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Clause 1
Rates of tobacco products duty
Question proposed, That the clause stand part of the Bill.
The Economic Secretary to the Treasury (John Healey): I welcome you to the Chair, Mr. McWilliam. It is a pleasure to serve under your co-chairmanship. I know from experience that you are fair and firm, and I look forward to seeing that twinkle in your eye to which my right hon. Friend the Chief Secretary referred earlier.
I also look forward to the scrutiny process that the Committee is about to embark on and to our debate with hon. Members on the Opposition Front Bench. I notice that the Liberal spokesman, the hon. Member for Yeovil, is virtually sharing the Front Bench. I trust that the physical positioning does not presage a political repositioning, even though the hon. Member for Arundel and South Downs might welcome it.
Clause 1 increases the excise duty on all tobacco products in line with inflation, raising the duty on a typical packet of 20 cigarettes and on a 25 g pack of hand-rolling tobacco by 8p, and increasing their cost by 9p when VAT is added.
The increase supports the Government's desire to reduce smoking prevalence by maintaining the real price of cigarettes. Smoking is the single greatest cause of preventable illness in the UK: it is responsible for the premature death of about 120,000 people every year.
The effects of tobacco are not restricted to smokers: a recent report by the British Medical Association entitled ''Smoking and Reproductive Life'' stated that studies showed links between smoking and fertility problems, cervical cancers, miscarriages and low birth weight. The report and its statistics underline the case for reducing the prevalence of smoking. As a result of the real terms duty increases introduced by the Government and previous Administrations, tobacco prices in the UK are at an historically high level. A decision this year to raise duties in line with inflation in the Budget will maintain their real price and thereby continue to encourage people to smoke less or to quit altogether, and to discourage children and young people from taking up the habit.
We believe that we can achieve those results without increasing smuggling, and since the introduction of the strategy to tackle tobacco smuggling three years ago, which my right hon. Friend the Chief Secretary played an important role in launching, Customs has succeeded in halting the growth in cigarette smuggling to the UK, and last year exceeded the target we set it yet again, restricting the illicit share of cigarettes still further to 18 per cent., compared with 34 per cent., the projected level of the illicit market if no action had been taken to counter the problem.
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Mr. Laws: The Economic Secretary has mentioned that the Government have been successful in reducing the smuggled share of the market to 18 per cent. in 2002–03, which is a particular achievement when one considers previous trends. Does he have any projections for that share of the market over the next couple of years? Does he expect it to reduce further, or merely to stabilise at the existing level?
9.15 am
John Healey: The hon. Gentleman may know that we have set a public service agreement target for 2006 for Customs to bring down further the illicit share of the market to 17 per cent. Compared with three years ago, when we were faced with a steeply escalating market share for illicit tobacco, Customs has succeeded in halting the rise, stabilising the level and now driving down the size of the illicit market. He may be interested to know that during the three years that the anti-smuggling strategy has been in place, Customs has seized 7.3 billion illicit cigarettes destined for the UK market, disrupted 190 tobacco smuggling gangs, and protected an estimated £3 billion of revenue for the public purse and the taxpayer.
Mr. Prisk: The Economic Secretary has rightly highlighted Customs and Excise's welcome successes in these measures. Can he confirm to the Committee that 27 per cent. of all tobacco consumed here is non-UK duty paid? The worry is that that masks hidden smuggling and counterfeiting.
John Healey: The hon. Gentleman will find that the volume of illicit tobacco and cigarettes that finds its way into the UK with no UK duty paid is greater than 27 per cent. Our main tobacco smuggling problem comes not from travellers from the European Union, where they may pay duty at other EU member state rates, but from large-scale organised smuggling through freight. In most instances, the tobacco and cigarettes that are smuggled by freight have no duty paid anywhere before coming into this country.
I can confirm not only the progress that we have made to date but that we are seeking to reduce the illicit market share further in future years. We shall maintain concerted pressure on all aspects of the illicit market and take further measures where they become necessary to restrict the supply of illegal cigarettes. However, this duty increase continues the Government's twin track of maintaining the high real price of cigarettes while clamping down hard on the unregulated supply of the illicit market. Together, we believe that these measures will help to reduce smoking and lower the financial, social and personal costs associated with it. On that basis, I hope that the Committee will endorse and support the clause.
Mr. Prisk: I add my welcome to you, Mr. McWilliam. I shall not continue your embarrassment with references to your eye and whether it twinkles, but we know that you will be able to guide us when we stray from the straight and narrow. I also welcome the Economic Secretary. We have debated, one might perhaps argue too frequently in the past 10 days or so, but it is always a pleasure, and he is always determined to ensure that we have a full debate, which is to be welcomed. I also welcome the hon. Member for Yeovil
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and his move to the right—if it is not political, it is certainly a physical move, although the former would be most welcome as well.
