Examination of Witness (Questions 420
WEDNESDAY 17 JANUARY 2001
420. Would the converse be true, that if whisky
taxes were lower it would create employment because you stop killing
the golden goose? Would the converse be true?
(Dr Crawford) It would. It depends on how price responsive
demand was. If you could get 200 per cent increase in demand for
a 5 per cent reduction in price, you would expect quite big increases
Sir Robert Smith
421. You talked about the job impact of increased
beer and wine duty as a negative option for beer and wine. Would
there be any positive for spirits in terms of people still desiring
(Dr Crawford) There would. It depends on the pattern
of complementarity of the substitute. If an increase in the price
of beer reduce beer demand, it might well increase the demand
for other things, spirits, socks, you name it.
422. In your memorandum you suggested that there
was no difference in the price responsiveness of UK consumers
before and after the introduction of the European Single Market
in 1993. You also found no difference in the price responsiveness
between the South-East of England and the rest of the UK. To what
extent has the introduction of the Single European Market made
any difference in the price responsiveness of alcohol consumers
in the UK?
(Dr Crawford) We could not find any statistically
significant responsiveness. By statistically significant we do
not mean big. Things can be significantI mean there could
be a big response but it may not be significant statistically.
It is a fine point. What we have here is a sample of households
and they tell the Office of National Statistics what they spend
on various things. It is not the entire population, it is 120,000
people. That is quite a lot but it is not the entire population.
So it is like opening the front door and stopping the first 20
people you see in the street and asking whether they are left
or right-handed. You would probably find that they were all right-handed
and that would be significant in terms of the large majority,
but it would not be statistically significant because you have
not sampled very many people and they might not be representative
of the whole population. What we did find were some significant
possibly effects demands for various alcoholic goods. But those
were not statistically significant. So they could have been generated
by chance during a random sampling process of data. You look less
happy than when I started.
423. What if you asked the first 20 people and
they were all left-handed?
(Dr Crawford) If you did not have a thorough grounding
in statistics you would assume everybody in the UK was left-handed.
But what you would then do is work out the standard error which
is something like 20 divided by the population of the UK.
424. The next question seems a bit irrelevant
now. Why are there apparently no significant regional variations
in price responsiveness within the UK?
(Dr Crawford) Well, there might be, but we were unable
to find it in our data. What that means is, if we re-sampled our
data 100 times, we would expect to get the same answer with no
difference 95 times out of 100.
425. Assuming your data is correct, what do
you read into the fact that you are not detecting any regional
variations? Does that mean you can put up the price of alcohol
and people will still buy it?
(Dr Crawford) We did not identify price responsiveness;
there was no change before and after the single market. When we
first came to this we thought before the single market, if price
went up what could people do? Not very much. They could continue
to consume as much as before or reduce their intake. Now they
seem to have an extra option. They can go to France and buy it
or buy it round the back of the bike sheds or wherever you buy
bootleg alcohol. So we would have thought the price responsiveness
would go up, but we just did not find that.
426. You would expect to get boot-legging in
England but that is not an option in Scotland.
(Dr Crawford) It is not.
427. But that is still not showing up in the
(Dr Crawford) No. We looked at various regions. We
looked at people a long way away from the Channel ports and people
in the South-East of England and just did not find any particularly
catastrophic drop in their demands after the introduction of the
428. There are significant differences in the
duty rates levied on different types of alcohol. For example,
duty accounts for about 62 per cent of the price of a bottle of
whisky but only 51 per cent of the price of a bottle of wine.
Do you think that there is any justification for the differences
in duties between competing alcoholic drinks? What are the economic
consequences of such differences?
(Dr Crawford) I do not think there is any evidence
that could support that difference. Speaking for myself I think
alcoholic drinks should be taxed on the amount of alcohol they
contain and that that should be constant across all forms of alcohol.
The effect of having relatively high taxes on spirits as compared
to wine would be a reduction in demand for spirits compared with
429. In relation to the external effects of
alcohol, do you think that the UK's current alcohol tax regime
adequately reflects the negative social consequences caused by
excessive alcohol consumption, particularly those related to health
(Dr Crawford) The answer to that question is that
I do not know. The reason I do not knowI suspect nobody
does I would say in mitigationis that what you need to
do is balance the revenue you get from these taxes with harm done
by over consumption of alcohol and evaluating the harm done is
very difficult. I know that people in the University of York and
the Centre for Health Economics up there have tried to do this
but I am not aware of exactly how much value they put on it or
whether the estimates they have come up with are very robust.
So all I can say is that, given there is some harm done by the
consumption of alcohol, taxes on alcohol should be higher than
they are on other goods and should try and reflect that. But the
exact level is hard to know because I do not know exactly the
value of the harm done.
430. The current thinking is that lowering tax
on alcohol will increase consumption and there will be an increase
in poor health and the crime rate. That is the argument of people
usually who are teetotal; in other words, the holy willies.
(Dr Crawford) That is true. It does not necessarily
mean it would be a bad idea to cut taxes on alcohol. If you cut
taxes on alcohol you might get an increase in crime and an increase
in health costs. Whether or not it is a bad idea depends on how
big those increases are and much those health costs are. If they
were very big then it would be a bad idea than if they were very
small and if there was a big increase in jobs then it might be
a good idea.
