§ Increases in other indirect taxes would add to the Retail Price Index and I have been tempted to conclude that I should take no such action in a year when the fight against inflation is so important. But there are important arguments in the opposite direction. Inflation over the past five or six years has substantially shifted the balance of our tax system from indirect to direct taxation, since the yield of income tax rises with rising earnings while the yield of the specific duties is not linked to the inflation rate. In addition, increased revenue in this area will help make room for the socially desirable expenditure I shall be describing later in my speech.
§ Because the Customs and Excise revenue duties on alcoholic drinks and tobacco are levied as specific sums on given quantities of the goods concerned, their impact has fallen heavily as a proportion of the selling price. I am therefore proposing modest increases in these duties. For beer I propose an increase which, together with the consequential VAT, will result in a price increase equivalent to 1p a pint on average. For spirits my proposal will represent an additional 32p, including VAT, on a standard bottle of whisky or gin. For wine I propose increases which will represent an addition, including VAT, of up to 12p a bottle on fortified wines and 6p on a standard bottle of table wine and of most made-wine. These changes will be 259 brought into effect for goods which are cleared from midnight tonight.
§ I also propose a small but nevertheless worthwhile new excise tax. Most ciders and perries are not at present taxed and I think it only right that they should bear some duty like other alcoholic drinks. I therefore propose that from 6th September these ciders and perries should be charged with a new excise duty of 22p a gallon. Allowing for consequential VAT, this will be equivalent to about 3p a pint. I propose to exempt small farmer producers from the new duty.
§ These revenue duty changes will produce in a full year an additional £95 million from beer, £25 million from spirits, £25 million from wine and £10 million from cider and perry, and an additional £10 million from the 8 per cent. rate of VAT on these goods.
§ There is a strong case on health grounds as well as revenue grounds for increases in the taxation of tobacco. I propose both some increases in the level of taxation and a first step in a restructuring of the duty system. Our present duty is charged basically on the weight of unmanufactured leaf. This is a system which has served us well for many years, though it has two disadvantages. First, the real burden of the specific duty falls at times of inflation, giving an unwelcome boost to consumption of a product dangerous to health. Second, because the duty falls on the unmanufactured leaf it has not been possible to discriminate between different types of smoking product.
§ When we joined the EEC we accepted an obligation to replace this duty by the end of 1977 with a duty falling not on the raw material but on the finished product. So far as cigarettes are concerned the duty is to be levied partly as a proportion of the retail price and partly on the number of cigarettes. However, this is a major change and if we introduced it overnight at the end of 1977 there could be a degree of disturbance to our existing market which I would find unacceptable. I have therefore decided to make a start in moving to the new system now, and in this Budget a part of the existing specific duty will be replaced by a new excise duty on the finished product.260
§ I envisage that at the final stage the duty on cigarettes should be predominantly ad valorem. For a start I am setting the new duty at a rate of 20 per cent. of the retail price and reducing the existing leaf duty by such an amount as will produce a net increase in the total yield. Because of the change in the system it is difficult to provide precise figures for the effects of the increase on the whole range of different kinds of cigarettes, but I expect that the total tax burden on the most popular sizes will rise by 3p or 3½p for a packet of 20.
§ I make no apology for this increase. Many people who are rightly concerned about the health of our nation will regard it as inadequate. I know that many of my hon. Friends do. However, I had to pay some regard to the level of prices and to the burden on those, particularly the poorer, who find it difficult to cut back on their smoking.
§ There are administrative difficulties about charging an ad valorem duty at this stage on other forms of manufactured tobacco, and for these the new end-product duty will be based on weight. For cigars and hand-rolling tobacco I am proposing to set the balance of the old and new duty rates at levels such that there will be increases in line with those for cigarettes. However, there will be no overall increase in the average tax burden on pipe tobacco. This is probably the least hazardous form of smoking and in addition many pipe smokers are retired or about to retire, or to be redeployed, and may therefore face financial problems.
§ In order to allow time for the administrative arrangements for the new duty to be worked out these changes will come into effect from 10th May. The net increase in the yield, including the consequential VAT, will be £115 million in a full year.
§ Together all these indirect tax changes will add about ¾ per cent. to the Retail Price Index.