RATES OF TOBACCO PRODUCTS DUTY

HC Deb 13 May 2003 vol 405 cc185-209 1.30 pm

Mr. Stephen O'Brien (Eddisbury)

I beg to move amendment No. 1.

The Chairman

With this it will be convenient to consider the following amendments: Nos. 61, 2 and 3.

Mr. O'Brien

As we commence the Committee of the whole House on the Finance Bill, may I welcome you to the Chair, Sir Alan, and draw attention to my entry in the Register of Members' Interests? We will deal with amendments Nos. 1, 2 and 3, standing in my name and those of my right hon. and hon. Friends, with the rates applying to tobacco and their implications, and with why the amendments have been proposed.

In considering these amendments, it is important to recognise the competing interests of the freedom of choice of consumers—people's freedom to be un-oppressed by the Government in the choices that they make in their own lives—and of the health background that has become an increasingly important consideration in recent years in relation to tobacco products. The plan has been to increase rates of excise duty on all tobacco products in line with inflation. The Budget stated that it would increase the rate by 2.8 per cent. with effect from 6 pm on 9 April 2003—the day the Chancellor made his Budget statement to the House. In the four Budgets between 1997 and 2000, the increases were inflation plus 5 per cent., and in Budgets since then the increases were inflation only, so the Government's current proposal is in line with the past three Budgets.

Although my colleagues and other Members will immediately have spotted that the amendments relate to tobacco products, they will also have noted that they relate not to the rate of duty on cigarettes—to which we do not propose an amendment—but that relating to the other categories of products: cigars, pipe tobacco, hand-rolling tobacco and other smoking and chewing tobacco. I hope that the reason for tabling these amendments will become clear, and that the Government will be persuaded to consider them favourably.

I began by mentioning the caveat of health issues because the focus tends to be on cigarettes. Because so much importance is attached to the behaviour that the rates of duty applying to tobacco products seek to influence, the message tends to be somewhat more emotively concerned with cigarettes. In order to ensure that the argument is as transparent and compelling as possible, those who think as I do on these matters have thought it important not to cloud the issue by dealing directly with cigarette tobacco products at this point, but I hope that the Government can learn some lessons if we are able to pursue the route proposed through the amendments.

Although the amendments do not deal with cigarette tobacco products, the problem that they identify and deal with is equally valid in terms of cigarette smoking and related tobacco products, and of other tobacco products. The outline of the problem that has informed me, my colleagues and a wide variety of outside bodies can be found in the Government's own document, entitled "Tackling Tobacco Smuggling"—it has become known as "TTS"—which was published by Her Majesty's Customs and Excise and the Treasury in March 2000. Paragraph 1 states: The increased availability of cheap smuggled cigarettes is undermining the Government's health objectives. That sentiment is well understood. The amendments would change the rates because a balance must be struck—I believe that the Government also recognise this—between influencing behaviour on health grounds, necessary revenue collection and seeking to ameliorate the situation regarding revenue lost through smuggling and cross-border shopping. These revised rates would have a direct effect on all those factors.

Smuggling currently accounts for 21 per cent. of cigarette consumption and 52 per cent. of hand-rolling tobacco consumption, and the Treasury has lost a staggering £12 billion in revenue since 1997. The level of cross-border shopping, which must be distinguished from smuggling, continues to rise; it now accounts for 7 per cent. of cigarette consumption and 17 per cent. of hand-rolling tobacco consumption. That constitutes a further revenue loss since 1997 of £3 billion. No UK duty is paid on 28 per cent. of cigarettes, or on 69 per cent. of hand-rolling tobacco. Some 28 per cent. of UK cigarettes sell at £2 to £2.50 for a packet of 20, the remainder selling at full price.

In looking at the competing factors affecting the judgment that the Treasury must be required to make annually in considering these rates, it is interesting to note that the long-term downward trend in cigarette consumption has been broken. Tax increases since 1997 have resulted in a broadly flat overall level of tobacco consumption, including cigarettes and hand-rolling tobacco. I was naturally somewhat sceptical about this, thinking that those who have an interest in tobacco—be they smokers or producers—might be spinning me a line. So I turned to the Office for National Statistics, which in fact bears out these figures. For instance, in 1979—to pluck a year at random—cigarette and hand-rolling tobacco smokers accounted for 39 per cent. of the UK adult population. Between 1979 and 1992, the rate of consumption declined dramatically through the tremendous work of the previous Conservative Administration. In 1992, the rate was approximately 29 per cent.—a full 10 per cent. decrease. In 1997, the rate was about the same, and today it remains in the region of 27 to 28 per cent.

In terms of a percentage of the UK adult population, the graph for the consumption of cigarette and hand-rolling tobacco has therefore flattened, and has remained flat since 1992. So the attempt to focus on the behavioural drivers through the Treasury's annual setting of rates, the function of which is to have regard to the health of our citizens, worked dramatically between 1979 and 1992; however, the graph has remained broadly flat ever since, with the percentage remaining at just over a quarter of the adult population.

It would be fair to say that, on health grounds, much progress has been made, but it has stalled and steadied. However, the amount of cigarettes, hand-rolling tobacco and other tobacco products either smuggled into the country or bought through cross-border shopping has shot up dramatically. The statistics are far more difficult to establish, not least because smuggling is unsurprisingly not officially recorded. The revenue loss through smuggling and cross-border shopping has risen dramatically from between £0.5 billion and £0.75 billion in 1996–97 to about £4.5 billion in 2002, the last year for which records are available.

Rather than taking the rates as read and viewing them as the natural order of a Chancellor's Budget—the result of people wondering what price he is going to put on a packet of fags—it is better to focus on behavioural success and behavioural opportunities. That applies to health, to revenue and to shopkeepers—particularly the owners of corner shops, examples of which can be found in every constituency and which carry considerable overheads—who are suffering significant losses through smuggling and cross-border shopping. Constituencies are more affected the closer they are to the south coast of England, but they are not alone because smuggling goes on equally on the east coast and the problem is also prevalent in my own constituency—as I know from talking to owners of what are colloquially known as corner shops—even though Eddisbury has no coastline. A large black market has developed, and at times it has become, frankly, a legitimate industry.

I recently debated with the Minister secondary legislation through which the Government sought to allow an increased quota of certain products for personal use to be brought into the country. The concern remained that some cross-border shopping had resulted in on-sales, so the Government attempted to deal with the problem through that secondary legislation.

I have consulted people from a wide range of interests, as well as people in my own party who are focused on these matters, to establish what the solution should be for this year.

