10 Prices: taxes and minimum prices |
284. While improvements in NHS services, education
and information campaigns and controls on marketing, licensing
and supermarket promotions have a part to play in curbing alcohol
consumption, the use of the price mechanism is seen by health
professionals as the key issue. It is also very contentious.
285. We took oral evidence about prices from health
professionals, including the CMO and the President of RCP, representatives
of four major supermarkets, of the drinks industry companies,
of the Wine and Spirits Trade Association and CAMRA. We also heard
from HM Treasury and Dr Meier who undertook the study of minimum
pricing for the DH and Ms Rabinovich of the RAND Corporation who
has undertaken an international study. As part of our visit to
Scotland, we discussed the Scottish Government's proposal for
minimum pricing with officials, medical and health experts, including
the Chief Medical Officer for Scotland, producers, representatives
of the licensed trade and economists.
286. The protagonists for raising prices argued that:
- Higher prices would reduce
consumption (they noted that the increasing affordability of alcohol
had been the major cause of increased consumption over recent
- Higher prices would have their biggest impact
on heavier drinkers because they drink most (hazardous and harmful
drinkers drink three-quarters of all the alcohol sold, of which
harmful drinkers drink around a third)
- In any case, it is desirable to reduce overall
consumption since this will reduce the number of heavy drinkers
- Higher prices would be particularly effective
in reducing drinking among low income heavy drinkers who suffer
most from alcohol-related disease.
287. These arguments are disputed. The main arguments
of those who are against price rises are that
- Price increases would have
little effect on heavier drinkers
- Price increases would be unfair, because they
would also affect moderate drinkers
- Rises in the price of cheap alcohol would particularly
affect lower income groups
- Price increases would have little effect on alcohol
harm; alcohol consumption has fallen in recent years but alcohol-related
harm has continued to rise; there is therefore no good reason
to reduce average consumption.
THE LAWS OF SUPPLY AND DEMAND
288. While it seems self-evident that alcohol obeys
the laws of supply and demand like almost all other commodities,
some witnesses came close to implying that it did not. Their argument
runs as follows. In each country the relationship between price
and consumption is different. In some countries there are relatively
high prices and high levels of consumption and vice versa. Therefore
putting up the price of alcohol will have little effect. We were
It is too simplistic to apportion responsibility
for problem drinking to the price of alcohol alone; if low-cost
alcohol were the only factor then countries such as France and
Spain, where prices are much lower than in the UK, would have
similar problems and countries like Finland, where alcohol is
expensive and its availability restricted, would not (Tesco)
289. To many this argument is economic illiteracy.
All these contrasts reveal is that there is a different relationship
between price and consumption in each country. Each individual,
each group and each country responds differently to a change in
price, but all respond. The extent of this change is known by
economists as the elasticity of demand.
290. We know a good deal about the elasticity of
demand for alcohol in England and the UK. We were told of information
a study undertaken for HMRC in 2003 (which HMT uses
to assess the effect of price changes on revenues), The Treasury
figures were estimated using historic expenditure data from 1970
to 2002. Separate elasticities were estimated for each category
of alcohol. They also take into account how the change in price
of one product will affect another.
the 'Sheffield University' Study commissioned by
the DH in 2008 'to quantify the potential impact of policies targeting
pricing and promotion of alcohol on alcohol related harm. ...
The study used UK data on alcohol consumption of around 7,000
individuals between 2001/02 and 2005/06. Alcohol elasticies were
estimated as part of this study.