It is a daunting task to consider clause 1, and the forthcoming 310 clauses and 574 pages of the Bill. I always feel that Room 10 is appropriate for us to consider it, because behind you, Mr. McWilliam, is a magnificent illustration of Alfred inciting the Saxons to prevent the landing of the Danes. Occasionally, as an Opposition spokesman dealing with the size of the Finance Bill, one cannot help feeling some sympathy for Alfred's position.
In this year's budget, as the Economic Secretary said, the Chancellor increased duty levels on cigarettes and other tobacco products by the rate of inflation. I think that it was the third or fourth Budget in a row in which such a change was made. The Minister explained to us the reason behind it, which is reaffirmed in a statement in the Red Book that accompanied the Budget:
''Smoking remains the greatest cause of preventable illness and premature death in the UK. Maintaining high levels of tax helps to reduce overall tobacco consumption.''
I doubt that any member of the Committee wishes to challenge the first of those two sentences. However, there is a serious question, which I hope we can consider in the debate, about the evidence that high duty levels have reduced overall consumption in any meaningful way.
Tobacco duties in this country must be seen in the context of the international tax environment. For our near neighbours in the European Union, a packet of 20 cigarettes generally costs between £1.85 and £3.40, depending, of course, on the brand; here, the equivalent packet costs about £4.60 to £4.75. The large price differential between neighbouring countries is worrying. It will, as the Minister said, continue to create significant opportunities for smuggling, fraud and counterfeiting.
The question, therefore, is whether high duties and increases cut consumption. We have to consider the industry figures and the Government figures to try to ascertain whether they do. Let us consider the industry figures in particular. The latest figures are for 1993 to 2003, and it is clear that there has broadly been stability. There was a small rise in 1999–2000. We are not sure whether that related to the millennium, but in 1993 the figure for consumption was about 99 billion cigarettes or their equivalent, and the figure is broadly the same this year.
The Committee will be interested to learn, however, that there was a much greater difference in the previous 10 years. In 1983, the figure was about 113 billion and it dropped to 99 billion. The 1970s saw the greatest change: in 1973, the figure was about 153 billion and it fell over the following 10 years to about 117 billion. I suspect that we have seen a natural reduction in the number of people smoking and are left with a hard core of smokers who are not likely to stop their habit. They may wish to change the way in which they consume the product, but they are unlikely to be deterred significantly. The figures produced by
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Customs and Excise and the industry reinforce that assumption.
It is fair to say that duty rises over the past three or four years, including the one set out in the clause, have created stability in the sense of the tax revenue. In the past four or five years, the Government have pulled in about £8 billion in tax revenue. However, it is not clear from any independent evidence or evidence from the Government that the tax changes have made any significant difference in terms of cutting overall consumption. What has changed in the past few years with regard to supply is the counterfeiting—which of course is run by organised crime—and the level and nature of cross-border purchasing. It is difficult to know how to measure that and to judge whether the changes made by the Government have had an impact.
According to the Government's figures, there has been one interesting change, which the Committee will wish to note. The estimated revenue loss that the Government have endured has changed radically. In 1997, they were losing about £60 million in revenue; by 2002–03, the figure had risen to £1.41 billion. There has therefore been a big change in purchasing habits. As all members of the Committee will be aware, people are opting for cross-border cigarette purchasing, which is very different from what they were doing just seven years ago.
Equally, there has been a dramatic change in the nature of illegal activity, with a shift from smuggling to counterfeiting. The Economic Secretary referred to Customs seizures in his opening remarks, and last year some 41 per cent. of them involved counterfeit goods. In the previous year the figure was just 15 per cent, so there has clearly been a change in the nature of organised crime. I fully accept that some of the steps that Customs and Excise has taken on smuggling have had good results, and I am sure that the Committee supports that.
The problem with counterfeiting is that it means that, whether one's views on the totality of the product are positive or negative, consumers do not know what they are buying. The danger is that the carcinogenic elements, for example, may be far greater in the counterfeit product, but the consumer will not know. As such, there is a worry that the shift in the supply habits of organised criminals from smuggling to counterfeiting goods is serious for the consumer.
My point is that the tax rises in this Budget and the past few Budgets have done one thing: changed but not reduced habits. On the consumer side, smokers have not cut their consumption in the past 10 years. They are buying abroad, switching to cheaper brands and, by the sounds of it, willing to buy counterfeit goods. The point is that the total consumption is static, so the tax rise has not achieved the Government's apparent aims. At the same time, on the supply side, organised crime seems to have been just as active, but has changed its activity from smuggling towards counterfeiting. That is clearly a more sophisticated activity, but one that is nevertheless highly profitable.
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How does the Economic Secretary feel that the increase in price helps to tackle organised crime and cut total consumption? Those two aims are laudable, but it is not clear that the policy set out in the clause will achieve them. I hope that we will be able to have a proper debate about that. I look forward to receiving the considered thoughts of the Economic Secretary.
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