Mr. George Osborne (Tatton)

My hon. Friend is making an excellent speech. Before he moves on, he might like to reflect on the fact that the black market encourages organised crime and has created serious law and order problems, as well as costing the Exchequer, small businesses and others in terms of revenue.

Mr. O'Brien

My hon. Friend represents a neighbouring constituency. He recognises that, despite the fact that neither of us has a coastline in our constituencies, smuggling and the black market deeply concern many people who run legitimate, well stocked and provisioned businesses.

The Government have repeatedly recognised—it is not a matter of contention and would be agreed by all parties—that applying a rate to tobacco products is not simply a revenue-raising matter. It carries revenue-raising opportunities, as well established over many decades by Governments of both colours, but over the past 20 years it has become more widely understood—and I have sought to put it on the record with the information that I provided—that the rates provide behavioural opportunities in respect of health and revenue raising. The rates also affect the opportunities to acquire these products—whether brought from across the English channel, from other countries, or smuggled.

I have viewed health considerations particularly highly, as they are well aired and understood, though people sometimes have different points of emphasis or completely different points of view on the dangers of tobacco. As I say, we have to look at behaviour. I concluded that we should focus on non-cigarette products in order not to be distracted by more emotive health arguments attached to cigarettes, not least because evidence shows that cigarettes are the tobacco products of choice for under-age children and have peer group attractiveness for teenagers. We should therefore reflect on what it would mean behaviourally if we froze tax rates this year on certain products.

1.45 pm

Kevin Brennan (Cardiff, West)

I am trying to follow the logic of the hon. Gentleman's argument and I understand where he is going. However, is it logical to include rolling tobacco, but not to include cigarettes? After all, rolling tobacco is one of the commonest ways through which young people on low incomes get into smoking.

Mr. O'Brien

I take the hon. Gentleman's point seriously and I have given considerable thought to it. Percentage sales of hand-rolling tobacco are small compared with cigarettes. If the hon. Gentleman will bear with me as I move through my argument, he may see that another balance has to be struck between the merits of what I am proposing now and the position in a couple of years' time when we can make a genuine comparison between the sales of cigarettes and of another set of tobacco products. We will all be better informed about any difference in the behavioural circumstances with respect to cigarettes and other tobacco products. We will be able to study where the graphs on health and revenue cross with respect to smuggling and cross-border sales and full UK duty-paid sales. 'We will also be able to assess the behaviour of young people. I hope that the hon. Gentleman will accept that children are primarily focused on ready-made cigarettes. Some may be interested in hand-rolling tobacco, but I am told—I do not have established evidence to give chapter and verse—that the bulk of such tobacco is sold to adults, defined as 25 years old and over. That is an adult lifestyle choice.

Rob Marris (Wolverhampton, South-West)

The hon. Gentleman talks about comparative figures and says that, if his amendment were accepted, we could assess them in a couple of years' time. Is he aware of the position in Canada, where I recollect that the provinces of Ontario and Quebec lowered the rate of excise duty on cigarettes because of smuggling from America? The consumption of cigarettes went up, so they are now raising the excise duties again because the earlier policy did not have the desired effect in terms of the behavioural changes that the hon. Gentleman is talking about.

Mr. O'Brien

That is helpful. It reminds me that I did encounter data of that sort, though I cannot remember it as clearly as the hon. Gentleman does. I recall that it was one of the reasons why I felt that it would be helpful to leave out cigarettes for that purpose. It should also provide a comparative control group to assess the risks and the behavioural differences, partly because purchasing of cigarettes is more widespread and obtaining them is easier than other tobacco products.

Mr. Jonathan Djanogly (Huntingdon)

Is it not the case, in Canada as in this country, that one simply does not know how many illegal cigarettes are being consumed? The statistics are effectively meaningless because, without knowledge of how many illegal cigarettes are in circulation, we cannot know whether smoking is increasing or decreasing.

Mr. O'Brien

My hon. Friend makes a helpful point. It prevents us from getting hijacked by a sense of unreality in a debate that the amendments are designed to promote. We are dealing with cross-border and, more importantly, smuggling issues, and my hon. Friend the Member for Tatton (Mr. Osborne) mentioned black market operations in the UK. All the figures have to be regarded as estimates, but the Treasury, Customs and Excise, and many other interested groups—health groups and the Tobacco Manufacturers Association—are doing their best to get hold of reliable figures.

Over a period of years, estimates and approximations have been made. Although there has been some difficulty in ensuring confidence in the numbers, for the reason that my hon. Friend the Member for Tatton outlined, those numbers have become internally consistent. The information that we have makes it look as though that internal consistency has produced comparative data, year on year. The Government and health groups are thus able to refer to them.

The Government's actions are driven as much by health considerations as by revenue considerations. That was true of the previous Government, whom I supported: they, too, were keen to look at the balance between health, the raising of revenue, and the jobs involved in the very important industry that depends on tobacco manufacturing and the distribution and retailing of tobacco products. Over a long period of years, the figures have achieved at least an internal consistency. The challenge is to produce comparable figures on which the House can rely. That challenge would not be made worse by the amendments. However, some hon. Members may declare that no numbers exist that can be relied on, and that we will never know whether health issues are improving.

Pete Wishart (North Tayside)

I want to clarify the central tenet of the hon. Gentleman's argument. Is he suggesting that we reduce the proposed rate of duty on these tobacco products in an attempt to beat smuggling and organised crime? If so, that appears a very blunt instrument.

Mr. O'Brien

I shall try to make sure that my argument comes to a form of conclusion, so that the hon. Gentleman gets a sense of where the proposal might lead. The amendment has not been tabled simply for the sake of it—far from it. There will inevitably he scepticism among hon. Members from time to time about such matters, but I am seeking to make a genuine argument, as the amount of effort that has gone into it proves.

My proposed solution would at least allow us to make a proper judgment. The primary argument for freezing tax rates on the specified tobacco product items—that is, excluding cigarettes—is that it would reduce, although not eliminate, the incentive to smuggle and to go cross-border shopping. Even tax rises by the level of inflation increase already very large price differentials. A packet of 20 cigarettes costs roughly £4.29 in the UK, compared with an official price of £2.69 in France, and street prices of between £2 and £2.50. Increases in tax since 1997 have also accompanied a rise in smuggling from just 3 per cent. to 21 per cent. We therefore have to determine what rates of duty have to do with that phenomenon, which is clearly of concern to the Revenue. That is the main business of the Committee as it considers the Finance Bill. However, it is also a concern for all hon. Members, as constituents regularly raise matters to do with health, both here and in other forums.

