53. The suggestion that lower excise rates would
lead to greater revenue was the most technical argument encountered
during the course of the inquiry. SWA documents
make reference to recent estimates of the price sensitivity of
alcohol produced by both the IFS and the Government Economic Service
These price sensitivity estimates are the crucial statistics needed
to gauge how revenues are affected by changes in duty rates. There
are no statistically significant differences between these two
sources, and we therefore focus on the IFS estimates.
54. The IFS estimates of the price sensitivity of
the three different alcoholic drinks are sophisticated, in the
sense that they take account of the revenue effects that varying
duty on one type of alcohol would have across all types. For example,
if the duty on wine were reduced, this would increase the revenue
obtained from wine.
The IFS also found that beer and wine were complements. When people
drink wine, they also tend to drink beer at the same time. This
means that the revenue from beer would also increase if the Government
were to cut the duty on wine.
55. Wine and spirits were found to be substitutes.
An increase in wine sales would lead to a fall in the sales of
spirits and a reduction in the revenue obtained from spirits.
This reduced spirits revenue would, the IFS estimate, be so large
that Government revenue would decrease if the duty on wine were
reduced, even though the revenue obtained from wine alone would
increase. By examining the net revenue affects across all drinks,
the IFS also gauged that a cut in beer duty would also lead to
an overall reduction in excise revenues.
56. The likely effect of a cut in spirits duty is
slightly more complex. The IFS estimated that this would lead
to an increase in the revenue from spirits, as the SWA implied.
In addition, a cut in spirits duty would also lead to an increase
in sales of beer and an increase in beer revenue. But wine was
a substitute for spirits. Although a cut in duty would therefore
lead to more spirits and beer sales, a loss of wine revenue would
follow as wine sales were reduced. The IFS considered that increasing
the duty on spirits would mean that these two revenue effects
would cancel out. Changes in the duty on spirits would therefore
leave overall revenue from excise on alcoholic drinks unchanged.
57. This finding has several important implications.
Firstly, it does not appear to be correct to say that a cut in
spirits duty can potentially benefit both the Government and the
consumer. The IFS results imply that, at current rates of duty,
the Government was obtaining the maximum amount of revenue from
spirits. This inevitably suggests that either a decrease or an
increase in duty would result in a loss of revenue, and if the
Government reduces spirit duties this will result in some loss
of revenue. However, the same conclusion does not apply to either
beer or wine. Here, the IFS results suggested that increasing
the duty on either beer or wine would lead to an increase in excise
revenues. The net effect is that, if we consider only the efficiency
of excise duties as a means of raising revenues, the duty on beer
and wine should be increased.
58. A European Commission study on competition between
alcoholic drinks was published in February 2001.
It examined six areas: the extent to which price-sensitive competition
exists between the various categories of drinks; the effects of
the system of EU minimum rates; the effects of rates actually
applied in member states; trends in consumption; reasons for these
trends; influence of changes in taxation upon them.
59. The study found that "Overall...our estimates
of own-price and cross-price elasticities accorded with those
found in the literature".
This implies agreement with the work carried out by the IFS. But
the study also said that there was a range of factors, including
attitudes and fashion, which influenced the consumption of alcoholic
drinks and the degree of switching between types. It concluded
that there was no systematic pattern demonstrating whether drinks
were complements or substitutes for each other across the various
studies that had taken place.
"The demand for alcoholic drinks does not appear to be substantially
dependent on relative alcohol prices".
60. We would not propose that excise duties should
be set solely with regard to the effect on government revenues.
Due regard must also be given to the health issues related to
alcohol; and how taxes affect employment. In its response to a
report on motor fuel taxation from the Trade and Industry Committee,
the Government said that it "continually monitors the effects
of all tax measures".
But we could find no sound economic basis for a continuation of
excise discrimination against whisky, or against any other spirit.
61. Several benefits might ensue if excise discrimination
against spirits were ended. Consumption of spirits could increase
relative to wine. This would have a positive effect on the Scottish
economy and the trading position of the UK. The evidence from
the IFS suggests that this could be achieved at little cost to
the Exchequer. The health impact is likely to be neutral.
62. We would therefore recommend that the Treasury
should continue on a long-term basis, its policy of freezing the
tax on spirits until it is comparable with that levied on alcohol
consumed in other forms. This would end discrimination against
one of Scotland's major indigenous industries, and one of the
UK's leading exports.