A study by Oxford Economics in 2008 for the British
Beer and Pub Association estimated elasticities for beer and other
There was also a study by the RAND in 2008 which
undertook inter alia an international examination of the
relationship between prices and consumption
291. Table 7 below supplied by the Treasury compares
the own-price elasticities (i.e. how consumption responds to changes
in the price of that product) from these three sources. For example,
HMRC estimate that a 1% increase in the price of on-trade beer
reduces consumption of on-trade beer by 0.48%.
||University of Sheffield
(Commissioned by the Department of Health)1
|HMRC2 ||Oxford Economics
(Commissioned by the alcohol industry)3
|Beer on trade ||-0.50 ||-0.48
|Beer off trade ||-0.52
||-1.03 ||-1.00 |
|RTDs on trade ||-0.36
|RTDs off trade ||-0.38
|| || |
|Spirits on trade ||-0.23
||-1.31 ||-1.73 |
|Spirits off trade ||-0.62
|| || |
|Wine on trade ||-0.33
|Wine off trade ||-0.58
|| || |
|Cider on trade ||N/A ||
|Cider off trade || ||
1. 'Independent Review of the Effects of Alcohol
Pricing and Promotion: Part B Modelling The Potential Impact Of
Pricing And Promotion Policies For Alcohol In England: Results
From The Sheffield Alcohol Policy Model Version 2008(1-1)'
2. 'Econometric Models of Alcohol Demand in the
United Kingdom', Government Economic Service Working Paper No.
140, May 2003
3. 'The economic outlook for the UK drinks sector
and the impact of the changes to excise duty and VAT announced
in the 2008 Budget and Pre-Budget Report', February 2009
Estimates of the elasticities vary considerably between
the three studies; for example, the estimates of the effect of
a 1% rise in the price of off-trade spirits vary from falls in
the value of sales ranging from 1.73% to 0.62%. The Sheffield
study figures are more conservative than the other two but are
consistent with other studies based on survey data. The differences
occur for a number of reasons. The Treasury figures estimates
are based on changes in overall sales figures and prices. Larger
estimates of alcohol price effects are consistent with models
based on aggregate sales data..
292. The relationship between price and consumption
is strong, as is the correlation between the price of alcohol
and affordability. The increase in consumption in recent decades
is clearly related to reductions in real prices and increasing
affordability, as the following figures show.
Figure 14: Indices of alcohol price relative to retail
price index, real households' disposable income (RHDI) and affordability
of alcohol, 1980 to 2007 United Kingdom
Source: Focus on Consumer Price Indices, Office
for National Statistics and Economic Trends, Office for National
Figure 15: Price of Alcohol and consumption
Source: Academy of Medical Sciences. Calling time.
The nation's drinking as a major health issue. London: Academy
of Medical Sciences, 2004.
293. The RAND study came to similar conclusions:
numerous international studies have generally concluded
that increases in the prices of alcoholic beveragesfor
example through local or federal taxationlead to reductions
in drinking and heavy drinking as well as in the consequences
of alcohol use and abuse
EFFECT OF PRICE RISES ON THE HEAVIEST
294. How are the heaviest drinkers affected by price
rises? Some representatives of the drinks industry argue that
the heaviest drinkers respond least to price rises and will switch
to cheaper drinks to maintain their levels of drinking. The CEBR,
in an analysis of the Sheffield and RAND reports commissioned
by SAB Miller, the world's second largest brewer, argued that
heavier drinkers were least responsive to price changes. Speaking
of minimum pricing (but the comments would apply to other price
rises) CEBR claimed that it would be
an incredibly blunt instrument which imposes significant
costs across large sections of society, whilst having very limited
benefits in terms of curbing the excesses of the minority
Mr Blood, the Chief Executive of Scottish and Newcastle,
I have read the Sheffield report
Why do we,
in principle, not support minimum pricing? We believe that where
misuse is happening and where people are drinking more than is
good for them or using alcohol in the wrong way, those are the
people that will not change their behaviour if you apply minimum
pricing, they will carry on misusing, and you will not address
the proper concerns that society has got about the misuse of alcohol
through that blanket approach.
295. Specifically, the CEBR argued that the Sheffield
study showed that heavier drinkers were more responsive to price
changes for individual alcohol products, but omitted to mention
that overall heavier drinkers were least responsive to price changes;
ie it failed to take into account the 'substitution effect'. The
CEBR claimed that the Sheffield study overestimated the impact
of price changes on consumption levels of hazardous and harmful
drinkers by a factor of two.