I remind the House of the Customs and Excise document published in March 2000. Known as the TTS document, it states that smuggling

undermines progress on government health objectives by making cheaper cigarettes available through unregulated sources". We can assume that the same applies to other tobacco products. The document adds that

there are other undesirable effects. These include the law and order and social problems"— noted by my hon. Friend the Member for Tatton—arising from the concentration of large groups of criminals in certain areas … And it has resulted in a decreasing respect for the law, as the numbers of people involved in the buying and selling of smuggled goods has risen to many thousands, possibly millions. In addition, large scale tobacco smuggling has the potential to create building blocks for organised crime networks run along business lines in a way rarely seen before in the UK, and to finance other serious criminal activity. Moreover, it is also argued that, because smuggled cigarettes are sold through unregulated sources, children can buy them easily. The amendment deals with the non-cigarette side, in an attempt to test whether a better result might not be achieved if the price of tobacco were not raised continually, as that creates the enormous differential that has been described. As has been noted, tobacco can be especially attractive to children. However, the amendment is not susceptible to such arguments, as it would not promote tobacco use among children.

Rob Marris

Does the hon. Gentleman accept that the vast majority of tobacco products smuggled into the UK come from countries in the eurozone? The euro has risen 10 per cent. in value in this calendar year. That will undercut any comparative figures that the hon. Gentleman is trying to use, and also what he is seeking to achieve with the amendment, because the price of cigarettes in France in sterling terms has effectively gone up 10 per cent.

Mr. O'Brien

The hon. Gentleman makes an interesting point. At the grave risk of sounding as though I would much prefer to be at the Government Dispatch Box, rather than the Opposition one—although of course I would—I have not seen figures to support the contention that smuggling is primarily from the eurozone countries. I believe that the original source may be the eurozone countries, but the rise in criminal activity means that there are increasing numbers of intermediaries outside the eurozone. There is a fair argument to be had as to whether that exchange rate will make a huge difference. I think that the real concern is the current price differential.

Mr. George Osborne

Perhaps I can help my hon. Friend, as a huge number of smuggled products are manufactured in the UK, and then exported abroad to countries such as Latvia, Moldova and Afghanistan. They are also exported to Kaliningrad. The products are then smuggled back into this country. They do not come from France, so the matter has nothing to do with the euro exchange rate.

Mr. O'Brien

I am grateful to my hon. Friend, who puts the balance of the argument. Some smuggled goods clearly do come from France. I have seen various figures, although I am reluctant to place enormous reliance on them all. The nature of the activities involved makes it difficult for us to be sure about such figures.

One option that is open to the Government is to alter, in the Finance Bill, the rates on these tobacco products. It is therefore right for us to take a cool, calm look at whether the House is doing the right thing in terms of influencing matters—smuggling, cross-border shopping, and health issues—about which we are so rightly worried.

Lawrie Quinn (Scarborough and Whitby)

The hon. Gentleman is developing an argument about an experiment. Has he assessed what such an experiment would cost the Exchequer?

Mr. O'Brien

I have looked at that. I have not had the Treasury model to play with, but I have been fairly persuaded by the evidence that I have seen. I am sure that the hon. Gentleman would want me to refrain from going through the body of that evidence—much of it is flagged among my notes—but I am convinced that concerns on these matters are shared by all hon. Members. They may approach the matter from a variety of angles, but there is a broad health concern. If the Government had the vision and courage to go down the sort of route proposed by the amendment, I think that there could be a net gain for the Revenue.

So much hand-rolling tobacco that is non-UK duty paid now comes into the country that reducing the price differential would have a beneficial effect. I do not propose that the Government should be braver, and reduce the differential still further. That would not necessarily be a responsible action, but the amendment offers us the opportunity to find out whether the approach would have some effect.

It is possible that those with whom what I propose might not necessarily find favour will say that it would increase UK tobacco consumption. I suspect that overall tobacco consumption is, in fact, set by other factors. It has to do with the price at which one acquires tobacco, but also the ease with which one acquires it and the incentive of a massive differential. There is becoming almost a culture of cross-border shopping, and there is something quite attractive to young people in acquiring cigarettes and tobacco products in marketplaces in which they are non-UK duty paid. There has been some interesting talk in the pub from time to time about that.

2 pm

Lawrie Quinn

Following the line of my argument, I am sure that the hon. Gentleman would not want to leave the House in the dark on why he feels there might be a net gain. Approximately how much gain does he think the Revenue and the Exchequer would receive from his experiment?

Mr. O'Brien

I am tempted to try to satisfy the hon. Gentleman's request, but I do not think that that would be responsible since I would be taking a stab at it. The effect is more likely to be neutral than to be a small net gain, but one need only examine the data to see where the graph lines cross. I cannot be sure; there might be a small net loss. What we should really focus on is the influence that the rates will have on those behaviours that we think are in the best interests of our constituents, as as regards access to products that some people believe have health considerations attached to them.

There might be some challenge to Treasury receipts; I cannot be 100 per cent. sure about that. The bigger issue is the direction in which we are going. Is it right automatically to assume that there should be an escalator each and every year, or should we reflect on underlying factors such as the massive rise in smuggling? We know that the Government are concerned about that. They have brought forward measures—somewhat late in the day in our view—to try to address it. They know about cross-border shopping, and it seems that nothing will persuade them to see that as something that they would necessarily want to stop.

It is important to the corner shops in all our constituencies to bear all these points in mind. I dare say that I am not the only Member of Parliament who has had representations from constituents who are doing their best to run those fine-margin businesses as a community service. They are not alone: community post offices and community pharmacies are also under threat, and we should do our best to help our constituents to retain those services.

I think it wrong to argue that increased UK tobacco consumption or reduced Treasury receipts would result from the amendments. We must accept that tobacco consumption has not changed since roughly 1992, in spite of a 27 per cent. real terms increase in cigarette tax. Smuggling has reduced the average price of cigarettes sold in the UK, and what has changed is from where and how tobacco products are bought, and at what price. The impact on Treasury receipts is likely to be broadly neutral, in fact, as more consumption will be captured in the tax net, though that does not necessarily imply more consumption. Catching consumption in the tax net is what rightly concerns the Minister and the Government. That would also give us data containing the right information for health planning.

