The
Financial Secretary to the Treasury (John Healey): I
welcome you to the Chair, Mr. O’Hara. It is a pleasure to serve
under your chairmanship again. In my experience you Chair proceedings
with a firm and fair hand and I know that you will continue to do so. I
am grateful to you for the guidance that you have given us on the
grouping of new clauses to be discussed as part of the clause stand
part debate. I shall
mention my views on the new clauses later, but first let me deal with
clause 1, which increases the rate of duty on cigarettes, cigars,
hand-rolling tobacco and other smoking and chewing tobacco products. It
does so in line with inflation, therefore increasing the typical price
of cigarettes by 9p, including VAT, and did so with effect from 6 pm on
Budget day, 22 March
2006. The Committee is
aware that smoking kills more than 100,000 people in this country each
year. It is the greatest cause of preventable illness and premature
death in this country. So the duty increase, in line with inflation,
will help to maintain the real price of tobacco, the contribution to
Government revenues and the price support—a level of pricing
that encourages people to smoke less or to quit, and discourages
children or young people from taking up the habit in the first
place. Duty rates form
an important part of our strategy to drive down the level of smoking in
this country and of our target to reduce the prevalence or level of
smoking to 21 per cent. by 2010. Those measures run alongside important
provisions that we are making through the NHS to support those who want
to quit and also the public places smoking ban due to come into effect
in the summer of next year. So the duty increase continues a
well-established policy—a twin track of maintaining the high
real price of cigarettes while clamping down hard on the unregulated
supply of cheap smuggled tobacco. That will help to reduce smoking, and
lower the financial, social, personal and health costs associated with
it. On the new
clauses, I welcome the interest of the hon. Member for Wycombe (Mr.
Goodman) in evidence-based tax policy decisions. I say to him and his
colleagues on the Opposition Front Bench, we publish more information
relevant to their new clauses than they might realise. In fact, we
might publish more than they care to read. In relation to new clause 1
on tobacco, I gathered up on my way here a selection—not an
exhaustive list—of the documents that we have published in the
last 18 months.
“The Demand for Tobacco
Products in the UK”, published in December 2004, is a detailed
model for the elasticities of tobacco demand. The pre-Budget report
2004 included an update on our strategic approach to measuring and
tackling indirect tax losses, including from tobacco, and in late 2004
we published an analysis of, and plans to deal with, counterfeit
cigarettes. I have brought also a copy of a quarterly
publication that includes a tobacco fact sheet—hon. Members might
or might not be aware of it—with data on tobacco clearances and
duty, and on the state of the market. As I said, it is a quarterly
publication and the hon. Gentleman might care to pick up the next one,
which is out later this
month. In December
2005, as part of last year’s pre-Budget report, we published an
analysis of indirect tax losses which took into account the impact of
duty. This year we have published a detailed fresh analysis of how we
will reinforce our strategies for tackling tobacco fraud and smuggling.
Furthermore, of course, there are the Budget notices—once again
I have brought only one copy with me—published alongside the
Budget, which are legally binding, and which we attempted to write in
plain English, setting out the changes announced in each Budget, how
they impact, and on
whom. We make a
considerable effort to assess the impact of tax regimes on specific
industries and the wider economy. We meet regularly with and take into
account the views of organisations with special interests. We
frequently reassess the general design or specific aspects of the
operation of areas of the tax system, and when we do so we run a
public, open consultation
process.
In each year’s
pre-Budget report and Budget, we give updates on tax and wider policy,
and each year we publish a pre-Budget report for the excise
regimes—an analysis of the tax gap, the losses and the impact of
the rates. Ours was the first finance Ministry to make such a
systematic analysis of the operation of the tax system and the first to
put in place comprehensive strategies for reducing the tax gap, and I
believe that we are still the only Government to do so. In those
circumstances, when we come to decide on whether the proposed new
clauses should become part of the Bill, I hope that hon. Members of all
parties will bear in mind the quantity and the quality of what we
already produce.
10.45
am Mr.
Paul Goodman (Wycombe) (Con): It is a pleasure to see you
in the Chair, Mr. O’Hara. Unlike the Financial Secretary, I have
not had the pleasure of serving under your chairmanship before.
