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November 2011
Article
Small beer? assessing the Government's alcohol policies
Type: Observations
Authors: Andrew Leicester

The March 2011 Budget raised the duty on strong beers (above 7.5% ABV) by 25% and cut the duty on weak beers (2.8% or less) by half. The Home Office has also announced plans to ban 'below-cost' alcohol sales in England and Wales, with 'cost' defined as the total tax (duty and VAT) due on each purchase, though precisely when the ban is to be implemented is unclear. In Scotland, the SNP Government has introduced a Bill to implement a minimum price per alcohol unit from 2012, following an unsuccessful attempt to do so last year. A new Briefing Note published today looks at these three policies in depth, using detailed data recording the off-licence alcohol purchases of more than 25,000 British households.

The changes to beer duty came into force in October. For the products affected, the effect is significant: the total tax (including VAT) due on a 4 x 440ml purchase of 2% ABV lager fell from 78p to 39p, whilst at 8% ABV the tax rose from £3.33 to £4.17. However, strong beers made up just 0.8% of all off-licence alcohol units purchased in 2010 and weak beers just 0.2%, so the policy has a big effect on a very small part of the market. The biggest impact is likely to be on households who consume large amounts of alcohol (more than 35 units per adult per week), who buy 23% of all off-licence units but 53% of strong beer units. Notably, the reform did not affect cider. This means that, on a per-unit basis, the duty on a strong 7.6% ABV beer (23.2p) is now more than three times higher than the duty on a 7.6% ABV cider (7.1p). Rather than switching to low-strength beer, the reform might encourage strong beer drinkers to consume strong cider instead.

A ban on 'below-cost' sales introduces a de facto minimum price for alcohol. For example, a litre bottle of vodka at 40% ABV could sell for no less than £12.25 and a 75cl bottle of wine at 12.5% ABV for no less than £2.17. The impact of the ban is likely to be small: only 1% of off-licence units retailed at less than the tax due in 2010 (see Table). Spirits sell below cost more often whereas cider and alcopops virtually never do. We find no evidence that large supermarkets were more likely to sell below cost; rather, discount stores, off-licences and corner shops were more likely to do so. Nor is there strong evidence that households who drink more bought below cost products more often.

Average off-licence prices per alcohol unit and proportion of units below 45p and 'cost', 2010

Average off-licence prices

Note: prices in December 2010 values. Source: Calculated from Kantar Worldpanel data.

These two reforms would have only marginal effects on the market for alcohol. By contrast, a minimum price could be a much bigger policy. Introduced across Britain at 45p/unit - the level proposed in Scotland last year - minimum pricing would directly affect 71% of off-licence alcohol units (see Table), and nearly 9 out of 10 households who buy off-licence alcohol. Unlike the below-cost ban, a minimum price would apply to all alcohols at the same rate. Lager and cider (which have low per-unit prices) would be particularly heavily impacted, whereas alcopops would not.

The effects would be largest for those who drink the most: about four-fifths of units bought by those consuming 30 or more units per week cost less than 45p. This lends some weight to the idea that minimum pricing targets heavier drinkers, but even amongst those consuming more moderately (6 to 10 units per week), two-thirds of units purchased would be affected.

A previous Observation and Briefing Note discussed some of the economic issues around minimum pricing. What would be most useful for the debate around minimum pricing would be convincing evidence not just of the direct effects, but the indirect impacts as well - how would retailers change the price of alcohol currently selling above the minimum price, or the price of other products? How would manufacturers change the range of alcohol products available once cheap goods are no longer competitive on price? As yet we do not have clear answers to these questions, but these secondary effects are extremely important in assessing the overall impact of minimum pricing.

In the absence of any behavioural responses or wider price changes, our estimates suggest that a 45p/unit minimum price would transfer £1.4 billion a year from drinkers to alcohol producers and retailers. If the intention is to raise the overall price of alcohol, it would seem preferable that these revenues flow to the Government instead. Annual real-terms increases in alcohol duties to 2014/15 are planned, but more fundamental change to the structure of alcohol taxes should be pursued as well. At the moment, different types and strengths of alcohol are taxed at very different effective rates per unit (see Chart), without a clear rationale. Whilst the tax system could not easily replicate a minimum price directly, a sensible starting point would be to tax all alcohol equally on the basis of alcohol content, perhaps in conjunction with a 'below-cost' ban, which would then introduce a floor price directly through the tax system. For example, taxing all alcohol at 25p/unit (the current rate for spirits) would increase the duty rate on typical beer and wine products by around 30% (and more than double the duty on typical ciders), and raise around £1.5 billion per year. Such a reform would require a change in EU Directives which restrict the basis on which alcohol is taxed, and the Government should seek to make this happen.

Effective rate of duty per alcohol unit by alcohol type, as at October 2011

Duty per alcohol unit by alcohol type

Source: Calculated from HMRC figures. Notes: Cider and perry rates are for 'still' ciders; different rates apply to 'sparkling' ciders which are a very small part of the cider market. Ciders above 8.5% ABV are treated as wine or spirits. Wine above 22% treated as spirits. Spirits duty rates apply to alcopops.

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