Budget reaction: Post-election moves are key

Reacting to the UK’s Budget announcement on Wednesday, which saw price cuts and lowered duty across several drinks categories, Ron Emler unpicks what it means for the country’s burgeoning industry.

A penny off a pint, 19p from a bottle of spirits, lower cider prices and wine duties unchanged. What more could the drinks sector have wanted from the Budget?

Very little, it would seem, judging by the enthusiastic reaction from trade organisations and pressure groups, especially to the 2% cut in spirits duties, the first for several decades. Has there been a sea change in the Treasury’s attitude to excise duties following years of above-inflation increases? Even tobacco duties were unchanged.

The arguments about Britain’s drinkers being among the most heavily taxed in the world seem to be having an effect. You cannot press for lower tariffs and alcohol duty rates in the interests of free trade, especially among developing nations, when your own are penal.

So why did George Osborne exclude wine from his pre-election generosity? That seems perverse when 60% of all adults drink wine, some 30 million voters spending about £10bn a year.

As part of the “Drop the Duty” campaign, the Chancellor had been urged to support the 135 wineries and 470 vineyards in England and Wales. A differentiated tax regime for home-grown products would not only be cumbersome to implement but also break EU single-market rules, so it was a non-runner. But he could have offered tax incentives for investment and opened the door to rural development funding for producers. He had been urged to bring in both measures but chose not to.

Perhaps he felt he had “spent” enough. Treasury figures show that the cuts he did make will cost about £185m a year until the turn of the decade, despite what it predicts will be a “minor” increase in overall alcohol consumption. However, in terms of Britain’s total tax revenues, those numbers are minuscule.

But the duty cuts are only part of the fiscal picture. By protecting jobs in production, distribution and retailing of alcohol, Osborne will generate extra tax income despite his personal tax moves intended to put about £200 a year extra into consumers’ pockets. What he gives from one pocket, he will recoup in another.

(Photo: Flickr/Phillip Ingham)

However, economists predict that spending on alcohol will outstrip inflation and growth in the general economy over the next few years.

True, the sector has suffered more than most since the recession began in 2008, largely because disposable incomes have only recently recovered and moved above the level of seven years ago. But there are predictions of better times ahead, or in Osborne’s words, that the “sun is starting to shine”.

Respected independent forecasting house Capital Economics predicted before the Budget that real spending (i.e after allowing for inflation) on food and drink will rise by 1% a year for the next five years. On the same basis it expects turnover in pubs and restaurants to rise faster – by between 2.5% and 3% a year. Those figures may be given a marginal fillip by the Budget measures.

The duty cuts went through Parliament without opposition, largely because the Labour Party accepted them and pledged to retain them (and the changes to personal taxation) if it wins the May 7 general election. So drinks businesses have a stable and improving backdrop against which to plan no matter what the general election result.

Or do they?

The elephant in the room is the government’s debt. Both the present coalition partners and Labour are intent on cutting it, but at a different pace and to different levels. But in one sense they are united; neither has been specific about how this will be achieved

It is a political fact of life that new governments (even re-elected ones) take unpopular measures early in their term of office so that they become a distant memory by the time the subsequent ballot comes round. If he remains Chancellor after May 7, Osborne will need to bring forward to the new Parliament some of his already-announced Budget plans. So there will be a “Budget” early in the new parliament, although perhaps not a stage-managed event.

There is one tax that most politicians won’t dare mention in the run-up to the election: VAT. An increase would be simple to impose and at a stroke would improve the public finances, despite the outcry it would create. But in today’s ultra-competitive environment, would it mean an extra squeeze on margins? The political gamble would be that businesses would absorb much of any rise, leaving households only marginally affected.

Against that scenario, Osborne’s duty cuts would be small beer.