Tax increases ‘superior to minimum prices’

The attempt by the Scottish Government to introduce a minimum price for a unit of alcohol has attracted international attention. Most public health advocates in the UK have adopted the cause of minimum alcohol pricing, seeing it as a key element in an effective policy to reduce alcohol harm, and many of their counterparts in the European Union and elsewhere in the world have also expressed support for the idea.

Now, however, the cause of minimum pricing has received a setback, with its abandonment from the Alcohol Bill introduced into the Scottish Parliament. Despite an intensive campaign, the minority Scottish National Party government could not win sufficient support from the other political parties to carry the measure. During the debate on the Bill, Scottish Health Secretary Nicola Sturgeon accused opposition MSPs of opposing minimum pricing for party political reasons, adding: “This is a sad day for the parliament. If this parliament refuses to take action to deal with a monumental problem and I think, in the fullness of time, Scotland will judge those who vote against this policy very harshly indeed.”

However, Labour health spokeswoman Jackie Baillie replied that her party was opposing minimum pricing, not on political grounds, but because “we do not believe it works - and that is a view that is shared by the main opposition parties in this chamber.”

Ms Baillie continued:
“There are three main concerns. It is untried and untested, it is possibly illegal and it will put £140m per year into the pockets of supermarkets.”

IFS Report

It is possible that some opposition Members were influenced by a report from the prestigious and influential Institute of Fiscal Studies (IFS), which concluded that minimum pricing is not such a good idea after all, and that increasing alcohol taxes is to be preferred as a measure to prevent alcohol harm.

IFS researchers estimate that if minimum pricing of 45 pence per unit was rolled out across Britain it could transfer £700 million from alcohol consumers to retailers and manufacturers. This contrasts with increases in alcohol taxes, which largely result in transfers to government in the form of much needed tax revenue. In the long-term, it would be desirable to restructure alcohol taxes so that they were based on alcohol strength, thus allowing the tax system to mimic the impact of a minimum price but ensuring the additional revenues went to the Government rather than firms.

The figure below shows the estimate of the total transfer to different retailers, though some of the gains would likely be shared with alcohol manufacturers. The largest beneficiaries are those stores which sell the most alcohol:

the supermarket chains Tesco, Asda and Sainsburys. In relative terms, the biggest beneficiaries are stores that sell alcohol most cheaply: the discount retailers Lidl, Aldi and Netto. Those stores which do not sell much cheap alcohol – Waitrose and Marks and Spencer – gain relatively little.

Percentage figures show the relative change in alcohol spending by store following a 45p per unit minimum price Note: bars show change in alcohol expenditure by store after the introduction of a 45p per unit minimum price, assuming all households have a common ownprice alcohol elasticity of demand of -0.5 and that stores increase prices below the minimum to the minimum but do not change any other prices. Percentage figures are the increase relative to prepolicy store alcohol expenditure.

The other main findings of the research are:

Almost 85% of off-licensed alcohol units sold for less than 45p in 2007, including 91% of lager units, 90% of cider units and 87% of spirits units. Only 9% of alcopop units sold below this price.

The average unit of cider sold for only 25p, compared to 33p for lager and 69p for alcopops.

80% of those with incomes under £10,000 per year bought alcohol during 2007, compared with 95% of those with incomes above £70,000. However, low income households bought cheaper alcohol: those on under £10,000 paid 33p per unit on average compared to 41p for those on more than £70,000.

Assuming that all households reduce their alcohol demand by 5% when prices rise by 10%, the off-licensed alcohol consumption of those on less than £10,000 would fall by 25% following the introduction of a 45p per unit minimum price. The fall would be 12% for those on more than £60,000.

Households that purchase a lot of alcohol not only buy more units but also buy cheaper units. Those buying less than 2 units per adult per week on average pay more than 40p per unit, compared with 32p per unit for those buying more than 35 units per adult per week.

The structure of alcohol taxes is governed by European Directives that mean it is not possible at present to tax the number of units directly for wine or cider, but it is possible for beer and spirits.

Current implied taxes per unit are 17.3p for beer and 23.8p for spirits. However, a 75cl bottle of 9% strength wine is effectively taxed at 25.0p per unit whereas a bottle of 14% strength wine is taxed at only 16.1p per unit. It would be desirable to change this so that all alcohols could be taxed according to the number of units.

The response to minimum pricing would probably be complex. Different consumers would respond to different extents, including substituting alcohol purchases towards pubs and bars which would be less affected by a minimum price. Retailers could change the price of alcohol currently sold above 45p per unit and change nonalcohol prices. Manufacturers could switch production into more expensive, higher quality products. Estimating the impact of these wider responses would require a more detailed model of behaviour.

“The impact of introducing a minimum price on alcohol in Britain” by Andrew Leicester and Rachel Griffith available on the IFS website: www.ifs.org.uk.

Front cover reprinted with kind permission of the Institute for Fiscal Studies