To help us test the Government's primary arguments, publication in full of the Taylor report, which I request once more although I know that that the Government have consistently denied us publication, would have been helpful, even if all the arguments have been made in this place and the other place. The Government have always claimed that the report contains operational and sensitive information, but it is appropriate to ask for publication for no other reason than that it is apparently one of the best studies available, on which the Government have, presumably, relied, and which contains data that would allow us not to make experiments in the dark. The hon. Member for Scarborough and Whitby (Lawrie Quinn) said that we should not take a step in the dark, and the Taylor report would help shed some light on the subject. Once again, therefore, I formally request publication on the basis that the debate is ill served by continued Government secrecy.

I propose a freeze on duty to encourage UK smokers to revert to UK duty paid products and maintain UK revenue, while not, I believe, increasing total consumption, which is what matters. UK duty paid product is sold at a price to deliver Government health objectives for adults and children. The reason I single out non-cigarette tobacco products for a freeze is that the House could, by accepting the amendments, establish evidence of the differential in consumption and revenue raising between cigarettes and other tobacco products. Placing them on a comparable basis would provide a control group test.

While there has been legitimate concern about whether that would be a stab in the dark, I think that it would provide a glimmer of understanding about how the House can genuinely influence our constituents for the better by what we do. During the period of the present Government, there has been an enormous expansion in smuggling and the new phenomenon of cross-border shopping, which seems to be set fair, without let. Consumption has flat lined; we are not reducing consumption among the adult population, and it is increasing among children and, particularly, young women.

What I propose would be appropriate, and I hope that the House will give the amendment a fair wind.

Jon Trickett (Hemsworth)

Thank you for calling me, Sir Alan, and welcome to the Chair. When I last sat on a Finance Bill Committee, Labour was in opposition. I do not doubt that you, in your wisdom, will keep me well in order.

I listened carefully to the lengthy exposition of the hon. Member for Eddisbury (Mr. O'Brien), but I was not convinced by it. His logic appeared to favour tax harmonisation across the European Union: wherever there was a cross-border differential in prices as a result of taxation, the country charging the higher rate of taxation should reduce it to the lower rate on the other side of the customs border. That implies tax harmonisation across Europe, so I was surprised to hear Conservatives, who usually pose as the Eurosceptic party, argue for a self-denying ordinance in the Treasury that would require a reduction in taxation wherever such a differential arose. I would not want that, and I am not sure that many of my colleagues would, but it was interesting to hear that case made.

A contrary argument might have been made—that taxation on the continent should correlate more closely to ours, but the Tories always want to cut taxes, no matter what the implications are, and the tax harmonisation that they want would take us to the lower end of the spectrum.

We should remind ourselves of why we tax tobacco products. Some 120,000 deaths a year are directly caused by tobacco consumption of one kind or another. There is no real evidence that cigarette smoking is substantially more lethal than other forms of tobacco consumption. The Treasury has increased taxation on tobacco products, under both main parties, not just to safeguard revenue, but to try to bring about a change in behaviour to reduce tobacco consumption. Every study undertaken throughout the world has demonstrated an inverse relationship between price and consumption: the more tobacco products cost, the lower is their consumption. There is also a correlation between consumption and the impact on health of tobacco, so the argument in favour of raising prices, reducing consumption and thus increasing the nation's health is extremely powerful.

Mr. John Baron (Billericay)

Does the hon. Gentleman accept that if taxes are increased to such an extent that smuggling becomes prevalent, thus swamping the domestic market with under-priced cigarettes, consumption could increase? That is Conservative Members' main concern. We believe that the link between tax increases and reducing consumption has finally been broken, and we are greatly concerned about that.

Jon Trickett

I shall come to that point in a moment or two. I was trying to remind the Committee that we should go back to first principles and establish why the Treasury, for many years and under all Governments, has increased taxation on tobacco products.

In the past, the Conservatives adopted an inflation-plus policy; each year, revenue would increase beyond inflation. The Labour Government decided to change the rules and, because of smuggling, to increase the amount only by inflation—the issue raised by the hon. Member for Billericay (Mr. Baron). Like the hon. Member for Tatton (Mr. Osborne), I am a member of the Public Accounts Committee, which looked into the issue and found that most smuggling is carried out not as a small private enterprise by people in white vans but on a massive scale. Imperial Tobacco was, apparently, systematically exporting tens of millions of cigarettes and other tobacco products each year, which were later smuggled back to the United Kingdom. After careful consideration by Customs and Excise and the PAC, measures are being taken and a memorandum of understanding is about to be signed. That will make a substantial difference.

Rather than adjusting tax rates and, in effect, abandoning the consensus about taxing tobacco products for health reasons, we should be trying to tighten the activities of Customs and Excise and other enforcement authorities so as to reduce smuggling. That would secure our objectives for both health and revenue.

With those few points, I conclude my remarks. I await the rest of the debate with interest.

Mr. David Laws (Yeovil)

The debate is extremely important and I am grateful for the opportunity to make some comments on the level of duties on a variety of tobacco products.

I share some of the concerns expressed by the hon. Member for Eddisbury (Mr. O'Brien), although I would not go as far as his proposal that the increase in indexation proposed by the Government should be reduced. The detail of the evidence given by the hon. Gentleman is not sufficient to allow us to make that move.

The amendment is a probing measure that invites the Government to reflect on their strategy for the taxation of a variety of tobacco products, and to consider whether it is working in the context of both the huge increase since 1996–97 in the share of smuggled tobacco products sold in this country and the changes that the Economic Secretary was forced to make last year to legislation on the single market. The changes reflect the fact that we are in a single market, so we cannot use some of the measures previously adopted by the Government to constrain people from legally importing tobacco products.

2.15 pm

The reason why we are focusing particularly on hand-rolled tobacco is that the greatest proportion of smuggling occurs in that market—a point made by the hon. Member for Eddisbury. I promise that I shall not go back over all the figures cited by the hon. Gentleman, but we need to consider the amazing proportion of the hand-rolled tobacco market accounted for by smuggling. The latest figures suggest that about 52 per cent. of that market is smuggled tobacco, which is extraordinary. Throughout British history, one can think of few other products where there was such a high proportion of smuggling. When we add to that the 17 per cent. of tobacco legitimately purchased across borders, we find that no duty is paid on almost 70 per cent. of the hand-rolled tobacco consumed in the UK.

When we consider changes in duty and the effect of the escalators introduced by the Conservative Government, which were escalated by the Labour Government for a period after 1997, we find that the consumption of hand-rolled tobacco has risen by about 47 per cent. since 1997. It currently accounts for 25 per cent. of UK cigarette consumption. The strategy does not, therefore, seem to have been especially successful.

