Amazement at drinks tax projections

Lay down the stocks. In 2016 and 2017 Britain will be partying like never before. That is the conclusion to be drawn from this week’s Autumn Statement.

Chancellor George Osborne did a fair imitation of Dad’s Army’s Private Fraser (“We’re doomed!”) but at least he left excise duty rates on alcohol unchanged. What caused amazement throughout the drinks industry, however, was a table in the background documents which show just how much the Treasury will be ramping up its tax take from alcohol over the next six years.

By 2016-17 the government’s income from beer and cider will go up by 10% compared with 2010-11, spirits will bring in an extra 30% in duties and wine a whopping additional 58%.

These are not the Treasury’s forecasts but predictions from the independent Office of Budget Responsibility (OBR) set up by Osborne just 18 months ago in an attempt to bring some credence to official forecasts.

The OBR predicts that the Treasury will be receiving £4.9 billion in duty on wine alone in 2016-17 compared with £3.1bn in the year that ended in April. Its income from excise duties on spirits will go up from £2.7bn to £3.5bn and from beer and cider from £3.7bn to 4.1bn.

Those figures do not include VAT, so assuming the rate remains at 20%, in six years’ time, the Chancellor of the day will be pocketing £15bn in the combined taxes on alcohol. Overall, that is a 58% increase on the £9.5bn the Treasury took in duty and VAT on alcohol last year.

Fascinatingly, the OBR predicts that in 2014-15 the government’s excise duty income from wine (£4.2bn) will eclipse that from beer and cider (£4bn) for the first time, reflecting changing drinking patterns.

That begs questions about how the OBR arrived at its figures. Did it assume that consumption patterns will continue unaltered by both the squeeze on household incomes and the increased levels of excise duty themselves? Or did it work on the basis of a straight line progression?

The OBR says that its calculations are based on the escalator ceasing in 2015 but take into account “different growth rates in sales of beer, wine, spirits and cider to those we had previously assumed.”  No further details were forthcoming.

For its part, the Wine & Spirit Trade Association said: “The tax escalator on wines, spirits and beers is having a major impact on the prices paid by consumers and will continue to do so. But sadly it’s already clear that it’s having a significant impact on wine sales, which suggests the Treasury forecasts for tax revenue are over-optimistic.”

Of course, a significant chunk of the increased revenue the OBR forecasts will come from the duty escalator introduced by Alastair Darling.

That ramps up duty levels by two points above the rate of inflation each year until 2015 (which implies a rise of 7% plus VAT in April).

So assuming that inflation falls to about 3% annually by the end of next year and then remains flat, rises in the rate of duty by the end of 2015 will be about 25% compound. That would bring in about £11.9bn from duties and VAT on drink in 2015.

The conclusion is that between April 2015 and April 2017 the Treasury will take an extra £3.1bn from the combined taxes on alcohol. And remember, the OBR forecast assumes that the escalator will be discontinued by then.

Even more significantly, Osborne has said he regards the 20% rate of VAT as a temporary measure. By then he hopes to have lowered it.

So, happy days will be here again. According to the OBR’s forecasts, in 2016 and 2017 we will be partying like never before. The dark days of austerity will be long behind us. Here’s hoping it is right.