling spend substitutes
for spending on other products within and outside of the gambling
There is extensive scholarly evidence from the
US and UK supporting the existence of strong substitutability
among gambling choices. Much of this analysis has focused on substitution
involving lotteries and casino gambling, although there is also
some evidence on pari-mutuel (horse race) betting. Using data
from the US state of Arizona, Anders and Siegel (1998) and Siegel
and Anders (2001) found that an expansion in slot machines at
Indian casinos was associated with a decline in lottery revenues.
Specifically, Siegel and Anders (2001) report that a 10% increase
in slot machines is associated with a (seasonally adjusted) 2.8%
decline in lottery games, and a 3.7% decline for high-stakes Lotto
games. Steinnes (1998) found a similar, though numerically slightly
smaller, substitution effect for the US state of Minnesota.
These results are consistent with broad-based
evidence from numerous US states, reported by Elliott and Navin
(2002), who identified significant cannibalization of lottery
revenues by both riverboat casinos and pari-mutuel betting. Fink
and Rork (2003) reported smaller, though still fairly large substitution
effects, finding that an additional dollar of casino tax revenue
is associated with a 56 cent decline in lottery revenue.
Empirical results from the UK are consistent
with the US findings. In a series of studies, Paton, Siegel and
Vaughan Williams (2002, 2003a, 2003b) generated several stylized
facts that are relevant to the issue of substitution effects.
First, they found that the rise of Internet gambling had significantly
increased the price elasticity of demand of gambling, ie that
UK consumers were more likely in recent years to switch from one
form of gambling to another. They also found evidence that gaming
machines (slots and video poker) and casino gambling are substitutes
for the lottery.
Assumptions made by Pion Economics about
displacement effects lead them, on the other hand, to a conclusion
that ". . . the effect on the National Lottery is relatively
minimal." (p 5).
In terms of displacement effects outside of
the gambling sector, the assumptions are equally critical in generating
While the conclusions of various studies (for
example Evans, 1996, Grinols, 1996, Thompson and Gazel, 1996)
diverge significantly as to whether the economic impact of gaming
is overall positive or negative, a detailed regional study by
Anders and Siegel (1999) in the US of potential displacement effects
of gaming on other business sectors produces clear evidence of
a significant substitution effect between gaming and other businesses
in the entertainment and amusement sectors. Anders, Siegel and
Yacob (1998), in a separate study, find that four major sectors
appear to experience significant revenue displacement from increases
in gaming spend, notably retail, restaurants and bars, hotels
and motels, and amusements. Moreover, the structural changes affecting
these sectors appear to have taken place simultaneously.
The conclusions of the Pion Economics report
are therefore critically dependent on the assumptions made and
on the modelling used. This is particularly worrying in that the
assumptions made in the report are clearly debatable. These extend
from the assumptions about likely displacement effects to the
assumption made in the report that existing duty regimes will
remain in place in all cases bar casino gambling, where duty is
assumed to be levied at an effective 15% rate rather than as at
present. Moreover, Input-Output modelling, as used in the report,
makes important assumptions about the static and dynamic inter-relationship
of economic variables. Even so, this modelling technique is a
standard and well respected tool of economic analysis.
In conclusion, the Pion report presents a well-constructed
economic impact study, albeit subject to the standard weaknesses
and strengths of the methodology used. The conclusions reached
are, however, critically dependent upon and sensitive to the (very
debatable) assumptions employed.
One specific point worth clarifying in the report
is a reference to the conclusions of a New Zealand study that
". . . just 9% of the money spent on casino gambling would
be spent on other forms of gambling." (p 15). More detail
is provided by Paton, Siegel and Vaughan Williams (2003b) who
report the relevant study, by McMillen (1998), for the New Zealand
Casino Authority, in the following words.
"A survey of casino patrons conducted as
part of the study found that if money had not been spent on casino
gambling, 37.5% said they would have spent it on other forms of
entertainment, 25.7% on housing items, 8.7% on other forms of
gambling, while 6% would have saved the money. Fifteen per cent
would have saved the money." (p 259).
Another report, which in part uses the conclusions
of the Pion Report, was produced by Ernst & Young, having
been engaged in September 2003 by Business in Sport and Leisure
Ltd ("BISL") to undertake a review of the UK Gambling
Industry. This report is called "A Winning HandThe
Modernisation of UK Gambling." The report reviews, to
some extent uncritically, a wide range of sources, as acknowledged
in the Executive Summary to the report.