431. You realise that that is the difficulty
we have as legislators in a situation of making recommendations
to our Government. On the one side we are being pressurised to
level down to stop importing and smuggling, but on the other hand
you have these people saying, no you cannot do that.
(Dr Crawford) You need to find somebody who can tell
you what the value of alcoholism is to the economy. Nobody knows.
On the industry levelling down, I think everybody agreeswell
your question earlier as to what we should about cross-border
shopping and harmonising with France, well harmonising with France,
although it is a nice word, it means cutting. Harmonisation itself
will not do anything apart from reduce cross-border shopping.
It will not of itself reduce the incentive to smuggle. If you
harmonise at the very high rate, the incentive to smuggle becomes
the difference between the pre-tax price and the post-tax price.
If you harmonise up you would solve cross-border shopping but
probably increase the level of smuggling. If you harmonise down
you would probably do both. But you have to distinguish the two
types of harmonisation and most of the people earlier this morning
were for harmonising down.
432. You did say it would be possible to get
estimates of the cost in terms of health and crime. But there
are estimates in relation to smoking and there have been campaigns
to ban smoking. Do you see similar campaigns taking place in relation
to alcohol and do you have any views on that?
(Dr Crawford) I do not know. I imagine those campaigns
are already underway by the holy willies. I do not have any particular
views on that.
Sir Robert Smith
433. The other effect of duty that the Scotch
Whisky Association has long argued and the Gin and Vodka Association
would probably agree, is the signals that our duty levels send
to other countries who we are trying to export to. Would you agree
with those associations that the high UK alcohol taxes provide
other countries with a reason to adopt a prejudicial fiscal approach
to UK-produced spirits? If we are saying our spirits should be
taxed higher, does that send a signal to the other countries that
we approve what they do?
(Dr Crawford) I can certainly see the argument. It
is a slightly odd thing for a country to do, actually, to impose
such a high rate of tax on imports. I can see the argument but
whether or not it actually has an effect, I simply do not know.
434. But you think it is unusual to tax your
unique product and penalise it in your home town?
(Dr Crawford) Yes. I am sure the reason for the structure
of alcohol taxation that we have got at the moment is historic.
435. One effect of the disparity in alcohol
duties between the UK and other EU countries has led to smuggling
and smuggling seems to involve individuals as well as organised
criminals. Do you think that alcohol smuggling will continue to
be a problem so long as EU duty disparities are sufficiently wide?
Could you identify any other steps, aside from extra policing,
that the authorities might take in order to reduce smuggling?
(Dr Crawford) Well, on the first part of your question,
the main incentive for smuggling as opposed to legal cross-border
shopping is to do with the difference between the pre-tax and
post-tax prices in the country to which you are smuggling. So
the profit that the smuggler would make in the UK would be by
selling whisky for the price without the tax essentially. That
is not really affected by the price of the tax rate in Finland,
for example. So it is not so much to do with differences. Smuggling
is a question of the difference between the pre and post-tax price
in the UK rather than differences between different parts of the
European Union. Differences between the different parts of the
European Union are more to do with having more effect on legal
cross-border shopping or possibly illegal cross-border shopping
where you go and buy in France, pay your duty then bring it into
the UK and tell the Customs officers that you are about to have
a massive party or a wedding and in fact you flog it. I think
that is relatively small compared with serious kind of smuggling.
436. What other measures could be taken, ruling
out increasing the policing. Obviously we would like to see that,
but aside from that?
(Dr Crawford) If an economist was going to do something
illegal, they would weigh up the benefits and risks. So policing
increases the risk; reducing the level of taxation in the UK reduces
the benefit. Those are the two main things. So if you did not
want to increase the probability of catching somebody, the only
other way to do it is to reduce the level of tax. I have to say
that tax on alcohol in the UK, you probably know and it will not
come as a surprise, are not the only taxes that are avoided. Lots
of taxes are avoided and it is only in the case where it becomes
absolutely catastrophic to the tax base or the tax base disappears
entirely. It is commonplace economics that as soon as you try
and tax an activity, that activity seems to mysteriously disappear.
Some will be avoidance and some will be people thinking, "I
am not going to do this any more because it is too expensive".
Typically it has not been the case for most sources of taxation.
People pay their income tax. Putting up income tax does not stop
437. If you reduce the tax disparity would you
be able to resolve the problem?
(Dr Crawford) In the absence of being able to do anything
about the police?
438. Let me put this question. What, if any,
are the economic distortions that such duty disparity causes?
(Dr Crawford) As far as the structure of tax in the
UK is concerned, it means we are drinking too much beer and wine
and not enough whisky because the price of beer is less compared
to whisky because of the tax. So far as international flows are
concerned, it means we are wasting a lot of effort going over
to France and shopping and then coming back. It is a classic deadweight
loss of tax distortions.
439. You referred to people having a large party
and filling up their cars or their vans. My understanding is that
you are allowed to bring in what is reasonable. But could or should
that change to a fixed amount, which would eliminate any uncertainty
and do away with the point about parties? A reasonable amount
for personal use would substantially reduce the amount coming
into the country. Could and should that be done?
(Dr Crawford) I do not know whether it could be done.
It may be illegal. It is not in the spirit of the single European
Market to stop people over the border buying something and bringing