To Tax Or Not To Tax?

All eyes will be on Rishi Sunak on the 11th of March when he is due to deliver his first Budget plan as the new Chancellor of the Exchequer. Particular attention will be paid to whether Sunak addresses alcohol duties as part of his fiscal strategy, after a number of health organisations called this week for hikes to the current tax rate on alcoholic beverages, in the wake of a new report released by the Institute of Alcohol Studies.

Although the UK government does currently levy a tax on alcohol, the rate at which it does so has trailed behind inflation for six of the last seven budgets and has been cut a number of times in recent years. Not only is this estimated to have cost Westminster more than £1 billion a year in lost revenue, but a recent University of Sheffield study also attributed nearly 2000 additional alcohol-related deaths to the cuts since 2012.

Alcohol tax hikes are usually opposed on the grounds that they are regressive in nature and tend to hit the poorest in society much harder than those who are more well-off. However, evidence released by the Institute of Alcohol Studies this week has presented a challenge to this commonly-held belief. The report argues that increases in the tax on alcoholic drinks would not actually disproportionately impact poorer households, provided the tax revenue was pushed back into the economy via additional healthcare spending.

The report estimated that households with the lowest disposable income levels would lose £18 a year from increased alcohol taxes but gain £34 from higher NHS spending. On the opposite end of the spectrum, the highest earners would lose £68 annually via the taxes and benefit by £33 in additional NHS spending.

Not only this, but poorer groups would also gain most from the positive consequences of a tax rise since they tend to suffer more on average from the negative consequences of overconsumption.

Of course, both of these conclusions rely on two pretty bold assumptions. Firstly, that the government would redirect revenue funds to the NHS rather than elsewhere (a huge infrastructure project that seems likely to further strengthen the London economy at the expense of the rest of the country perhaps?) and, secondly, that a rise in price would actually deter consumption.

The addictive nature of alcohol means that demand for it can be relatively inelastic – in other words, price rises don’t necessarily correlate with reductions in consumption. However, evidence from the minimum pricing strategy recently introduced in Scotland has shown that increases in price do have some impact on demand, with the volume of alcohol sold per person falling 3.6% in the first year of the policy’s implementation.

Raising taxes on alcohol in England and Wales, albeit a bit of an unappealing prospect for student budgets, could reap similar benefits of reduced consumption. This, in turn, tends to coincide with lower rates of crime and better health outcomes whilst generating valuable additional revenue for the government at the same time.

Although relying on the government to redirect this revenue to the most beneficial areas is a pretty big caveat, the case for a rise in alcohol duties is a compelling one.

Isabel Ralphs