The price of a drink

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Rose Carpenter
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1 The price of a drink The price of alcohol varies between beverage types (i.e. wines, spirits, beers). It depends on two main factors: the costs of producing an alcoholic beverage and the taxes levied on its production and sale, namely Excise Duty and Value Added Tax [VAT]. Duty and VAT are decided upon by the Chancellor of the Exchequer for all alcohol sold on UK soil. HM Revenue & Customs [HMRC] publish the rates for the various beverage types every financial year. Before the 2012 Budget changes, the breakdown in costs for each alcoholic beverage since 1996 according to the HMRC figures was as follows: Figure 1: Beers Source: HMRC, 'Alcohol Factsheet March 2012'

2 The price levels of both bitter and lager beers rose every year between 1996 and 2011, with the single exception of the price of bitter in 2009, which fell due to the temporary cut in the standard rate of VAT 17.5% to 15%. The price of a pint of bitter was 1.54 in 1996; it reached a high of 2.72 in 2011, a 77% increase. The price of a pint of lager was 1.70 in 1996; it has risen every year since. In 2011, it was 2.96, marking a 74% increase on 15 years ago. Increases in the base price and tax rates tell a similar story. For all three categories in both drink sub-types, levels rose by at least 70% between 1996 and Figure 2: Cider * Source: HMRC, 'Alcohol Factsheet March 2012' The retail price of cider increased by a smaller amount over the same period. It cost 1.60 a litre in 1996; by 2007 it had risen by 22 pence to 1.82, a peak that was repeated in This represented a 14% increase over 15 years. Production costs and taxes increased in a similar manner, ending 12% and 38% higher in 2011 compared to However, at a cost of 1.14, the pretax price of cider was nearly as cheap in 2011 as it was 15 years ago, whereas taxation reached a new high of 66 pence per litre in Figure 3: Wines * Data for pricing of cider are unavailable for 2009 due to exclusion from RPI basket of goods in 2009

3 Source: HMRC, 'Alcohol Factsheet March 2012' The price of sherry has risen from 4.61 to 6.50 a bottle over the 15 year period, an increase of 41%. Taxation is the biggest contributory factor, responsible for 75% of the rise in sherry prices over 15 years. In comparison, the pre-tax price increased by 50 pence or 19% from 2.61 to In 2011, excise duty and VAT made up for 54% of the price of a 70cl bottle of sherry, compared to 43% in Table wine traded at a retail price of 3.00 in 1996, rising by 34% to 4.11 by Again, much of the increase was absorbed by taxation. Whereas the pre-tax price rose by 12 pence, from 1.50 to 1.62, excise duty and VAT

4 increased by two-thirds [66%]. In 2011, 61% of the price of a 75cl bottle was taxed, compared to 50% in Figure 4: Spirits Source: HMRC, 'Alcohol Factsheet March 2012' The average price of a 70cl bottle of whisky increased from in 1996 to in The cost of production and the tax burden rose in line with each other, both rising by roughly a third over the period. The percentage of taxation that constitutes the overall price was the same in 2011 as it was in 1996 [65%]. Vodka prices were similar to that of whisky in those years, increasing by 38%, from to a bottle. The pre-tax value of whisky rose by 43%, whereas the amount of tax levied increased at a slightly slower rate [35%]. As

5 a result, taxation represented a slightly smaller proportion of the overall price of a 70cl bottle in 2011 [64%] than it did in 1996 [66%]. The most recent ONS numbers (see Figure 5) on alcohol consumption as a proportion of total expenditure show that UK households spent an average of a week in 2010, of which 7.20 was put towards the purchase of alcoholic beverages consumed at home (off-trade purchases). Figure 5: Households' average weekly expenditure, 2010 ( ) Source: Office for National Statistics [ONS], 'Family Spending, 2011 Edition' If we multiply the total weekly sum of purchases of alcoholic beverages in the off-trade 189m by the number of weeks in the year to come up with an annual figure, we would arrive at an estimated total of 9.8bn. It is important to note that the ONS statistics are based on survey data (usually the Living Costs and Food Survey) from a random sample of participating households and therefore underreporting on certain items (notably tobacco and alcohol) is likely to occur among respondents. i Figures on total consumer expenditure from market intelligence research group Mintel indicate that just under 38 billion was spent on alcoholic

6 beverages in 2010 [ 37.9bn], rising to slightly more than 38 billion in 2011 [ 38.1bn]. ii This includes alcoholic drinks consumed in the on-trade (hotels, bars, pubs, etc). Mintel's figures are based on sales data and therefore offer a more concrete snapshot of the volume of trade taking place in the alcoholic drinks market. i ii Horsfield, Giles (2011), 'Family Spending: 2011 edition, A report on the 2010 Living Costs and Food Survey', Office for National Statistics [ONS], p. 75 Mintel, 'British Lifestyles, 2011 Consumer Expenditure', page three

A rational approach to alcohol taxation

A rational approach to alcohol taxation Christopher Snowdon Executive Summary Excessive drinking creates costs to public services which the government can recoup through alcohol taxes, thereby making drinkers