Monday, 29 October 2018

Budget 2018 and the Laffer Curve

The Chancellor, Philip Hammond, was on a spending spree in today's budget. A few new stealth taxes were announced, notably on digital services and online gambling, but the story with booze and tabs was much the same as it's been for the last five years: tobacco duty goes up by two per cent above inflation while duty on wine, cider and beer is frozen. Wine duty is set to rise in line with inflation, unfortunately, because it's mostly produced by foreigners.

The rise in tobacco duty will, of course, lead to more downtrading to cheaper brands and rolling tobacco and will encourage more smokers to buy their cigarettes in the EU and on the black market.

Looking at total revenues from tobacco and alcohol duty in recent years tells its own story. The alcohol duty escalator was abolished in 2014/15. Every year since has seen healthy growth in alcohol duty revenues.

The story is very different for tobacco. Although tobacco duty revenues have traditionally risen despite a declining number of smokers. Since 2013/14, every year has seen tobacco duty rise by two per cent above inflation. Every year has seen a decline in revenues.

Arthur Laffer wouldn't be surprised.

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