Although I am sure that, in the course of these proceedings, the
Financial Secretary and I will not agree on everything, he was right to
pay tribute to your chairmanship, and I look forward to your guiding us
in our transition through today’s clauses in a dignified,
orderly and efficient manner.
The clause that we are
considering invites us to approve the tax rise proposed in the
Chancellor’s Budget. As the hon. Gentleman said, new clause 1
would have the effect of compelling the Chancellor to publish a review
in relation to the effectiveness of tobacco duties. You, Mr.
O’Hara, will be pleased to know that I do not intend to discuss
the proposed review in detail, and the hon. Gentleman will be pleased
to hear that too. I want to refer to what he said about the quantity
and quality of the information already published by the Treasury; he
was right to draw attention to that. The proposed new clause seeks to
draw an assessment from him of how all those
documents come together in terms of the effectiveness of the
Government’s strategy with regard to the duty. We need to explore the
effectiveness of that strategy in some detail. Any tax needs to be
effective; it must achieve its aims. The Financial Secretary made it
clear that the aim is to discourage smoking. That is an aim that we
share. However, he did not mention the other aim of the clause, which
is to raise revenue for the
Exchequer—[Interruption.] He did. I
apologise to him. We are covered so far as aims go.
The Financial Secretary will be
mindful of that great law in relation to taxation and many other
matters, the law of unintended consequences, as well as of the effect
that raising a tax beyond a certain point might have on expected
consequences, namely that it might not discourage the behaviour that it
seeks to discourage. If raised beyond a certain point, it might raise
less revenue than it would if it were not increased or if it were
decreased. Raising it beyond a certain point could cause such
unexpected consequences as evasion, in this case tobacco smuggling,
which we shall discuss in more detail when we debate clause
2. At present,
according to the Tobacco Manufacturers Association—which would
like duties to be frozen, not unusually—smuggling increased
between 2002 and 2004, the last few years for which the organisation
has figures, resulting in a rise in revenue loss
from£2.6 billion to £2.9 billion. The Minister
will doubtless point this out when he replies, so I shall point it out
for him: it is true that the cross-border element has fallen from
£1.4 billion to £1.3 billion. However, when both figures
are added together, the result is a rise from£4
billion to £4.2 billion. The Tobacco Manufacturers Association
suggests that those developments threaten the Government’s
smuggling targets. I am sure that the Minister will want to respond to
that point
too. According to a
Gallaher monthly pack swap survey, the consumption of counterfeits has
risen slightly, from 2.4 per cent. to 2.8 per cent. of total
consumption. It is worth standing back from the figures for a moment
and looking at them in context. According to the TMA, cigarette prices
in the UK are already the highest in Europe, and the UK’s excise
duty burden is the highest in the EU. The rising number of freight
movements and visits within the EU, good things in themselves,
naturally increases opportunities for smuggling. There has also been a
significant rise in UK consumption of hand-rolling
tobacco. Mr.
Brooks Newmark (Braintree) (Con): My hon. Friend makes a
good point about the influence of duty increases on smuggling, but I
should be most interested to hear the Minister’s response to the
point made earlier about the analysis of elasticity. What is the
Government’s analysis of the effect on reducing smoking of each
1p increase in duty? It would be extremely interesting to hear
that.
Mr.
Goodman: My hon. Friend has conveyed his request to the
Financial Secretary through me, so I shall not repeat it. We look
forward to hearing the
answer. I
return to hand-rolling tobacco consumption. In 1995, £5.1
billion-worth of hand-rolling tobacco was
consumed. Last year, £10.8 billion-worth was consumed. The amount
of non-UK-produced hand-rolling tobacco in particular has increased
every year since 1995. The Minister works on
enforcement with the Tobacco Alliance, which represents some 17,000
independent UK retailers. I know that he sees the alliance regularly,
and I am sure that he will join me in paying tribute to its work. The
Tobacco Alliance is seriously concerned about the effect of smuggling
on small shopkeepers’ livelihoods and on public health, given
smugglers’ greater propensity to sell tobacco, particularly
counterfeit tobacco, to children.
