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Raising alcohol taxes could boost the economy, study finds

A new report from the University of Strathclyde’s Fraser of Allander Institute (FAI), funded by the Institute of Alcohol Studies, has found that raising alcohol taxes by 10% could boost GDP by £850 million and create an additional 17,000 jobs in the UK.

The report, entitled The economic impact of changes in alcohol consumption in the UK, examines the net effect on the economy of a reduction in alcohol spending. Whereas previous analyses have looked only at the negative impact of lower spending on the alcohol industry, FAI’s study accounts for the likelihood that if people do not spend money on drinks, they will likely increase their spending on other products and services, and so other sectors will benefit.
Using a sector-by-sector model of the economy, incorporating the links between different industries and the wages and employment they generate, FAI model a range of scenarios associated with a 10% reduction in spending on alcohol in the UK – for example as a result of a successful government information campaign.

They find that the overall economic impact of reducing alcohol spending depends on what happens to the money that people would otherwise spend on alcohol. In one scenario, FAI assume that people chose to buy 10% less alcohol and to reallocate the saved money in proportion to the rest of their spending (so, for example, if on average people spend 20% of their income on housing, 20% of the money saved from alcohol would be redirected towards housing). In this scenario, GDP would slightly increase by £23 million, but employment would fall by 22,000 full-time equivalent jobs.

However, in practice, some goods and services are more likely to be substitutes for alcohol than others. To account for this, FAI model scenarios where all the money saved from alcohol is spent on grocery products (such as food, soft drinks, clothing), where it is spent on leisure (such as eating out, hotels, going to the cinema) and one in which it is spent grocery and leisure.

In all three scenarios, GDP increases (by between £50 million and £350 million), while employment falls (by between 1,800 and 3,400 full-time equivalent jobs). This implies that a shift in preferences from alcohol to other products would result in fewer jobs overall, but that overall workers would be better paid.

However, one important exception is public services. FAI also look at the impact of a 10% increase in alcohol taxes, assuming that the proceeds are reinvested in public services. In this scenario, they find that both GDP and employment would rise. GDP would increase by £850 million, while 17,000 full-time equivalent jobs would be created. This authors therefore suggest that raising alcohol taxes could have a “double dividend”, stimulating the economy while reducing consumption and alcohol-related health harms.

Katerina Lisenkova, one of the authors of the report, said:

“What our report shows is that policies to reduce alcohol consumption may not necessarily have a detrimental impact on the economy, even before considering any health or social gains. This is because when looking at changes in consumption patterns, people tend to shift spending from one area to another rather than not spend the money at all.”

Aveek Bhattacharya, Policy Analyst at the Institute of Alcohol Studies, said:

“This important study challenges the argument that the government cannot afford to tackle cheap alcohol. While the weight of evidence that reducing the affordability of alcohol would save lives and reduce crime and violence should be reason enough to take action, this research strengthens the economic case for raising its price through taxation and minimum unit pricing.”

To read the full report, head here.