"The information contained in our report
comes from a number of sources and has not been verified as complete
and accurate." (p 2).
Likewise, the conclusions of the Ernst &
Young report derive from the assumptions and assertions contained
in the source material. For example, they report uncritically
the finding of research for the Cross-Industry Group on Gaming
Deregulation (Pion Economics, 2003) of ". . . an additional
£500 million per annum of tax receipts and 40,000 new jobs
in the Gambling Industry arising directly from the proposed changes."
Moreover, Ernst & Young report this claim
as a "forecast" (p 40), which should be contrasted with
the witness evidence of Mr John Kelly, of the Cross-Industry Group
on Gaming Deregulation, and Mr Jim Twomey, of Pion Economics,
to Question 305 of the Joint Committee on the Draft Gambling Bill,
13 January 2004 (Joint Committee on the Draft Gambling Bill, 2004).
The methodology employed is in large part a
survey methodology, consisting of interviews and soliciting opinions.
It is generally accepted that survey methodologies can be dependent
on how questions are phrased, upon response rates which can be
self-selecting, as well as upon an assumption that economic actors
will behave as they say as they will, or at least in a measurable
way related to this. This is an underlying problem common to any
survey methodology, even if we assume that all sources volunteering
information are doing so impartially and truthfully.
While the social and cultural implications of
the changes, as considered by the report, are outside the scope
of this memorandum, the economic implications are not. These are,
in particular, the likely impact of a growth in Internet gambling
as well as the implications of proposed changes for economic growth
and for displacement of other economic activities.
As noted above, there is evidence that the growth
in Internet gambling has significantly increased the price elasticity
of demand of gambling, ie that UK consumers have been more likely
in recent years to switch from one form of gambling to another
This view is given added credence by an econometric
modelling of the impact of key variables on margins in the betting
industry subsequent to the introduction of the Gross Profits tax
on betting in the UK in October, 2001 (Paton, Siegel and Vaughan
Williams, 2003c). One of the variables used was increased market
penetration from Internet-based bookmakers ("Internet Share"),
on the basis that an increase in Internet Share might be expected
to increase competitive pressure and lead, therefore, to a reduction
in both market and producer prices. Paton, Siegel and Vaughan
Williams (2003c), using available market data, did indeed identify
a significant impact on the margins of large bookmakers arising
from the Internet share variable.
Ernst & Young's Executive Summary notes that:
"The opportunities for economic growth post
modernisation are well documented. These include the prospect
for job creation, regeneration of deprived areas, inwards investment
(mostly into the casino sector) as well as increased tax receipts."
There appears, however, to be no sustained critical
analysis of information provided to the report's authors, or indeed
critical assessment of independent work which is used to assign
meaningful scale to the relevant parameters.
The report concludes that ". . . the growth
of casinos may be at the expense of other sectors such as bingo
and the National Lottery" (p 10) as well as concluding that
an increase in gambling spend may displace other leisure pursuits
". . . including pubs, clubs, cinemas and restaurants."
(p 11). Again, there is no sustained critical analysis of
source information or apparent awareness of independent academic
studies (eg Siegel and Anders, 2001) which could be used to assign
some sort of scale to relevant parameters or degree of certainty
to the conclusions.
In the "Response to the Joint Scrutiny
Committee" (DGB37), BISL offers an additional point.
"Business in Sport and Leisure supports the Association of
British Bookmakers (ABB) who believe that Betting Exchanges should
be regulated by the new Gambling Commission and that the "layer"should
pay a 15% Gross Profits Tax on their winnings." (p 5).
It must be made clear that while this is the
view of BISL and the ABB, this is not derived from analysis or
conclusions found anywhere in the Ernst & Young report.
The issue raised is, however, an important one.
To put it into perspective, we should first
note that the essential nature of betting exchanges is a flow
of money arising from those backing and laying selections. Since
the margin to which betting exchanges operate is lower than that
of traditional bookmakers, the disposable income of the bettor,
lasts longer, ie there is a greater multiplier effect and hence
a greater turnover for a given loss to the bettor.
A charge on the loss to the bettor, ie the gross
profit to the exchange, serves to treat exchanges in this sense
equally to bookmakers. A system based on turnover, however defined,
does not. To this extent, at least, a differential tax structure
on betting exchanges based on turnover has the effect of relatively
penalising a set of companies for operating to a lower margin.