296. The Sheffield study paid particular attention
to underage drinkers, 18-24 year old binge-drinkers and harmful
drinkers (over 50 units per week). Consistent evidence was found
for an association between alcoholic price and patterns of drinking
by these groups. It also found that most policy options affect
moderate drinkers in a very minor way, simply because they consume
only a small amount of alcohol.
297. Even if the elasticity of demand for heavier
drinkers was exaggerated by the Sheffield study (and it is unclear
it was and, if so, by how much), simply because the 10% of heaviest
drinkers consume 44% of all the alcohol bought, the Sheffield
study is able to claim that:
Harmful drinkers are expected to reduce their absolute
298. We asked our adviser, Professor Godfrey, to
analyse the CEBR study, which had not been peer reviewed. She
found that the CEBR claim about the elasticity estimates of the
Sheffield study was based on a fundamental misunderstanding of
the Sheffield study.
The CEBR critique fails to recognise that the Sheffield
model takes account of all the price effects across different
types of consumers and is not artifically averaged as in the CEBR
study. The models take account for each group not only of all
the cross price effects of other alcoholic drinks but also the
impact of a change in alcohol prices on the consumption of other
non alcohol goods.
PRICE CHANGES AND HARM
299. The Sheffield study also found evidence linking
price increases to reductions in chronic and acute health harms
and in crime: 'Significant health benefits are estimated for harmful
drinkers (particularly deaths avoided)'. There would be less crime
because young people would drink less: 'a much larger proportion
of the crime-related harm is due to reduced drinking in the underage
and 18-24 year old hazardous drinker groups'.
300. Opponents of price rises argued that higher
prices could affect consumption but could not affect the misuse
of alcohol because they did not affect harmful drinkers or binge
drinkers who, it was claimed, did not reduce consumption when
prices rose. The CEBR argued that the Sheffield study was wrong
in linking alcohol consumption to harm done by alcohol: since
2004 alcohol consumption had fallen in the UK, but there had not
been a reduction in hospital admissions. The question arises whether
this short period is enough to establish a trend.
THE EFFECT OF A DECLINE IN AVERAGE
CONSUMPTION ON HEAVY DRINKERS
301. Linked to the previous argument is the dispute
as to whether a decline in average consumption would affect heavy
drinkersie if we all drank less, would there be fewer heavy
drinkers? As we saw in chapter 4, Ledermann's 'whole population
that there is a fixed relationship between average per capita
consumption of alcohol and the number of problem drinkers and
alcohol-related problems. The alcohol industry believes that this
not the case, arguing once again that the fall in alcohol consumption
since 2004 has not been associated with a fall in hospital admissions.
302. On the other hand, it is pointed out that the
figures for admissions are older than the consumption ones and
the recent consumption fall is slight compared to the large historic
rise. It is argued that the very modest fall from the 2004 peak
is not yet large enough to significantly impact on the health
harms from alcohol.
303. There are a number of studies which bear out
Ledermann's theory. A study of English regions (see figure 16)
found a strong relationship between average weekly consumption
in the region and the percentage of the population drinking more
than 28 units per week.
Figure 16: Relationship between mean alcohol consumption
and prevalence of drinking more than 28 units (approx 224 grams)
of alcohol per week: Men
Source: Primatesta et al., 2002.
304. The average intake of a patient with cirrhosis
is around 100 units/week, and deaths from liver disease are a
good indicator of the levels of regular heavy drinking within
a population. Figure 17 shows that liver deaths in the EU countries
with the biggest changes in either death rates or alcohol consumption
are strongly linked to consumption at a population level, both
within countries and overall. The different gradients between
countries suggest that other factors, for example nutrition, also
operate to influence this relationship change.
Figure 17: Liver death rates and overall alcohol
Source: British Association for the Study of the
HIGHER PRICES ARE UNFAIR ON MODERATE
DRINKERS AND LOWER INCOME GROUPS
305. It is argued that raising prices would be unfair
on moderate or responsible drinkers. Why should such drinkers
be punished because a minority drink too much? It is also claimed
that higher prices would be unfair because lower income groups
drink less than higher income groups.