We would have thought that the Department responsible for such matters—the Treasury, which is stuffed full of economists—would be cautious about maintaining its present policy, which is based entirely on trying to police the trade, as opposed to trying to deal with some of the fundamental underlying problems: in essence, the vast duty differential between the UK and other countries, including those on the continent, which provides a massive incentive for individuals to engage in illegal activity as well as legally to bring across the channel huge amounts of goods on which duty is low or not paid at all.

Our current policy on this matter reflects a change in the approach that we have taken for many years. I freely acknowledge that, some years ago, our party was in favour of increasing tobacco taxation and hypothecating it to the national health service, a policy picked up by Labour when it came into government. We acknowledge that the huge smuggling activity, across the channel and elsewhere, puts a cap on the extent to which we can increase tobacco duty in the interest not only of health objectives but also of revenue raising.

Mr. George Osborne

I am grateful to the hon. Gentleman for being so candid about the mistakes made by the Liberal Democrats in formulating their previous policy. Does he agree that if tobacco revenue was hypothecated to the health service, it would be extremely difficult for him to move an amendment to lower duty because that would be to cut money for the NHS?

Mr. Laws

I accept that it would not make sense to hypothecate all tobacco revenue, although it certainly could be done at the margin.

I am most grateful to the hon. Gentleman for referring to alterations from previous policies, as I was about to invite Members from other parties to acknowledge that their policies have also changed over time. I hope that brief reference will encourage Members on both sides of the House to reflect that such debate is worth while and that we should all be honest about our history.

The hon. Gentleman has been involved in politics long enough to know that the significant increases in tobacco taxation in recent times began in 1993, when the then Chancellor of the Exchequer, the right hon. and learned Member for Rushcliffe (Mr. Clarke), introduced his 3 per cent. escalator, over and above the rate of inflation and the indexation that we are discussing. In true style, the right hon. and learned Gentleman pugnaciously defended his approach in the Budget statement of November 1996, describing it as necessary masochism in the wider public interest.—[Official Report, 26 November 1996; Vol. 286, c. 168.] That necessary masochism, as he termed it, was continued by the Labour Government in 1997, when they stepped up the escalator to 5 per cent., which they maintained for a number of years before deciding in 1999 that the automatic link should be broken, while implementing the 5 per cent. rise in the March 2000 Budget on the basis that it would encourage existing smokers to smoke less or quit and discourage young people from taking up the habit. All parties, at different times, have therefore supported the strategy of increasing tobacco duty. It has no doubt been a useful revenue raiser for parties in government, and a desire has also existed to increase the price of tobacco products to deter their use, which, as we all know, is extremely damaging to health.

Other EU countries with high duty rates and prices compared with other countries have similar concerns to those that have been expressed in this country over the past couple of years. Canada and its experiences were mentioned in an intervention, but we should recall that Denmark voted recently to reduce tobacco duties and to bring that measure into effect later this year. I hope that the Treasury will follow the experiences of other countries in the EU closely. I hope that it will look at the evidence on which the decision in Denmark was based, and that it will also follow closely the experiences in Denmark after it reduces duties, to see whether the policy has the effects that the hon. Member for Eddisbury was suggesting.

We prefer to ask the Government to take seriously the arguments being made now about the huge duty differential between ourselves and other countries. We also ask the Government to consider seriously whether it will ever be possible to reduce significantly the market in smuggled tobacco while we have such duty differentials. We have had similar debates over recent years about the level of duties in the UK, many of which considered the evidence, whereas the hon. Member for Eddisbury appears to want to conduct an experiment without amassing the appropriate amount of evidence. One good example of that evidence-based approach was the previous Government's decision to reduce the taxation of spirits, which has to some extent been followed under this Government.

We therefore know why successive Governments have decided to maintain high duties on tobacco products. First, it has been as a consequence of medical concerns about the consumption of tobacco. Secondly, it has proved to be an extremely good way of raising money for Governments, which suggests some contradiction in relation to the first motivation. The increases since 1996–97 in the share of our market accounted for by smuggled tobacco and tobacco, on which no duty is paid, should give all of us in the UK reason to wonder whether the existing strategy is working and reasons to take the issue very seriously. I join the hon. Member for Eddisbury in regretting very much that when Martin Taylor considered this issue a few years ago, and produced what we believe was an extremely detailed report, which was rumoured to touch on the issue of duty differentials and whether they were too wide, the Government did not allow his report to be aired in public. They have been criticised for that a number of times in the House, including by the Treasury Committee.

Pete Wishart

Can the hon. Gentleman help the House by naming any health professional body that agrees that the freezing or reduction of duty on cigarettes would be a good thing in terms of the health issues?

Mr. Laws

I am grateful to the hon. Gentleman. That is precisely the type of issue that needs to be considered as part of a study into whether the existing duty differentials are working. Although I am sure that no o r very few individuals would suggest that a lower price for tobacco products in this country would have anything other than adverse effects on health, many individuals, even in the health field, would be extremely concerned about a system in which no duty is paid on 28 per cent. of cigarettes, and in which smuggled hand-rolled tobacco accounts for 70 per cent. They would also be extremely concerned that a large amount of the Government's health policy in respect of tobacco products was being undermined by the fact that a huge amount of consumption in this country is of products on which no duty was paid.

That trend is being exacerbated, undoubtedly, by the Government's responsibilities in respect of the single market, as was demonstrated by the decision that the Economic Secretary had to take last October to dismantle some of the Government's draconian steps to stop tobacco and other dutiable goods being brought into this country. It is too early to say what will be the effects of the Government's policy reversal. When we look at the figures in the year ahead, we may find, as some tobacco manufacturers have suggested on the basis of the early data, that the proportion of tobacco consumed in this country that is smuggled or brought in legitimately with no duty paid increases markedly as a consequence of that policy reversal.

Rob Marris

May I point out to the hon. Gentleman that it was not a reversal of Government policy? The Government were turned over in the courts and followed the law.

Mr. Laws

The hon. Gentleman is playing with words. What he is saying is that the Government's policy was overturned in the courts, so the Government had to change their original policy in a serious way. Some of the major measures suggested by Martin Taylor that the Government implemented were precisely the measures that have now had to be dismantled, whereas some of the proposals in respect of narrowing duty differentials appear to be precisely those that the Government have not been willing to discuss.

