Joint Committee on the Draft Gambling Bill First Report

Memorandum from Professor Leighton Vaughan-Williams (DGB 186)


    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 sector?

  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 the conclusions.

  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 Hand—The 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." (p 40).

  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." (p 10).

  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 equity.

  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 in 2000.

  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 the "layer".


  Anders, G and Siegel, D (1998). "Economic Analysis of Substitution between Indian Casinos and the State Lottery," Gaming Law Review, Vol 2, No 6, December 1998, pp 609-613.

  Anders, G, Siegel, D and Yacoub, M (1998). "Does Indian Casino Gaming Reduce State Revenue? Evidence From Arizona," Contemporary Economic Policy, Vol 16, No 3, July 1998, pp 347-355.

  Business in Sport and Leisure Ltd "Response to the Joint Scrutiny Committee", DGB 37.

  Elliott, D S and Navin, J C (2002). "Has River Boat Gambling Had Any Impact on State Lotteries?" Public Finance Review, Vol 30, No 3, pp 235-247.

  Ernst & Young (2003) "A Winning Hand—The Modernisation of UK Gambling", November.

  Fink, S and Rork, J (2003). "The Importance of Self-Selection in Casino Cannibalization of State Lotteries?" Economics Bulletin, Vol 8, No 10, pp 1-8.

  Henley Centre (2004). "Economic and Social Impact Study of the Proposed Draft Gambling Bill: A Henley Centre Report Commissioned by BACTA", February.

  Joint Committee on the Draft Gambling Bill (2004), Uncorrected Transcript of Oral Evidence, January 13, 2004 (available at: on March 3, 2004). To be published as HC139 iv.

  Paton, D, Siegel, D S and Vaughan Williams, L (2003a). "A Time Series Analysis of the Demand for Gambling in the United Kingdom," forthcoming in the National Tax Journal (working paper version available online at ).

  Paton, D, Siegel, D S and Vaughan Williams, L (2003b). "A Review of the Empirical Literature on the Demand for Gambling," in The Economics of Gambling, edited by Leighton Vaughan Williams, London: Routledge, pp 249-270.

  Paton, D, Siegel, D and Vaughan Williams, L (2003c), An Evaluation of the Gross Profits Tax on Betting, unpublished manuscript, 2003.

  Paton, D, Siegel, D S and Vaughan Williams, L (2002). "A Policy Response to the E-Commerce Revolution: The Case of Betting Taxation in the UK," Economic Journal, Vol 111, Issue 480, F296-F314.

  Pion Report (2003) "Gambling Deregulation Impact Study: Final Report", October.

  Siegel, D and Anders, G, (1999) Public Policy and the Displacement Effects of Casinos: A Case Study of Riverboat Gambling in Missouri, Journal of Gambling Studies, 15(2), Summer, 105-121.

  Siegel, D S and Anders, G (2001). "The Impact of Indian Casinos on State Lotteries: A Case Study of Arizona," Public Finance Review, Vol. 29, No 2, March 2001, pp 139-147.

  Steinnes, D, (1998). "Have Indian Casinos Diminished Other Gambling in Minnesota? An Economic Assessment Based on Accessibility." Mimeo.


  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.

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