Strong case for reform of alcohol duties, says IFS

By agency reporter
December 18, 2017

The Scottish Government plans to introduce a minimum unit price for alcohol on 1 May 2018. (http://www.ekklesia.co.uk/node/24637) Its favoured rate is 50 pence. The Welsh National Assembly is currently considering the introduction of a minimum unit price for Wales. In a new briefing note, IFS researchers show that this proposed 50 pence minimum unit price would have a big impact on prices. 

Almost 70 per cent of off-trade alcohol units purchased (i.e. those bought in supermarkets and off-licences) in Britain between October 2015 and September 2016 were priced below 50 pence per unit. The prices of these products would increase by at least 35 per cent, on average, if a 50 pence minimum unit price is introduced.

Price increases would occur across alcohol types, from cider (e.g. the price of a 20×440ml pack of Strongbow would double) to fortified wines (e.g. the price of a bottle of Tesco cream sherry would increase by 20 per cent).

Purchases of lager and cider would be most affected. Around 85 per cent of lager and 80 per cent of cider units bought off-trade are priced below 50 pence per unit of alcohol. The per-unit price of cider products currently priced below 50 pence would rise by 90 per cent. For lager, the equivalent increase is 44 per cent. The majority of wine, fortified wine and spirits are also currently priced at less than 50 pence per unit of alcohol. In contrast, almost no alcopops are sold below 50 pence a unit.

Other key findings include:

  • Heavy drinkers tend to purchase cheaper alcohol. The majority of problem drinking is done by a small number of heavy drinkers, who systematically buy cheaper alcohol than more moderate drinkers. This means a higher fraction of their alcohol purchases would be directly impacted by the introduction of a minimum unit price, and so a minimum unit price would be reasonably well targeted at problem drinking.
  • Heavy drinkers tend also to purchase stronger alcohol than more moderate drinkers. This is partly because they get a higher share of their alcohol from spirits compared with more moderate drinkers, but even within broad alcohol types, heavy drinkers tend to buy stronger versions of the same drink – for example, stronger cider or lager. Raising the relative price of stronger alcohol products would also be reasonably well targeted at heavy drinkers.
  • The current UK alcohol duty system is chaotic. Due to EU requirements, within broad strength bands, wine and cider must be taxed per litre, which means that higher ABV products are taxed less per unit of alcohol than lower ABV products. In addition (and not due to EU requirements), taxes levied on cider are much lower than those for other types of alcohol; for instance, a litre of 7.5 per cent beer is taxed more than three times as much as a litre of 7.5 per cent still cider.
  • With or without a minimum unit price, reform of alcohol duties is overdue. A sensible reform that would substantially improve the system of alcohol duties would entail taxing directly the alcohol in wine and cider (a move which exiting the European Union will presumably make legally feasible) and increasing the tax on cider to bring it into line with that on beer. A more ambitious reform would involve adjusting rates to target more systematically the high-strength products most popular with heavy drinkers.
  • It may be better to reform duties and not have a minimum price at all. Minimum unit pricing has a substantial disadvantage: by introducing a price floor, the policy is likely to dampen competition in the retail market, resulting in increases in profits to the alcohol industry. In contrast, reform of alcohol duties that acts to raise the price of strong products, as well as cider, is likely to raise tax revenue. However, unlike with minimum unit pricing, power over the system of alcohol duties resides with the Westminster Government.

Martin O’Connell, an Associate Director at IFS and co-author of the briefing note, said, “The costs of anti-social drinking are high and concentrated among heavy drinkers. Heavy drinkers, when buying alcohol in supermarkets and off-licences, tend to choose products that are cheaper per unit than more moderate drinkers. A minimum unit price would therefore target a higher share of the units that heavy drinkers buy. However, the policy will lead to substantial increases in alcohol prices that will also impact on many moderate drinkers.”

Kate Smith, a Senior Research Economist at IFS and co-author of the briefing note, said, In recent years, the policy debate around alcohol has focused on minimum unit pricing. However, there is a strong case for reform of alcohol duties. The current system is not well targeted at heavy drinkers and has indefensible anomalies, such as very low rates on cider compared with beer. Regardless of whether minimum pricing is introduced, the UK Government should consider redesigning alcohol taxes.”

* Institute of Fiscal Studies https://www.ifs.org.uk/

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