The stage has been reached at which the Government and the Treasury ought to commission a serious and public piece of work that is seen to be independent from all interests, to consider three issues. First, it should consider the economic impact of current duty differentials, and what would be the effect of narrowing them. I know of few economists who at this moment think that a reduction in tobacco duty would be selffunding—that it would increase demand in this country in such a way that it would pay for itself. The Institute for Fiscal Studies certainly did not seem to reach that conclusion when it reviewed the issue a couple of years ago. The increase in smuggling, however, may have changed the dynamics of that calculation. As the hon. Member for Eddisbury also mentioned, we need to consider other costs, such as the effects on small businesses, the economic incentives that we are creating for people to travel backwards and forwards between the United Kingdom and the continent, and the farfrom-negligible policing costs for the Government of having to convert a strategy that could be based on narrowing duty differentials into one based entirely on policing.

Secondly, clearly, we must understand better the health effects of any reduction of duty levels. As the hon. Member for Eddisbury said, it is notable that recently, when tobacco duty has been increasing rapidly, we seem to have been least successful in reducing consumption. Consumption seems to have levelled out precisely when duty has been increasing significantly. That may tell us that the strategy has not been working recently because it has created such incentives for people to bring in nonduty-paid goods that it has undermined the effect of the Government's attempts to increase tobacco prices.

Thirdly, as the hon. Member for Eddisbury also mentioned, there is the issue of crime, and the fact that the huge illegal smuggling activity is fuelling a significant crime wave, not least in the south-east corner of the country. That and the associated crime, and the causes to which that profit is put, ought to be a great concern for the Government.

I hope that the Government will not hide behind the concept that the present rate of duty is exactly right. I hope, too, that the Economic Secretary will acknowledge the huge increase in smuggling over recent years and the need to take that into account in Government policy. I also hope that he will acknowledge that the Government's U-turn on the tobacco escalator—the scrapping of the automatic escalator—reflects their understanding that there is a limit to the extent to which tobacco duties can be allowed to rise without introducing such large incentives to smuggling that the basis of the policy is undermined.

Mr. George Osborne

The hon. Member for Yeovil (Mr. Laws) said that we all had to be honest about our past. Saying that I used to smoke is my contribution to meeting that request. At times, I am in danger of having the zeal of the convert, because I see the damage that smoking does. By instinct, and like many people, I recognise the value of having high duties as a way of discouraging people from smoking. However, as the hon. Gentleman said and as my hon. Friend the Member for Eddisbury (Mr. O'Brien) pointed out in his good speech, the issue is much more complicated than that, and it is right for the Committee to explore how the rates of duty that the Government set impact on tobacco smuggling and consumption.

2.30 pm

As many people have said, smuggling is a massive problem. A fellow member of the Public Accounts Committee reminded us that it had recently carried out an investigation into tobacco smuggling. It broke with all precedent by summoning before it the representatives of a private company—the management of Imperial Tobacco—to explain to the Committee what the company's relationship was with the smuggling problem and Customs and Excise.

I have several concerns that have already been elucidated by other hon. Members, but I will touch on them briefly. My hon. Friend the Member for Billericay (Mr. Baron) pointed out the health concern. The Government's legitimate objective of using fiscal measures to discourage consumption is clearly undermined if those same measures lead to a huge increase in smuggling. One of the features not yet touched on in the debate is the fact that between 2 billion and 3 billion of the cigarettes that are smuggled are counterfeit. They are not actually the cigarettes that they claim to be. That could have serious health implications. People might think that they are smoking low-tar cigarettes because that is the way that they are packaged when, in fact, they are smoking counterfeit cigarettes that are not low tar. There are serious health concerns which should be addressed.

I touched on law and order when I intervened on my h on. 'Friend the Member for Eddisbury. Tobacco smuggling is a huge boon to organised crime in this country and it goes hand in hand with other activities such as drug smuggling and the trafficking of human beings for prostitution and immigration purposes. It is striking that many of the smuggled cigarettes that we consume come from places such as Latvia, Moldova, Afghanistan and Kaliningrad. Such places are associated with many of the other serious crime problems that we face.

There is another aspect to my concern about law and order. Because one in five cigarettes are smuggled in, because one in five smokers use illegal products and because they are purchased off the back of a lorry by the owners of pubs, clubs and corner shops, many otherwise law-abiding people are brought into contact with the criminal fraternity. That can have a corrosive effect.

As is legitimate in a debate on a Finance Bill, Members have touched on the revenue concern. In one year that the Public Accounts Committee considered, £3.5 billion was lost as a result of tobacco smuggling. That is the equivalent of 1p on the basic rate of income tax, so we are talking about a very large sum of money.

My next remark is not intended as criticism of the present Government, because all Governments have pursued this policy. The underlying cause of the problem is the variable rates of duty available in this country and in other countries, particularly those near us in Europe. If the price of a packet of cigarettes were very low, there would be a limited incentive to smuggle them into this country. Therefore, it is legitimate to ask about the impact of those rates on smuggling and consumption.

I have two questions for the Economic Secretary—one is general and the other more specific. First, what sort of work and modelling has been done in the Treasury on the effect on cigarette consumption, smuggling and revenue of freezing or reducing the duty? When Richard Broadbent, who is otherwise a very impressive individual, came before the Public Accounts Committee, he was questioned by its Chairman on this issue. Mr. Broadbent replied: I do not know and I am not sure we are able to calculate with any degree of certainty—and we have not calculated—what the impact might be of such a step downward in rates in the UK".> That is very surprising because, when the Chancellor sets his Budget, I should have thought it perfectly reasonable to ask what the effect of reducing duty would be. What modelling has been done? Can the Economic Secretary tell us now or write to me later with detailed evidence of the modelling?

Mr. Stephen O'Brien

I am grateful to my hon. Friend for making that important point. It is quite clear that the absence of any such modelling at official level in the Treasury must reinforce the argument for looking at the proposals in the amendments. There must be some form of ability to test whether the strategies for smuggling and cross-border shopping are having an effect in the way that most of us desire.

Mr. Osborne

I am grateful to my hon. Friend for making that point. It is, of course, normal practice in this place for the Opposition to do the Government's work for them by trying to work out what would actually work. As the debate has gone on, I have watched as the Government Whips and Treasury Ministers have spoken to each other. I am an optimist. Perhaps they will accept the amendment. That would be a good thing.

It would be interesting to know what work has been done. As the hon. Member for Yeovil said, clearly some thought went into the issue when the Government stopped the escalator effect on cigarette duty. They must have known or guessed what impact that would have had. It would be interesting to hear from the Economic Secretary what the Laffer curve effects—if I can cite another economist—would be on reducing duty. Would that increase revenue?

Pete Wishart

Is the hon. Gentleman seriously asking the Government to determine their fiscal policy on the basis of trying to deal with smuggling?

