Contrary to government thinking, higher taxes on alcohol would not be bad for the economy as a whole: they would bring economic benefits, as well as be an effective public health measure, writes Aveek Bhattacharya. This potential ‘double dividend’ is the reason why the Chancellor will do well to look again at alcohol duty.
The government has cut alcohol taxes substantially in recent years: accounting for inflation, beer duty is 18% lower today than in 2012, and duty on cider and spirits has been reduced by 10%. This is concerning from a health perspective because alcohol taxes are widely recognised to be among the most effective tools governments have to address harmful drinking. As alcohol taxes have fallen, progress in reducing alcohol consumption has stalled, and death rates have begun to tick up. It has also been a costly policy: at a time of squeezed public services, the government is set to give away over £9 billion in foregone revenue by 2023.
A major reason for this recent government largesse is the belief that raising alcohol taxes is bad for the economy. In the run up to each Budget, alcohol industry lobbyists take every opportunity to draw attention to the thousands of people that are employed by pubs, brewers and distilleries, and warn that higher duty would put this economic contribution under threat. For example, in his 2016 Budget statement, then Chancellor of the Exchequer George Osborne claimed that ‘the action that we took in the last Parliament on beer duty saved hundreds of pubs and thousands of jobs’, and that cuts to spirits duty were justified because scotch whisky is such a ‘vital industry’.
In a recent paper, written with colleagues at the Fraser of Allander Institute, we examined whether higher alcohol duty would indeed have these negative economic effects. We produced an input-output model – essentially a scale model of the economy that shows how the different sectors of the economy interact with each other. We then looked at what would happen if the government chose to raise all alcohol duty by 10%. This would lead to a 1.1% decrease in alcohol sales, which would obviously be bad news for the alcohol producers and retailers, as well as their suppliers: we estimate they would lose out on £300 million and shed over 7,000 jobs.
However, the duty increase would also generate revenue for the government. We estimate that the tax take would increase by almost £800 million in response to a 10% increase. If this money was re-invested in public services, it could boost incomes and create jobs in health and social care, education, the civil service or defence. We therefore modelled what would happen if the government spent all of the extra £800 million in proportion to its current budget allocation. We found that the jobs and income created by government spending more than offset the losses resulting from lower spending on alcohol. Overall, we found that the net effect would be an £850 million increase in GDP and an additional 17,000 full time equivalent jobs.
In fact, this could understate the full economic benefits of higher alcohol duty. Our analysis only looked at the effects of shifting spending from the alcohol industry to public services. It did not account for the positive consequences of a healthier workforce. Previous research has shown that heavier drinkers have higher rates of sickness leave and are more likely to be unemployed. Premature death due to drinking accounts for 16% of all years of working life lost in England.
All this suggests that the government is wrong to think there is a trade-off between health and wealth. Higher taxes on alcohol would not only be effective as a public health measure, but could also bring economic benefits, creating a ‘double dividend’. The Chancellor will need all the help they can get, inheriting a tough job in a challenging economic environment. They would do well to look again at alcohol duty.
This article draws on the author’s published work (with Kevin Connolly, Katerina Lisenkova, and Peter G. McGregor) in Drug and Alcohol Review.
Aveek Bhattacharya is Policy Analyst at the Institute for Alcohol Studies.
All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science. Featured image credit: Pixabay (Public Domain).
I am not keen on this sort of model based estimates – the Treasury is bombarded with these sort of exercises and I doubt if they have much influence. It seems to confirm that higher taxes are a blunt instrument with an inelastic response to a significant tax rise. The argument that we should increase taxes because it will create more jobs elsewhere is bizarre as it depends on people not reducing alcohol consumption very much. A more logical use of the cash raised and a much better justification would be to fund additional support and associated social programmes which seek to address the root of the problem. That of course would reduce tax revenues in the future, but this seems a small price to address problem drinking successfully. If the author wants to reduce alcohol consumption across the population on public health grounds through taxation then it is not clear what tax rises would be required to reduce consumption to the desired level or indeed what the desired level might be.