How to implement a minimum price for alcohol

personal finances, reform, taxation

Author(s):  Matt Cavanagh
Published date:  16 Feb 2012
Source:  Spectator, Coffee House Blog

Pete posted earlier on the Prime Minister’s latest intervention on the issue of problem drinking. The new proposals — like a greater police presence in A&Es, and ‘drunk tanks’, special units where drunks are taken to sober up — are sensible enough, but seem small relative to the scale of the supposed problem, and focus on peripheral (though important) side-effects, rather than the core of the issue.

The ‘big idea’ seems to be missing, even though the Conservatives have been flirting with it for some years, is a minimum unit price (MUP) for alcohol: far more controversial, but potentially far more effective. 

The last Labour government, in which I was an adviser, looked at this idea in some depth. I was attracted to it, but believed we should pursue the same objective in a different way: namely, by fixing an effective MUP through increases in alcohol duty (together with a ban on selling alcohol below the level of duty). The justification is that problem drinking has clear ‘negative externalities’: costs imposed on others which are not compensated for through the market. These include costs to the taxpayer — especially NHS treatment — and the (non-financial) cost of anti-social behaviour and violent crime. Tax is often the most efficient and least illiberal way of tackling negative externalities. It would also raise revenue: a crucial advantage in the present fiscal context.

Imposing an MUP directly, as campaigners suggest, and as the Scottish government is now committed to doing, would channel the resulting price increases straight to industry profits. Last year’s IFS study (which Pete linked to earlier) estimated that, assuming ‘no behavioural response from consumers and no wider price effects’, the 45p MUP proposed by the SNP in 2010, if introduced across the UK, ‘would transfer £1.4 billion from alcohol consumers to producers and retailers’. By contrast, an MUP implemented indirectly, via changes in duty, would transfer this money to the Exchequer, which could reduce the need for spending cuts or tax increases elsewhere.

In terms of the level at which an MUP might be set, the Scottish proposal of 45p is towards the ambitious end. The IFS study found that in 2010 this would have raised the price of ‘71% of all off-licence alcohol units, including 87% of cider units and 81% of lager units’. Even this doesn’t satisfy the more zealous health campaigners, who favour an MUP set at 50p, but modelling suggests that significant health and social benefits start to kick in below 45p. A sensible approach — leaving the politics aside for the moment — would be to start at 35p per unit, but announce an intention to increase in 5p increments over a number of years, after monitoring the effects on tax revenue, health, and crime. (The main drink types that would be caught at the initial level of 35p would be strong cider, supermarket multi-buy beer, and supermarket own-brand spirits.)

The main counter-arguments to an MUP are the same however it is implemented, and whatever level is chosen — and they are the same today as they were when Labour was considering this three years ago. First, that an MUP is a blunt instrument. Moderate drinkers are already drinking less; the problem is that heavier drinkers are drinking even more heavily. These are the drinkers who are imposing costs on others, either through NHS treatment or crime, but a blanket MUP would treat all drinkers the same — particularly unfair for moderate drinkers on low incomes. Second, the political version of that argument, that it would be mad for any government, at a time of squeezed living standards, suddenly to jack up the price of one of life’s cheap luxuries. And third, that an MUP is illegal under EU regulations.

As an advocate of an MUP, I believed these objections were serious, but not conclusive. The legal issues are too complex to go into here, but are certainly not as clear-cut as opponents suggest: the experience of the Scottish government will be a useful test. The blunt-instrument objection is true as far as it goes. Whether an MUP is imposed directly, or indirectly via changes in duty, people will pay more for their drink — including, regrettably, moderate drinkers and, even more regrettably, moderate drinkers who are badly off. The health experts and academics who lobbied me and others in support of an MUP were not able, at that time, to provide any evidence that it would target problem drinkers very effectively: problem drinkers do buy cheap alcohol, but so do many moderate drinkers (especially those taking advantage of supermarket multi-buy promotions); and there is some evidence that problem drinkers are more likely than moderate drinkers to adjust to rising prices in part by reducing spending elsewhere, rather than reducing their drinking. However, health experts are able to provide convincing evidence that higher prices will reduce problem  drinking to some extent, and also reduce the negative externalities in health and crime. A blunt instrument maybe, but still an effective one.

In the end, it was probably the political objection which tipped the balance in our internal debate, and I expect the same will apply to the present government, despite some of the briefing around Cameron’s speech today. But, over the longer term, when living standards start to rise, there will be a strong argument for returning to the issue of alcohol prices. If the costs of problem drinking continue to rise, a future government should at least raise duty to offset the fall in the real price of off-sales over recent decades. (This could also have a side-effect of helping pubs — the change in relative cost of on-sale and off-sale being one of the drivers of their decline.) 

Ideally, the government should go further and both raise and adjust levels of duty to impose an effective MUP, as outlined above, increasing the level gradually while monitoring the effects, and using the revenue raised to reduce spending cuts or tax increases elsewhere. If this truly does require changes in EU regulations, the government should start lobbying for these changes now. I would hope that many people would agree that the UK should have the option to adjust its alcohol duty regime in this way — whether or not they believe we should actually exercise that option.