Last August, 83 per cent. of
retailers surveyed by the alliance reported that smuggling had
decreased their sales, 27 per cent. had cut staff—those are the
two most serious figures—and 21 per cent. said that they were
considering closing. Some 71 per cent. were aware of tobacco smuggling
in their area, 35 per cent. were aware of counterfeit tobacco smuggling
and 20 per cent. knew of smugglers who supplied underage smokers. A
total of 90 per cent. thought that the Government were not doing enough
to help retailers affected by smuggling—I suppose that when
surveyed people always tend to think that the Government are not doing
enough, but there it is—while 74 per cent. thought, perhaps
unsurprisingly, that the Government should reduce or freeze
taxes. Yesterday, I
received a letter from Ken Patel, a Leicester retailer and the chair of
Retailers Against Smuggling, the campaigning arm of the Tobacco
Alliance. The Financial Secretary will know him. What he wrote is
important:
“Tobacco sales account
for a large proportion of our footfall and when a customer comes in to
buy their cigarettes, the chances are they will pick up something else,
like a pint of milk or a newspaper at the same time. We shopkeepers are
therefore losing out twice. We simply cannot compete with the smugglers
who can undercut our prices by
half. Let me put to
you a hypothetical situation: say I was the European head of a
smuggling organisation who had to report in to my boss, the worldwide
head of a smuggling organisation who wants profits and wants them fast.
Where am I going to focus on to get the most profits as quickly as
possible? Clearly the solution would be to focus on the country where I
can undercut shop prices but still make the most profit—the
place with the highest tobacco levels in the EU—the United
Kingdom. On top of
that, the best thing about the
situation”— he is
writing from the vantage of the imagined head of a smuggling
organisation— “is
that the Government in Britain is going to help me out, by increasing
tax every year and encouraging more people who smoke to buy their
cigarettes from my street-sellers.
Let’s take another
hypothetical situation: that I smoke 20 cigarettes a day. I enjoy it
and it is part of my life. I am not going to stop just because my pack
has gone up over the £5 threshold. It could go up over the
£6 threshold and it would not make me stop smoking. It
wouldn’t matter that much because I know that if the cost of a
pack of legitimate goes over a price barrier I might have
subconsciously set, then I can go and get some smuggled from the street
corner. It’s going to be quite a while before the cost of a pack
of smuggled reaches that subconscious level I have set for a legitimate
pack.” I will
not read the rest of Mr Patel’s remarks nor will I explore, in
the manner of the Hutton inquiry, subconscious motives. However, I
wanted to draw the letter to the attention of the Committee because it
represents the views of 17,000 retailers and Mr Patel makes some
important points. It
is worth standing back from those figures for a few moments to consider
which organisations are making profits from tobacco smuggling.
Ministers do not know and cannot be expected to know all the
organisations involved, but they do know, as the rest of us do, the
names of some of the organisations. When we refer to smuggling gangs,
it can be assumed that they are ordinary criminal gangs. However, they
do include the Provisional IRA and loyalist paramilitary groups, which
is plainly a serious matter.
Two months ago, Radio
4’s “File on 4” programme reported that the IRA is
linked up with other criminal gangs and is behind the smuggling of
millions of pounds of contraband across the North sea. It is perhaps
significant that cigarettes were among the items seized when premises
of the IRA’s reputed chief of staff, Thomas “Slab”
Murphy, were sealed off in March, after an operation by customs
officers, detectives and soldiers from both sides of the
border. Rob
Marris (Wolverhampton, South-West) (Lab)
rose—
Mr.
Goodman: I am delighted to see the hon. Gentleman here and
I am sure he will contribute enthusiastically to the debate, just as
all his other colleagues
will.
Rob
Marris: I am grateful to the hon. Gentleman, who I know
well from our time in Select Committee. Can he tell me whether he is
talking to clause 2 or clause 1?
Mr.
Goodman: I am addressing clause 1, because as my hon.
Friend the Member for Braintree said a moment ago, one of the phenomena
that impacts on smuggling is price. Thus, the duties relate to price,
so I am addressing clause 1. I am glad that he is following proceedings
so closely that he can see that is taking
place. Gordon
Banks (Ochil and South Perthshire) (Lab): Will the hon.
Gentleman give
way?
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