A GPT on betting exchanges, on the other hand, provides an incentive
for exchanges to adopt a low-price, high-turnover strategy.
To this extent, the levy of a gross profit tax
on betting exchanges satisfies the aims of both efficiency and
The taxation structure for betting exchanges
prior to Budget 2003 was based on the net aggregated profits of
the layers on the exchange over a given accounting period. This
is an extremely variable figure, which could be positive or negative.
A tax based on commission reduces the uncertainty which accompanies
high variability in net aggregated layers' profits. In particular,
it removes the possibility that exchange operators could pay more
tax than is earned in a given accounting period, or no tax at
all in other accounting periods. This provides greater certainty
to both the operators themselves as well as to Government.
There is the additional issue of potential sabotage
to be considered, ie competitors or malicious parties seeking
to artificially inflate the tax liability of the betting exchange.
The principle underlying this is based on a user setting up two
or more accounts, and backing and laying across these in such
a way as to generate artificial tax liability for the exchange
at little financial risk to the saboteur. This is a particular
problem for a tax base based on aggregated profitable layers,
ie ignoring layers who make losses. Indeed, such a tax base would
not seem to address any of the problems of the net aggregated
profits of layers approach considered above, but would rather
seem to exacerbate them.
In summary, a policy of GPT based on commission
would seem to be the option which most closely fits the criteria
on which the optimal original tax structure for betting was evaluated
Furthermore, betting exchanges are the most
modern example of the future-proofing of the tax system offered
by the Gross Profits system. In particular, a GPT system taxes
price instead of quantity, thereby encouraging lower price and
higher quantity. This benefits the twin objectives of efficiency
and equity at any given point in time and in a manner which is
proof against changes and developments over time.
It may be argued that betting exchanges are
reducing the margins and gross profits of bookmakers. Insofar
as they are, the present system of taxation automatically adjusts
to reduce the burden of taxation on these bookmakers.
Paton, Siegel and Vaughan Williams (2003c) looked
at the effect of betting exchanges since the introduction of the
tax changes proposed in the 2001 Budget, concluding that margins
would have decreased significantly and turnover increased significantly
since the change to the tax regime even if betting exchanges had
never existed. They conclude in that study that the effect on
the margins overall was small. To that extent, betting exchange
activity was complementary to and not a substitute for other forms
of betting turnover.
The Henley Centre (2004) have also produced
a report, commissioned by BACTA, assessing the economic and social
impact of the proposed Draft Gambling Bill.
Their approach was to examine the current position
for betting and gaming in the UK, and to assess and quantify the
position in 2010 based on two scenarios, one in which the Bill
passes into law and one in which it doesn't. The scope of their
work is to assess the likely effect on key sectors of the gambling
industry as well as on employment, and the impact locally and
on the wider leisure sector. They also assess the impact on levels
of problem gambling.
The validity of the economic impact studies
depends, as noted above, critically on the assumptions made and
the modelling used.
In summary, I have in this memorandum considered
the analysis and conclusions contained in two reports, ie the
Pion Report (2003) and the Ernst & Young report (2003), and
I have made passing reference to the Henley Centre report (2004).
I have shown how the conclusions reached in the Pion Report are
critically dependent upon the assumptions made and the modelling
used. I have drawn upon the findings of independent academic analysis
to explain why the assumptions used are at least somewhat debatable,
and have drawn attention to the potential weaknesses of the modelling
approach, whilst accepting that the techniques used in the report
are respectable tools of standard economic impact analysis.
In conclusion, I consider that the Pion report
presents a well-constructed economic impact study, albeit subject
to the standard weaknesses and strengths of the modelling methodology
used. I consider further that the conclusions of that report are
critically dependent upon and sensitive to the (very debatable)
assumptions employed. I have also highlighted the somewhat uncritical
manner in which the Ernst & Young report has used the findings
of other studies, and have placed some of the core conclusions
of that report within the context of existing academic research.
Finally, I have addressed critically the support expressed by
BISL for moving from the present tax system for betting exchanges,
which is to tax their commission, to a system based on taxing
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Professor Leighton Vaughan Williams, PhD is
Professor of Economics and Finance at Nottingham Trent University.
He is also Head of Economics Research and Director of the Betting
Research Unit at Nottingham Trent University.