306. On the other hand, as we have seen, others argue
that a rise in prices would have little effect on moderate drinkers
because they drink so little. As we have noted, 44% of all the
alcohol purchased is consumed by 10% of the population. According
to the Sheffield study a minimum price of 40p per unit would cost
a moderate drinker (defined as someone who drinks about 6 units
per week which is the average consumption of drinkers) about 11p
per week; A the same minimum price, a woman consuming the recommended
maximum of 15 units would have to pay £6 for her weekly intake
of alcohol , which is scarcely going to be a massive rise.
307. In fact, those most affected by of price increases,
especially on cheap alcohol, would be heavy low income drinkers,
as we discuss in the next section.
Minimum pricing or rises in duty
308. If prices are to rise, is this best achieved
by introducing a minimum price for a unit of alcohol or by raising
the level of duty or a mixture of the two?
309. Minimum pricing has recently had a number of
powerful supporters including the CMO. While much of the alcohol
industry and most supermarkets were against, there was some support
for minimum pricing from Tesco, Molson Coors (makers of Carling
lager) and CAMRA.
310. The main arguments for preferring minimum pricing
to rises in duty are:
Supermarkets will not pass on the full rises in duty
to customers; they will get the drinks industry to absorb them;
in contrast, this could not happen with minimum prices. As a result,
supermarket and other off-licence sales would be much more affected
than pub sales; thus minimum pricing could help traditional pubs.
Minimum prices would be particularly effective in
raising the price of the cheap alcohol; this would be particularly
effective in reducing consumption by heavy drinkers in low income
groups and young binge drinkers
Minimum pricing would encourage people to buy weaker
311. We have seen that supermarkets aggressively
promote alcohol to attract customers; supermarkets even sell alcohol
below the cost of the duty; thus raising the duty would not necessarily
lead to higher prices.
312. Traditional pubs have lost custom for years.
Rises in duty hit them; minimum prices would not since most pubs
sell alcohol at a higher price than the any minimum price which
has been proposed. For this reason CAMRA supports minimum pricing.
Mr Benner, the Chief Executive of the organisation, told us:
I think the price ratio at the moment is about five
to one (ie the ratio of the off-sale to the on-sale price). If
a minimum price of around 40 pence was introduced, that would
make the ratio about three to one. Therefore, I think that is
enough for there to be a shift in consumption towards drinking
in community pubs.
313. While most pubs would benefit, some pubs and
clubs, such as those which offer 'Happy Hours' and special promotions,
would be affected. The Sheffield study found that the greatest
impact on crime and accident prevention would be achieved through
reducing the consumption of 18-24 year old binge drinkers, by
raising the cost of cheap drinks in pubs and clubs and by reducing
off-licence sales which encourage pre-loading. Off-licence sales
can be very cheap with alcohol being sold for as little as 15
p per unit in some outlets.
314. BASL pointed out that alcohol-related ill health
and mortality was very strongly linked to socio-economic status,
with the most deprived experiencing between a three and five fold
increase in death rates (health statistics quarterly 33) compared
to the most privileged. For any level of drinking, lower income
groups suffer more. The organisation argued that given the strong
link with socio-economic status, one would predict that changes
in the affordability of alcohol over time would have had the most
impact on death rates in the poorer sections of society, which
is what happened to liver death rates between 1991 and 2001. We
know that professional groups drink more than lower income groups
but, astonishingly, as the figure below shows, lower income groups
suffer far more from liver disease. In the 1990s as price fell
and consumption increased, liver disease increased among more
deprived social groups but fell among the 'higher' social classes.
Alcohol duty increases can therefore be predicted to reduce mortality
in those lower socio-economic groups most at risk.
Figure 18: Changes in age standardised liver mortality
rates (deaths / million) according to socio-economic status
Age standardised alcohol mortality rates according
to social class for 1991 -3 (1) when socio-economic status was
assessed by social class, and again for 2001-3 (Health Statistics
Quarterly no 38) by which time socio-economic status was assessed
by NS-SEC groupingshence the different x axes in the graph.
