INTRODUCTION (PAGE 288)

  The figures for loss of indirect tax revenue in 1996—£185 million—grew to £240 million in 1997 and neither figure includes the £290 million lost via bootlegging of alcoholic drinks. The bootlegging figure itself does not include losses from duty diversion fraud nor large scale commercial smuggling. The data is generally rather out of date.

LONG TERM TRENDS IN ALCOHOL SPENDING (PAGE 289 ET SEQ)

  The FES is not a sufficiently robust data source for this exercise and all the calculations of price elasticities and their interpretation must be considered doubtful. For example how does the statement that "real spending on beer has remained fairly constant, with an average real increase between 1979 and 1996. . . " reconcile with the Consumer Expenditure data which shows that real spend on beer fell by 20 per cent between 1979 and 1996 and the volume of beer sold in the UK fell by 14 per cent in this period? Moreover 40 per cent of the breweries operating in 1979 have closed and 25 per cent of brewing companies have closed, merged or given up brewing—this is not a state of affairs that might be expected in a stable market. In the same vein Consumer Spend data shows that the average annual decline in spending on spirits has been—1.3 per cent (almost half the rate of decline in the IFS study). Indeed the "long-term decline in spending on spirits" is itself a questionable statement since Consumer Spend on spirits has shown year on year growth in '93, '94, '96, '97 and is ahead in the first six months of '99.

  Footnote 5 states that "our analysis is concerned only with the impact of legitimate cross-border shopping". Since HM Customs & Excise estimate that over 70 per cent of cross-border shopping for beer is not legitimate is this not a significant omission in the analysis?

  Page 290 the duty-free allowance for spirits was effectively doubled after the start of the Single Market (purchases thereafter could be made on both legs of the journey). . . could this account for the slower growth in UK domestic spending on spirits after 1993? Should this have been taken into account in the analysis?

TAX RATES AND REVENUES (PAGE 290 ET SEQ)

  Page 291 Table 1. This table is heavily biased against beer! Thus while take-home prices are used to calculate the Duty + VAT percentage of the retail price for wine and spirits the IFS use on-trade prices for beer. This is clearly not comparing like with like and if an average take-home price was used for average strength beer (4.1 per cent) then the beer percentage would be 42 per cent (not 30 per cent). Similarly, using average take-home prices and strengths for wine and spirits from AC Neilsen gives wine at 40 per cent (not 51 per cent) and spirits at 53 per cent (not 62 per cent). The implied duty per litre of pure alcohol figure for wine (£14.56) is based on an average alcoholic strength of only 10.25 per cent: the correct average is 11.55 per cent which gives a duty rate of £12.92 which is similar to the beer figure.

  The IFS set out some possible economic justifications for taxing alcohol including "adverse health effects". In the interests of achieving a proper balance it should be noted that there is plenty of evidence of the beneficial effects of alcohol consumption in moderation which might argue against high alcohol taxation. Most "adverse health effects" are associated with alcohol abuse and taxation is not an effective tool to combat this.

  Page 292 says that the "externality" is linked to the quantity of alcohol and a sensible system would tax alcohol on a uniform basis. "To justify taxing alcohol in different forms in different ways it needs to be shown that consuming alcohol in different forms is associated with different levels of social cost". It should be noted that the disproportionately higher tax per percentage alcohol on spirits in the UK at 1.7 is less than the international norm of c 3:1 (the average of 19 countries). Some Scandinavian countries base their duty system on research which they claim does show that social costs increase as alcohol concentration increases.

  The Crawford & Tanner work took no account of the impact of cross-border shopping and the relative pricing between the UK and France in their elasticity calculations. The current IFS study looks at cross-price effects between different UK alcoholic drinks—but again not the impact of cross-price effects between the UK and France. Since cross-channel shopping now accounts for some 15 per cent of UK take-home beer and wine consumption post the Single Market this would seem to be a significant omission. The calculation of elasticities in relation to tax revenue only take into account duty and VAT: no account or mention is made of the impact on other tax streams which in the case of beer are very substantial because most beer is sold in the labour intensive on-trade rather than the self-service take-home trade which accounts for the most wine and spirit sales. This would seem a significant omission.

  It is not clear what price, volume and spend data is used in the calculations. In the case of beer it is important to use separate data for on and off trade consumption since they are in effect different markets, moving in different directions and impacted differently by cross-border shopping.

  As stated earlier the FES is not a robust data source for this type of exercise and does not reconcile with Consumer Expenditure nor with market volume data. Thus any subsequent analyses or conclusions based on this data have to be dubious.

  The standard errors quoted on page 298 are also particularly high for wines and spirits (eg 0.904 on an elasticity of -0.86) which surely makes it difficult to say with any confidence that spirits are more price elastic than beer (-0.74). It is also noted that the SPIT model developed by IFS and used by HM Customs & Excise shows significantly different own price elasticities: beer -0.985 (vs -0.74 in current IFS paper), wine -1.145 (vs -1.85), spirits -0.941 (vs -0.86). Note that the SPIT model shows spirits to be less elastic than beer in contrast to the current IFS study.

  Page 300 the conclusion that "tax rates (for beer) are below their revenue maximising levels" is interesting in the context that beer duty receipts fell substantially below the level forecast in both 1997-98 and 1998-99 despite duty rates only rising with inflation. Indeed the receipts were unchanged at £2.7 billion despite two increases in duty rate.

4 November 1999