Following a decade of cuts and freezes, alcohol duty is finally expected to rise in line with inflation next year. In this blog, Colin Angus, senior research fellow at the University of Sheffield, unpacks what these changes mean, and what the impact is for public health.
You could be forgiven for not noticing amongst the political turmoil of the last few months, but some big things have been happening in alcohol taxes. In his ill-fated mini-budget in September, the then-Chancellor Kwasi Kwarteng announced that alcohol duties would be frozen in 2023. Cancelling this freeze was one of the first things announced by the new Chancellor Jeremy Hunt when he took office. The alcohol industry has reacted strongly to this change in policy, with the Scotch Whisky Association’s Director of Strategy and Communications stating that this would lead to “the largest increase to excise duty in over 375 years.”
This sounds like an extraordinary claim, but it is, at least on the surface, true (at least, as far as I can confirm – I don’t have data from 1647). However, this ignores a very important piece of the puzzle: inflation.
Inflation represents the inevitable drift in everything to get more expensive over time. You could buy a house for a few thousand pounds 60 years ago, but that doesn’t mean that everyone owned 5 houses – household incomes have also risen at the same time. This means that when we are comparing prices between different points in time, it’s important to adjust for inflation, otherwise the past looks far cheaper (and the present far more expensive) than it felt to people at the time. Adjusting for inflation is sometimes called putting prices ‘in real terms’ because it reflects how those prices really feel, while comparing just the raw numbers in pounds and pence is called ‘cash terms.’ To illustrate the difference, compare these two graphs. The first shows alcohol duty rates in the UK since 1980 in cash terms, while the second is their value in real terms (i.e., adjusting for inflation).
These graphs seem to tell very different stories. In cash terms, alcohol taxes are about as high as they have ever been. However, when we adjust for inflation, the opposite is found to be true, with alcohol duty rates at historically low levels in real terms.
What does this have to do with duty freezes? Well, in every budget, the default assumption is that almost all taxes will increase in line with inflation – that is to say, that they will remain at the same level in real terms. If the Chancellor doesn’t say anything about alcohol duty in the Budget, then it will increase in line with inflation. However, if you freeze alcohol duty (i.e., you don’t increase it in line with inflation), this means that taxes are not keeping pace with inflation, and their real value will fall. When you account for inflation, a duty freeze is actually a cut in alcohol tax rates.
All of this is complicated by two factors. The first is that inflation is at very high levels. RPI, the measure used to adjust duty rates, has increased by 12.3% in the past year. This means that we would have to increase duty rates by 12.3% just to keep the real terms value unchanged. It’s like being on a treadmill that’s speeding up – we have to run faster just to stay still, and if we don’t then we’ll start going backwards rapidly. The second complicating factor is that recent Governments have repeatedly frozen or cut alcohol taxes since 2012. This means that any increase in duty, even one that only keeps pace with inflation, looks at odds with what has happened in recent years. Some people might argue that this means we should keep on with this pattern and freeze duty rates again, but if anything, this actually strengthens the argument against yet another freeze. Almost a decade of falling real-terms rates of duty has led to alcohol becoming more affordable than ever.
This has real consequences for public health. In 2019, we published research that estimated that the duty cuts and freezes since 2012 had led to 2,000 additional deaths due to alcohol in England and cost the NHS £317 million.
Since then the picture has only worsened, with significant increases in heavy drinking during the pandemic that are estimated to lead to a further 7,000 additional alcohol-attributable deaths over the next 20 years. On top of all of this, freezing alcohol duty costs the government a lot of money. The Treasury’s own figures show that freezing duty this year would cost us all around £600m every year. At a time when there are talks of major cuts in government spending, it seems hard to justify such a huge giveaway to the alcohol industry.
The truth is, that when we account for inflation, alcohol duty rates have been cut almost every year for a decade. Freezing duty rates again, particularly at a time of high inflation, would be bad news for public health and for public finances at a time when we can scarcely afford either.
Written by Colin Angus, Senior Research Fellow, Sheffield Alcohol Research Group, University of Sheffield
This blog was 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 Alcohol Health Alliance or its members.