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Last Updated: Thursday, 13 March 2008, 17:11 GMT
Do smoke and drink tax rises work?
By Nigel Pankhurst
BBC News

Glasses of wine
The increase in the tax on alcohol was the biggest since the 1970s

Chancellor Alistair Darling announced big increases in the tax on alcohol in his first Budget as the government looks to tackle problems associated with a binge-drinking culture.

The increase, 6% above inflation, will put 4p on a pint of beer, 14p on a bottle of wine and 55p on spirits.

Do moves to increase tax on items such as alcohol and cigarettes have any effect, or will people carry on smoking and drinking regardless?

Mark Hastings of the Beer and Pub Association believes the measure will not change the amount we drink - just the places we get it from.

He said: "The chancellor is aiming to raise 1.5bn over the next three years. He's banking on the fact that we'll drink the same amount.

"The trend of people being driven out of the pub into the arms of the supermarkets will continue.

"It doesn't stop people drinking; it drives them into buying the alcohol from different places.

"We've seen this in Britain in the past, when tax rates increase dramatically people switch from the home market to the foreign market for their alcohol.

He says the rises will not be enough to influence the people the government is trying to target.

"Surely what we are trying to do is stop the drunken hooligans on our streets but you're not going to do that through an increase of a few pence," he said.

"Low-income families and pensioners will be hit the hardest by these increases."

Strong effect

Personal finance expert Chris Gilchrist says tax increases can be an effective tool to change the way people spend their cash.

"We know extremely well that tax does have a very strong influence on people's behaviour," he said.

He says above-inflation tax rises have worked with cigarettes and, given time, could do the same for alcohol.

Theoretically it is possible to change people's behaviour but there would have to be an extremely large increase
Charles Davis
Economist

"If you think about the average person who has a certain disposable income, people simply cannot afford that tax increase on a packet of cigarettes every week, and that means it will reduce consumption," he said.

"The policy of increasing tax by more than the rate of inflation on cigarettes has been a success. It's not completely winning but it's moving things in the right direction.

"Over time, if the government persists with rises in alcohol taxes it will reduce consumption. As long as the incentive is clear people will respond to it, whether it's a carrot or a stick.

"Tax changes have less effect on people's propensity to consume on luxury items. The items you will have most effect on people's consumption will be everyday, lower-priced items.

"Beer is the clearest example. Will the extra 4p be noticed? Yes, it will be noticed."

'Good earner'

Economist Charles Davis of the Centre for Economics and Business Research is less convinced about the effectiveness of increasing tax on items such as cigarettes and alcohol.

It takes a lot to wean people off their attachment to their favourite tipple or brand, he says.

"In economic terms the demand for cigarettes and alcohol is quite inelastic," he pointed out.

"Percentage changes in price don't have much effect because people don't want to change their consumption of cigarettes and alcohol. If you want a cigarette you can't really replace that with anything else."

Cigarettes and alcohol are a "good earner" for the Treasury because of people's reluctance to give them up, he says.

"There should be a point where people start substituting cigarettes or alcohol for something else but with the incremental changes people adapt to it," he said.

"Theoretically it is possible to change people's behaviour but there would have to be an extremely large increase.

"If you look at other items where there's a clear substitute, perhaps different types of food, there's not such an inelastic demand. People are more prepared to change their behaviour."



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