315. According to the Sheffield study, a minimum
price of 50p per unit would save over 3,000 lives per year,
a minimum price of 40p, 1,100 lives.
316. Minimum pricing would encourage people to buy
weaker alcohol; for example, at a minimum price of 40p a 70cl
bottle of 10% abv wine could sell for £2.80, of 12% wine
for about. £3.40 (8.4 units), of 15% wine, about .£4.20p.
317. Opponents of minimum pricing argue that it would
be illegal under EU competition law. The Scottish Government,
which has examined this issue thoroughly, strongly disagrees and
EU Competition Law does provide for a public health exemption.
This exemption has been successfully used by the French Government
to ban alcohol advertising and sponsorship in certain circumstances,
winning a number of cases in the ECJ which were brought by the
318. The DH memorandum to this inquiry stated that
the Government had made no decision about minimum pricing. However,
when the CMO's report which advocated minimum pricing was leaked,
a Government representative rejected minimum pricing.
RISES IN DUTY
319. The main case for higher sales duties rather
than minimum prices is that minimum prices would lead to higher
profits for producers and vendors of alcohol, assuming that any
fall in sales would be more than offset by the increase in revenue
from each unit. In contrast, a rise in duty would avoid this,
producing not additional profits but extra money for the Exchequer.
A rise in taxes can also be justified, as we found in Scotland,
on the basis of recovering the costs imposed by alcoholestimated
at £20-55bn; the duty on alcohol currently raises far less.
The duty on alcohol in the UK raised £14.7 bn (£8.3
bn excluding VAT) in 2007/8 and £14.7 bn (8.5bn excl VAT)
320. In addition, minimum pricing is likely to lead
to a large increase in expenditure on marketing and other forms
of non-price competition as price competition declined. This would
not happen with a rise in prices since supermarkets and others
could more readily compete on price.
321. Another potential advantage of increasing duty
is that increases can be targeted on stronger drinks. Alcohol
duty rates and structures in the UK must comply with European
Directives on the structure and minimum rates of alcohol duty.
Under this legislation, beer and spirits must be taxed in direct
proportion to the alcohol they contain. For example, the duty
on a pint of beer at 6% alcohol by volume is double that of a
pint of 3% abv. Wine and cider must be taxed in strength bands;
thus 10% abv wines can be taxed more heavily per unit of alcohol
than 12 or 14% abv wines. However, it is possible to tax some
different products at different rates; thus in the UK spirits
are taxed more heavily per unit of alcohol than beer and wine.
Member states can also charge lower rates on beer products below
2.8% abv (beer of this strength currently accounts for a tiny
amount of beer salesless than 0.5 %).
In addition, the main beer duty rates can be and have been reduced
for small breweries.
322. We questioned the Treasury in oral evidence
about two apparent anomalies in the present tax system: first,
the low rate of duty on cider and secondly the fall in real terms
in price as a result of the freeze on the duty on spirits from
1997 to 2007. It is little wonder that cheap cider and spirits
are popular with many young people and heavy drinkers.
323. The Treasury's rationale for the low duty on
cider was to protect small producers.
While this is a laudable aim, some 'white cider' is an industrial
product which uses fermented corn syrup.
324. The rationale for freezing the duty on spirits
from 1997 to 2007 was that Government wanted to equalise rates
of duty so that the duty on each product would be equivalent to
its alcoholic strength; ie the tax on a unit of alcohol would
be the same for all alcoholic products. In contrast, older policies
taxed strong liquors such as spirits at a higher rate per unit
of alcohol than weaker products such as beer. The decade long
freeze on the duty on spirits was unusual but in line with a long
trend that has seen a very significant decline in spirits duty
as a percentage of average earnings. This has transformed drinking
habits: spirits were once an expensive occasional tipple; now
they are a cheap way for teenagers to get drunk. The remarkable
figure below shows the dramatic fall in affordability. The rate
of duty on spirits per litre of pure alcohol in 1947 was almost
60% of a average male manual weekly earnings; in 1973 when VAT
was introduced, it fell and since then it has declined consistently
as the figure below shows.
