Excise duties were introduced in England in the 1640s by parliament as a temporary way of raising money during the Civil War. They were presented as measures to discourage gluttony and extravagance or “favoureth virtue and punisheth vice”.
In The Wealth of Nations published in 1776, Adam Smith – the Scottish Economist and Philosopher often described as the parent of free markets – said that rum is not a necessity and was “an extremely proper subject of taxation”. Smith understood the desirability of targeting the generation of revenues from sectors which cause harm and to improve public health. Adam Smith would have supported the health taxes approach which is currently of interest to the WHO and OECD.
The potential of taxes to improve health is why the UK Chancellor’s decision in March 2023 to raise alcohol duties in line with inflation is welcome. There will, of course, be interest groups criticising this decision and in the past their calls for a duty freeze have been framed around ‘protecting pubs’.
However, the UK has long been a home drinking country, with over 70% of alcohol being purchased in off sales, a sector now dominated by the major supermarkets. The short-term reaction of celebrating a tax freeze as good for consumers and good for pubs does not do justice to the impact on health and wellbeing and the complexity of the economic effects.
The past freezes – effectively real terms cuts – have led to alcohol becoming increasingly more affordable over the past decade, particularly in off sales. Lower alcohol duty and prices lead to higher levels of drinking, which in turn lead to worse health and social outcomes. The University of Sheffield estimated that duty freezes from 2012-2019 led to 2,223 additional deaths in England and Scotland. After the pandemic, UK alcohol deaths are at an all time high, rising by 27% since 2019, and those parts of the UK – notably Scotland – which had previously made good progress in reducing alcohol deaths have seen upward trends since 2020.
The rising rates of harm during a period when hospitality venues were closed or limited further points to the central importance of the off trade. In recent years affordability has risen by far more in the off trade compared to the on trade, and pub landlords have reported the greatest threat to their businesses – greater than alcohol duty – is the cheapness of alcohol in supermarkets. The growing price disparity is plain to see.
Rising affordability of alcohol, 1987-2020
Duty makes up a higher proportion of price in the off trade, whereas much of pub costs are in wages and property. Freezing or cutting alcohol duty across the board allows supermarkets to maintain much lower prices, leading to consumers – especially heavy consumers who experience the greatest levels of alcohol harm – drinking at home rather than in pubs.
The higher price of alcohol sold in the on trade means that this shift to at-home drinking represents a significant revenue loss for the UK alcohol market. In 2017, research found that the UK alcohol market shrank by 5% between 2004 and 2014 because of the shift to drinking lower cost at-home, costing the market £6 billion. So there has been harm to the economy and to the health of the public from recent price driven market trends.
Health organisations have welcomed duty structure reforms, which will: reduce the highly favourable tax arrangements for the cider industry; ensure that wine duties relate better to product strength and thus to harm; and introduce a draught relief, allowing different duty rates between the on and off trade, with lower rates applied to draught beer. All of these are steps which make the system more rational.
So the recent Budget’s approach of restructuring tax to better respond to the harm potential of alcohol products and the increase of alcohol duties is a welcome development. HM Treasury estimates that past duty freezes and cuts leave a £1 billion hole in public finances every year, and this figure is cumulative. This year’s approach to Adam Smith’s “extremely proper taxation” by increasing alcohol duties will improve public finances and health, narrow inequalities, and help people to “living longer, healthier and happier lives”.
Written by Dr Peter Rice, addiction psychiatrist and chair of the Institute of Alcohol Studies, and Jem Roberts, communications manager, Institute of Alcohol Studies.
All IAS Blogposts are published with the permission of the author. The views expressed are solely the author’s own and do not necessarily represent the views of the Institute of Alcohol Studies.