Mr. Osborne

I am asking the Government to tell me whether they would further their objectives for improving the health of the nation, for cracking down on problems of law and order and for raising revenue by reducing the duty. That suggestion may be counterintuitive, but we have shown in other areas of taxation how that can work.

Mr. John Bercow (Buckingham)

Will my hon. Friend give way?

Mr. Osborne

I cannot resist.

Mr. Bercow

I am very grateful to my hon. Friend for giving way. I fear that his optimism about the Government's reaction to the amendments is positively Panglossian. However, at least his position is not obscurantist or neanderthal, something to which the stance of the Scottish nationalists bears a striking resemblance. Can he tell me what proportion of the cost of a packet of 20 cigarettes is now accounted for by tax and excise duty? When I introduced a ten-minute Bill covering the matter nearly three years ago, the figure was more than 79 per cent.

Mr. Osborne

I cannot give my hon. Friend a precise figure. but 80 per cent. is the figure that I have seen. That is extremely high and certainly higher than in any other country in the EU and I imagine anywhere else in the world.

My specific question is about Imperial Tobacco, which was raised earlier in the debate by a fellow member of the Public Accounts Committee. It may astonish the Committee to learn that half of all the smuggled cigarettes in this country are Regals or Superkings. A huge proportion of the smuggled products are produced by Imperial Tobacco. When we examined the issue, we found that a third of its exports went to five places: Latvia, Kaliningrad, Afghanistan, Moldova and Andorra. Indeed, when the hon. Member for City of Durham (Mr. Steinberg), who is also a member of the Committee, asked the chief executive of Imperial Tobacco whether you honestly believe that the 2 billion cigarettes that you exported"— to these five places—were going to be smoked by the people of those countries", Mr. Davis, the chief executive of Imperial Tobacco replied, "Yes".

For all those reasons, Customs and Excise was unable to conclude a memorandum of understanding with Imperial Tobacco even though it had concluded a memorandum with Gallaher and British American Tobacco. It has been reported in the press recently that Customs feels that [imperial Tobacco has made huge progress and is close to signing a memorandum. It would be interesting to hear the Economic Secretary say something about that.

Mr. Baron

I welcome you to the Chair, Mrs. Heal. I want to focus on the adverse effects of tobacco smuggling in support of one or two previous contributions, most notably that made by my hon. Friend the Member for Tatton (Mr. Osborne). Smuggling will increase because of the measures in the Bill, and there are many dire effects of that.

Clause 1 sets out the new rates of tobacco duty, which increased by 2.8 per cent. from 9 April, in line with inflation. Conservative Members share the Government's desire to reduce tobacco consumption in this country. No one disputes the harmful effects of smoking—it is the single largest cause of preventable illness and premature death in the United Kingdom. As we have heard, it kills approximately 120,000 people every year and causes 85 per cent. of deaths from lung cancer. The Government have confirmed that tobacco is the only legal product that kills one in two people who use it.

I urge the Government to think carefully about how they intend to address one of the main drivers that affects tobacco consumption in Britain, especially among the more vulnerable groups in our society: tobacco smuggling. There is a flourishing trade in black-market tobacco products in the UK and one cannot escape the fact that that is caused, to a large extent, by the substantial price differential between cigarettes sold in the UK and in other European countries. A packet of 20 cigarettes is about £2 cheaper in France than here. It is little wonder that the National Audit Office has estimated that the number of cigarettes smuggled in 2001 rose from 14 billion to 17 billion and that more than one in five cigarettes consumed in the UK are smuggled. The propc rtion of consumed cigarettes that are smuggled has increased from 3 per cent. in 1997 to 21 per cent at present. That is a phenomenal increase.

There are two profound consequences of that. First, there is a tremendous loss of revenue to the Exchequer. As my hon. Friend the Member for Eddisbury (Mr. O'Brien) said, the combined effect of a steep rise in smuggling and cross-border shopping means that about 28 per cent. of cigarettes and 69 per cent. of hand-rolling tobacco do rot attract UK duty. Estimates suggest that the total revenue lost since 1997 is something like £15 billion. Indeed, the NAO recently published a report claiming that Customs and Excise is losing up to £7 billion a year owing to fraud and lost taxes and that half that is lost owing to tobacco smuggling. That sum of money is enormous. How many hospitals could be built and how many extra doctors and nurses could be recruited with that money? That is certainly worth thinking about.

Secondly, the increase in smuggling has been a major contributor to the fact that the long-term downward trend in cigarette consumption has been broken. Indeed, one could argue that consumption might be on the rise and that the problem is underestimated. For example, a survey published in the British Medical Association's journal "Tobacco Control" at the end of last year revealed that one in five childrer aged under 16 are regular smokers, which is twice the Department of Health's original estimate.

There is little point increasing taxes and thus creating an ever-larger differential with prices across the channel if we do nothing to stop the smuggling that undoubtedly ensues from that. It is a silly policy that is costing this country many billions of pounds in lost revenue. The policy is contributing to the increase in cigarette consumption, especially among cur young, because cheaper smuggled tobacco products and cigarettes are now so prevalent in the UK. In other words, because smuggled cigarettes are so much cheaper, they are swamping the market and consumption is rising. That is the exact opposite of what we are trying to achieve.

The Government should take the issue more seriously and re-examine their assumptions. Without a real clampdown on smuggling, the policy of ever-higher taxes will lead to a market that is increasingly supplied with cheaper smuggled cigarettes. That will encourage a long-term increase in consumption, although I believe that that has already started, and a consequential loss of life. I hope that the Government will re-examine their policy.

2.45 pm

Mr. Djanogly

Many of my hon. Friends have discussed in detail loss of revenue owing to smuggling and I shall not go over all those arguments again. They made sophisticated arguments, and none more so than my hon. Friend the Member for Eddisbury (Mr. O'Brien), and I thought that it would be more appropriate to make a more basic observation.

The tax increases will hit the poorest members of our society disproportionately. Taxes that are paid on things always attack the poorer members of society but the tobacco tax is especially disproportionate. We must face the essential point that people who cannot afford to go on a booze cruise are likely to be the people who will be induced to buy smuggled goods off a barrel in the street. The impact of the measure is doubly disproportionate toward poorer people.

The hon. Member for Hemsworth (Jon Trickett) said that he was surprised that our patty was talking about Europe, but this is not a question of what my colleagues or I say about other countries. The fact of the matter is that this country's policy is to dig its head in the sand. It is no wonder that hundreds of thousands of people go abroad to buy cigarettes from our European neighbours every year because they are less than half the price of those sold in this country. It is a straightforward and unsophisticated argument.