Figure 18: Duty level per litre of spirits as a percentage
of average weekly wages of manual workers (1948 to 2002)
Source: House of Commons Library, based on HM
Treasury statistics on duty levels
Conclusions and recommendations
consumption of alcohol, like that of almost all other commodities,
is sensitive to changes in price as all studies have shown. Because
some countries with high alcohol prices have high levels of per
capita consumption and vice versa some countries with low levels
of consumption have low prices, it is sometimes implied that alcohol
sales do not respond to price changes. This is economic illiteracy.
Different countries, like different people and groups, respond
differently to price, but they all respond. Studies have shown
varying elasticities of demand. The increase in alcohol consumption
over the last 50 years is very strongly correlated with its increasing
the price of alcohol is thus the most powerful tool at the disposal
of a Government. The key argument made by the drinks industry
and others opposed to a rise in price is that it would be unfair
on moderate drinkers. We do not think this is a serious argument.
The Sheffield study found that for the moderate drinker consuming
6 units per week a minimum price of 40p per unit would increase
the cost by about 11p per week. At 40p per unit a woman drinking
the recommended maximum of 15 units could buy her weekly total
of alcohol for £6.
also claim that heavier drinkers are insensitive to price changes,
but these drinkers will be most affected by price rises since
they consume so much of the alcohol purchased in the country (10%
of the population drink 44% of the alcohol consumed; 75% of alcohol
is drunk by people who exceed the recommended limits).
328. We believe
that the Government should introduce minimum pricing for the following
- It would affect
most of all those who drink cheap alcohol, in particular young
binge-drinkers and heavy low income drinkers who suffer most from
- It is estimated that a minimum
price of 50p per unit would save over 3,000 lives per year, of
40p 1,100 lives per year.
- Unlike rises in duty (which
could be absorbed by the supermarkets' suppliers and which affect
all sellers of alcohol) it would benefit traditional pubs and
discourage pre-loading. For this reason it is supported by CAMRA
- It would encourage a switch
to weaker wines and beers.
without an increase in duty minimum pricing will lead to an increase
in the profits of supermarkets and the drinks industry and an
increase in marketing, promotions and non-price competition. The
Treasury must take into account public health when determining
levels of taxation on alcohol as it does with tobacco. Alcohol
duty should continue to rise year on year above incomes, but unlike
in recent years duty increases should predominantly be on stronger
alcoholic drinks notably on spirits.
330. The duty
on spirits per litre of pure alcohol was 60% of male average manual
weekly earnings in 1947; in 1973 (when VAT was imposed in addition
to duty) duty was 16% of earnings; by 1983 it was 11% and by 2002
it had fallen to 5%. We recommend that in stages the duty on spirits
be returned in stages to the same percentage of average earnings
as in the 1980s. Cider is an extraordinary anomaly; the duty on
industrial cider should be increased. To protect small real cider
producers, their product should be subject to a lower duty. Beer
under 2.8% can be taxed at a different rate: we recommend that
duty be reduced on these weak beers; although at present there
a few producers of beers of this strength, the cut should encourage
331. In the
longer run the Government should seek to change EU rules to allow
higher and more logical levels of duty on stronger wines and beers;
it should also seek to raise the strength of beer which can be
subject to a lower duty rate from 2.8 to slightly higher levels.
332. The introduction
of minimum pricing would encourage producers to intensify their
marketing. This will make it all the more important to control
290 Q 271 (Rabinovich) Back
The studies are described in AL 72 Back
AL 72 Back
Q 385 Back
An Assessment of Minimum pricing of Alcohol; (WSTA) Back
AL 67 Back
See chapter 4 above. Back
Q 395 Back
Oral evidence Back
AL 72 Back
Q 956 Back