Why the Chancellor’s freeze on alcohol duties is bad news for pubs

In his latest budget speech, Rishi Sunak proudly announced that all alcohol duties were being frozen for a second successive year, “For only the third time in two decades”. Alcohol industry groups and even the Chancellor’s own Twitter account touted this decision as a common-sense decision which will help the hospitality sector get back on its feet in the wake of the COVID-19 pandemic.

It is undoubtedly true that British pubs have faced unprecedented financial challenges throughout the past 12 months, but will a freeze in duties really help? And might there be any wider impacts of this decision?

In order to start to answer these questions, it may be helpful to look at a little recent history. In the UK, alcohol duty rates for all products rose fairly steadily between 1980 and 2008, when the Labour Government introduced an ‘alcohol duty escalator’ which increased duty by 2% above inflation each year. This was then abolished in 2014 by the Coalition government and duties since have seen frequent freezes or even cuts.

This view fails to account for inflation – the inexorable rise in the cost of living. If we adjust for inflation, the picture looks rather different, and it becomes much clearer that alcohol duties were at historically low levels even before this latest freeze. Official estimates from the Office for Budget Responsibility suggest that inflation over the next year will mean that the effective level of duty charged on alcohol will now fall by 2.4% by the time of the next budget, so a freeze in duties represents a cut in alcohol duty in real terms.

For a long time, alcohol consumption in the UK has been shifting gradually away from pubs and we have been buying an increasing proportion of our alcohol from shops, particularly large supermarkets. In 1994, 58% of all alcohol sold in England and Wales was sold in the on-trade. By 2019 that had fallen to 28%.

There are many reasons underlying this trend, including a long-term increase in women’s drinking and a more recent shift in drinking from younger age groups to later middle age, but price has also played an important role.

Since 1987, according to figures from the Office for National Statistics, the price of a pint in the on-trade (pubs and restaurants) has increased by almost 400%, while the price of beer in the shops has risen by only 70% and has barely risen at all in the past 20 years. This widening gulf in the price of alcohol between pubs and shops has almost certainly helped to fuel the rise in home drinking.

Yet, alcohol duty is no different in the on- or the off-trade: around 44p on a pint of lager (or equivalent large can). That 44p makes up a much greater proportion of the price of beer on the supermarket shelf than in the pub. The Chancellor compared the latest duty freeze to a 2p cut in duty on a pint of beer. Assuming pubs and shops pass that cut onto consumers, economic theory tells us that taking 2p off the price of a large can of beer costing £1.16 will have a much greater effect on people’s purchasing behaviour than taking 2p off the price of a pint costing £3.50. So while we’d expect an effective duty cut to increase the amount of alcohol people buy everywhere, that effect is likely to be considerably larger for shops than for pubs.

Ultimately cutting duty increases the relative gap in prices between the on- and the off-trades and will have a much larger impact on alcohol sales in the supermarket than in the pub. The evidence for this is clear already – since 2012 beer duty has been cut by 24% in real terms, yet beer sales in pubs have fallen by 17% while supermarket sales have increased by 11% over the same period.

It seems that cutting alcohol duty isn’t such a great idea if your aim is to help the hospitality industry.

The duty freeze isn’t too great for the Treasury either – the government’s own impact assessment of the latest freeze is that it will cost £1.7 billion in lost duty revenue by 2026.

But what about impacts on wider society? In 2019, my colleague Maddy Henney and I modelled the impacts of government cuts and freezes in alcohol duty since 2012 and compared them to what might have happened if duty had simply increased in line with inflation instead. We found that between 2012-19, government duty policy led to an estimated 37,000 additional hospital admissions, 1,400 additional deaths and cost the NHS almost £200 million.

Worse still, duty cuts and freezes have a larger impact on the drinking of the most deprived in society. This is because cutting duties has a bigger impact on prices in the off-trade, and drinkers in more deprived groups buy a greater proportion of their alcohol from shops rather than the pub. This means that a greater proportion of the additional burden of alcohol harm also falls on these groups, who already suffer much higher rates of alcohol-related hospitalisations and deaths. Our research showed that cutting or freezing alcohol duties therefore increases health inequalities. This latest freeze comes at a time when the health and economic impacts of COVID have already had a hugely disproportionate effect on more deprived groups in society, making this even more concerning.

Finally, there is the concern that persistently freezing duties changes public perception, encouraging the idea that duty freezes for alcohol are the norm, making it politically more difficult for the Chancellor to increase duties in line with inflation in future years. We’ve seen the same thing happen with fuel duty, which has been frozen in every budget for a decade.

Overall the story here is one of bad news. Freezing duty is bad news for pubs, bad news for the Treasury, bad news for public health and bad news for inequalities in health.

The only winners from this announcement seem likely to be retailers, particularly large supermarkets, who have already been largely insulated from the worst economic impacts of the pandemic, or even seen profits rise in the past year.

There may yet be hope for those of us who would like to see public health playing a greater role in setting alcohol taxation. In 2020 the government announced a wide-ranging review of alcohol duty to examine the way that we tax alcohol in this country. As a consequence of having left the EU, we now have greater freedom to choose how we levy alcohol duty and there is broad agreement that the current system is inefficient and unfair, with vastly different rates of duty charged on different products, irrespective of their actual alcohol content. Hopefully the government will take this opportunity to act and introduce a duty system which can benefit both the economy and public health.

Colin Angus is an alcohol policy modeller in the Sheffield Alcohol Research Group, University of Sheffield. Follow him on Twitter @VictimOfMaths.