Tax and price

JAMES NICHOLLS: Well, in the case of alcohol, tax has long been recognised as one of the fundamental levers that government has to influence the consumption of alcohol. So that goes right the way back to the 18th century in the UK, where there was a big concern, for example, over gin consumption. And governments– repeated governments, actually, used tax levers to try and influence consumption of gin, with varying degrees of success. I mean, the experience then and later was that if you tax too highly, you encourage a black market. If you tax too low, you encourage an open market. So it’s getting that balance right between the two.

I think in the case of alcohol as well, particularly there are cases throughout history really where governments have had to balance between the use of taxes as a kind of public health measure, because alcohol is price elastic. Price goes up, by and large consumption goes down. So there is a relationship between taxation, price, and therefore consumption. But it’s a very complicated relationship. And the difficulty for any government is that, particularly around the case of alcohol, primarily the reason tax is being applied to alcohol is because it is an income generator for the Exchequer. And so there’s a balance and a trade-off between the desire of governments to reduce harms and the desire of governments to raise income.

And so alcohol in particular is an interesting example for public health generally, but it’s a very interesting specific example of how that tension plays out. So historically, alcohol has been taxed either according to its general strength, so a 15% drink may be taxed more than a 13% drink, or it’s being taxed according to the volume, the amount produced, or it’s been taxed according to how much it costs when it’s sold at market. Minimum unit pricing isn’t a tax as such.

What it is is a– well, actually, it’s a condition that would be placed on retailers that says, you cannot sell alcohol at such a price that the price per unit of alcohol– so say for example a bottle of wine has 10 units of alcohol in it, which is roughly what a bottle of wine would have. If you had a 40p minimum unit price, you couldn’t sell that bottle of wine for less than four pounds, because there are 10 units in it. So that’s the idea of minimum unit pricing. It’s a much simpler method for setting a floor price, a level below which you can’t sell alcohol. It doesn’t really do anything about the prices above that floor level.

But it sets that floor. And I think that’s why it’s an attractive policy to a lot of people, because there’s a simplicity about it, or at least a kind of superficial simplicity. So there are probably two or three reasons why governments seeking to directly influence the price of alcohol is controversial. One is it’s controversial because the alcohol industry is a large employer. It’s a large contributor to the Exchequer. It’s very powerful politically. In government, the alcohol industry is close to the Treasury usually. It’s close to the departments that deal with business and trade, which are very, very powerful government departments.

Now, public health is often close to the department of health, but in terms of policy-making, the treasury is the big beast in the jungle. And the alcohol industry is generally close to the Treasury, because it contributes lots of treasury. It’s controversial politically. It’s difficult for a government to take on an industry as powerful as the alcohol industry. But it’s also controversial in terms of popular public opinion and how policies land. Most people drink. And generally, it’s not– experience shows it’s not always the best political sell to go to the country and say, we’re going to put up the price of something you like. It’s not something government’s enthusiastic about doing, for obvious reasons.

So there’s a political price to be paid if you’re going to increase the price of a commodity that is as popular as alcohol. So that’s the other kind of major reason why it’s controversial. So there’s a number of differences between tobacco taxation and alcohol taxation, although the principle of price elasticity applies to both, so the principle that if you raise the price, the consumption is liable to go down applies to both. But some of the really important differences are that in the case of tobacco taxation, governments more recently have been able to apply really quite high taxes to tobacco alongside public health campaigns, alongside things like the banning of smoking in public places.

And that has worked partly because there’s been a degree of consensus among the public, even including smokers, there’s always a high proportion of smokers who want to give up. So there’s been a lot of political buy-in to the use of very high taxes around tobacco. The difference for alcohol– well, there’s a number of differences. One is that alcohol is much more widely used. It’s much more culturally embedded. Many people– the majority of people in the UK drink. And the majority of those are not going to come to harm because of that drinking, which is very different to tobacco, where at least 50% are going to come to harm because of their smoking.

So there’s a different political balance to be struck between taxation, people’s freedoms, people’s desires to drink.