Drinks industry awaits Darling’s duty decision

Rumours abound about what Alistair Darling has in store for the drinks sector in next Wednesday’s Budget.

MPs on the Commons Health Select Committee want the real level of duties to return to those in 1983, when the duty on a litre of pure alcohol was 11% of the average male weekly manual wage compared with 5% in 2002.

Such a measure could send a bottle of blended scotch above £20 and put Britain at the top of Europe’s alcohol tax league. But what will he really do?

At a minimum, the UK drinks sector faces duty rises of 5.1% from Darling’s in-built “escalator” (two percentage points above the rate of inflation, which was 3.1% in February).

Treasury minister Liam Byrne insists that no cuts to public services are necessary to meet Labour’s pledge to halve the national deficit over four years, so stand by for extra personal and consumption taxes. There are fears of VAT moving up to 20% and even higher rates (å la the continent) being imposed on “luxuries”. Champagne shippers fear a 20% duty rise.

Taxes on wine and spirits have risen by 20% since Darling became Chancellor. As a result, consumption has fallen by 12%, according to the WSTA-backed Drinkers’ Alliance.

Oxford Economics, the forecasting house, predicts that swingeing drinks tax increases of the order predicted by some could result in the axing of a further 16,500 alcohol production jobs in the UK in addition to the 30,000 the WSTA says have disappeared in the drinks sector in the past year. But Darling would be courageous to push standard scotch over the £20 barrier – Labour cannot afford to jeopardise Scottish seats.

Yet, even if Darling decides to restrict duty rises to just those implied by his “escalator”, he will also hit drinks sector sales through previously-announced tax increases that come into force in April.

At the personal level, higher earners face a 50% top rate of income tax while everyone with a taxable income will lose out because personal allowances are to be frozen – so a million extra people will start paying the 40% marginal rate of tax. Across the board, take-home pay will shrink, leaving less disposable income and tightening the squeeze on spending.

At the same time, all businesses will be hit by extra National Insurance rates. In addition, higher fuel duty, which is expected to go up by 3p a litre based on Darling’s November forecasts, will add not only to the costs of travelling salespeople but also to product distribution. And if the travelling salesman needs a new car, that will be hit by extra vehicle excise duty (the “showroom tax”) of up to £1,000.

Finally, if Darling’s measures get the thumbs down from international investors, Britain’s credit rating will come under pressure, sending the pound lower, at least in the short-term, and putting more pressure on importers. So even if Darling does no more to the drinks sector than he has announced already, it adds up to a cocktail of gloom on Wednesday evening.

Meanwhile, a group of beer and pub industry executives today had a letter published in The Times, urging Darling to freeze beer duty in an effort to save 7,500 jobs over the coming year. 

Finance on Friday, 19.03.2010