Success or failure? The history of the UK duty escalator reviewed
In 2008, the UK introduced a so-called ‘duty escalator’ by which alcohol excise duties would have to increase each year by +2% above inflation until 2015. However, the escalator was abolished for beer in 2013, followed by the abolition for all other alcoholic beverages a year later (i.e. in 2014).
In a recent report published in October 2019, the Sheffield Alcohol Research Group claimed it had found evidence that the early abolition of the escalator had a number negative implications. In particular, the report claimed that the cuts to alcohol duties since 2012 would have led to a +1% rise in alcohol consumption in England and to nearly 2,000 additional alcohol-related deaths between 2012 and 2019. By contrast, these developments – according to the report – would not have happened if only the escalator (as was originally planned) had remained in full place until the year 2015.
However, in how far do such claims stand up to real-life evidence? Looking at the details, the effects of the measures seem far less clear-cut, particularly when considering the claimed reduction effect on harmful drinking. While excise duties and price policy measures are doubtless powerful tools to collect and generate Government revenues, their direct relevance for health seems a lot less pronounced. It is worth to look at the evidence in a little more detail. Below we have selected some of the report’s claims and fact-checked them against the broader context in which they took place.
Claim n°1: The abolition of the duty escalator was responsible for a +1% increase in alcohol consumption in England from 2012 levels. The duty escalator was introduced in 2008 and scrapped in 2014. The choice of 2012 as a baseline year thus seems somewhat random. If one takes the year before (i.e. 2011) as baseline instead, the authors would have arrived at a -2% drop in alcohol consumption. If one had taken 2013 as a baseline, results would have shown a +2% increase in alcohol consumption. Conclusion: it seems doubtful that the annual ups and downs in overall annual alcohol consumption can be linked neatly to a single tax policy measure such as the duty escalator in a specific year.
Claim n°2: Alcohol in shops is now more affordable than it has been at any point in the last 30 years. According to Eurostat data, the change in the price level index for alcoholic beverages during the last 30 years is almost identical with the change in the price level of foodstuffs. In other words, all foodstuff became more and more affordable and the same happened with alcoholic beverages due to the fact that society has become richer, resulting in an increase in disposable income. At the same time, it is important to remember that excise taxes on alcoholic beverages increased above the inflation rate in the UK. Still, while alcoholic beverages were (technically speaking) much more expensive in 1987 than they are today, per capita alcohol consumption in 1987 was merely 3% below today’s level. Yet had the authors chosen 1986 as the reference year, they would have discovered that today’s alcohol consumption rate is 4.5% below the level of 1986, notwithstanding the fact that alcoholic beverages have become around 131% - 188% more affordable in the meantime. Conclusion: it seems difficult to link the trends in the general affordability of alcohol too tightly to the trends in overall levels of alcohol consumption.
Claim n°3: Modelled estimates of consumer spending suggest it fell by £23.11 per drinker per year in England as a result of recent duty policy compared to an estimated increase of £10.15 if the duty escalator had remained in place until 2015’. If one assumes that excise taxes are fully passed on to the final price of a product, then prices for alcoholic beverages in the UK should have increased by +3.5% in 2014 (2% above the inflation rate of 1.5%) and by +2% the year after in 2015 (as the inflation rate was 0). What would that have meant for consumers? For instance, a premium bottle of spirits with the freeze of duty escalator in place would have retailed at £50 in 2014, instead of £51.75 in 2014 and £52.79 in 2015. For an average bottle at £10 in 2014, the price with the escalator would have been £10.35 in 2014 and £10.56 in 2015 respectively. Indeed, the cost difference estimated by the authors means that weekly expenses for the consumer dropped by £0.4 instead of an increase of £0.2. To be sure, even small price developments can shift consumer preferences. However, would the above changes really have induced harmful and addicted drinkers to stop buying alcoholic beverages?
Claim n°4: Changes in alcohol duty policy between 2012 and 2019 are estimated to have led to an additional 1,969 deaths (a +2.7% increase) and 61,386 (+1.4%) hospital admissions in England over the same period, increasing NHS costs by £317million (+1.7%), compared to a scenario where the alcohol duty escalator remained in place until 2015’. Again, the time period chosen appears somewhat surprising, as the duty escalator was in place in 2012 for all beverage types. In light of the relatively small price differences described in the previous paragraph (with or without the duty escalator in place), is it really plausible to assume such aggregated impacts as a result?
Claim n°5: ‘The treasury’s own figures show that cuts to alcohol duties have cost the public purse £4 billion in lost tax revenue since 2012.’ The obvious and main reason why excise revenues have declined is the fact that per capita alcohol consumption in the UK has dropped by -14.4% since 2008. That being said, some losses could of course be ascribed to the freeze of the duty escalator. At the same time, since the freeze also coincided with a slight increase (+1%) in sales, it could be equally argued that the freeze may have reduced the revenue loss.
Conclusions: excise duties and price policy measures are certainly important from a fiscal perspective and serve a function to generate revenues, yet their importance as regards health is far less clear. It would seem that the real-life effects of such measures are difficult to prove with certainty and could be minimal given the complex, multifactorial context in which they are taking place, especially when one considers the reduction of harmful drinking rather than per-capita consumption.