The amount of revenue lost was mentioned earlier in the debate and I said that I was always dubious about the figures that are bandied around. I have seen a figure of £3.5 billion cited as the amount of lost revenue, although I heard my hon. Friend the Member for Billericay (Mr. Baron) cite a figure of £7 billion. I am not sure which figure is true, but that confirms my view that we do not know how much is being lost, although I am happy to accept the figures that my hon. Friend mentioned. Additionally, when we talk about lost revenue, we do not discuss the hundreds of millions of pounds that we also spend on extra customs officials, special equipment and operations to root out smugglers.

The Government receive significant revenue from tobacco but by setting the tax rate so high that British people increasingly buy legally from the continent—that has nothing to do with smuggling—they will lose out on the potential tax take while doing nothing to improve public health in this country.

The Economic Secretary to the Treasury (John Healey)

May I welcome you to the Chair, Mrs. Heal, on my first opportunity to serve under your chairmanship in the Committee of the whole House? We heard a reflective and detailed exposition from the hon. Member for Eddisbury (Mr. O'Brien) that raised genuine concerns and questions about the current policy and although I respect that, I must tell him that his contribution might have been more appropriate in the Standing Committee. However, what is discussed on the Floor of the House is a matter for his and his colleagues' judgment and choice.

The hon. Member for Yeovil (Mr. Laws) made a somewhat less detailed and reflective contribution, although it was nevertheless considered. He described amendment No. 61 as a probing amendment. It would make a negligible change to the Bill and it does not disguise his interest in tax harmonisation throughout the European Union, which lies behind many of his remarks.

Mr. Laws

I am happy to confirm that my party believes in tax competition, not tax harmonisation, and that is precisely what the debate is about.

John Healey

The hon. Gentleman urged us to have a smaller, if not harmonised, differential on excise duties. We will follow closely what other European countries do. The hon. Gentleman is right that Denmark is reducing excise duty on tobacco, but in January France increased the duty and VAT on a packet of cigarettes by 34p and Germany recently increased it by 63p. So the UK is not alone or isolated in its policy of high taxation to reduce smoking.

The hon. Members for Yeovil and for Eddisbury asked about the publication of the Taylor report. That call is not new and my reasons for refusing its publication have not changed. The Taylor report contains internal private advice that was supplied to the Chancellor and we will not publish it.

Mr. Stephen O'Brien

It is difficult for Opposition Members to gainsay what a Treasury Minister says about an internal report that was commissioned to provide private information. It would be fair for the Economic Secretary to reflect on the idea that it would be better if internal reports were not publicly announced as great triumphs of consultation. There were high expectations about the report's probity and that encouraged many outside bodies to do a lot of work and make representations. If the report cannot be published, much of that good will has been wasted with only the Government benefiting, not the nation.

John Healey

The Taylor report was undertaken four years ago. Since then, the Government have published an unprecedented amount of data and analysis. They have made an unprecedented assessment of the amount of revenue lost and the problem posed by smuggling. They have also put in place unprecedented investment to tackle that.

Mr. Michael Jack (Fylde)

Is the Minister willing to supply a copy of the document to the Information Commissioner and ask whether, in the commissioner's judgment, it contains matters that for security reasons prevent it from going into the public domain? We would all feel happier if we had a proper assessment of the Treasury's need to keep the report to itself.

John Healey

The Government made their position clear several years ago and we have no intention of altering that now.

Mr. George Osborne

On a point of order, Madam Deputy Speaker. Is it in order for a Minister to refer to a document in the House and not place a copy of it in the Library?

The First Deputy Chairman of Ways and Means (Sylvia Heal)

The Minister is entirely in order.

John Healey

Thank you, Mrs. Heal.

Mr. Bercow

rose—

Mr. Laws

rose—

John Healey

I have a great deal of time for the hon. Member for Buckingham (Mr. Bercow) but he only recently arrived in the Chamber, so I shall give way to the hon. Member for Yeovil.

Mr. Laws

The Economic Secretary says that he will not publish Mr. Taylor's report. Will he confirm the press reports at the time which suggested that Mr. Taylor made recommendations in the report on the duty differentials between this country and the continent?

John Healey

The hon. Gentleman tempts me into the realm of speculation and I shall not respond.

Mr. Bercow

Will the Economic Secretary give way?

John Healey

The hon. Gentleman is so persuasive that I shall give way just this once.

Mr. Bercow

I am grateful to the Economic Secretary for giving way and happy to reciprocate his good regard. However, it will not do to say, "This is our position. It is a clear position and therefore I am not going to consider changing it, notwithstanding powerful arguments in support of so doing." Aside from any commitments to his boss, what intellectually is his answer to my right hon. Friend the Member for Fylde (Mr. Jack) on the idea of putting the issue before the Information Commissioner? What is his intellectual response to that?

John Healey

The Government have determined their position. I am afraid to say that that has not changed and I do not entertain seriously the suggestion proposed by the right hon. Member for Fylde (Mr. Jack).

The clause increases excise duty on all tobacco products in line with inflation. Its purpose is to maintain the real cost of smoking by ensuring that the level of duty on all tobacco products keeps pace with inflation in line with recent years, as the hon. Member for Eddisbury said. Our aim is to encourage people to smoke less or quit, and to discourage children and young people from taking up the habit. To that extent, the general approach reflects what this and previous Governments have done to use high prices as part of maintaining the pressure to reduce consumption. Some 35 per cent. of the population smoked 20 years ago. Five years ago that was down to 28 per cent. and there has been a slight fall since then to 27 per cent. in 2001, the latest year for which figures are available. I congratulate the hon. Member far Tatton (Mr. Osborne) on his personal contribution to that statistic.

Amendments Nos. 1 to 3 would freeze excise duty on all tobacco products other than cigarettes. We cannot accept them as their likely effect would be to increase smoking. Amendment No. 61 would raise excise duty on hand-rolling tobacco by marginally less than inflation. It is hard to understand the purpose of that marginal change proposed to the new duty rate. The tax effect would be an increase of about one quarter of one penny on a typical 25 g packet of hand-rolling tobacco.

I emphasise that we do not take lightly or without regard to wider considerations the decision to increase tobacco duties in line with inflation across the board. The policy as set out in the 1999 pre-Budget report is to have Budget-by-Budget decisions that take into account a wide range of factors, as hon. Members urged us to do, including the Government's health objectives. When there have been reasons to do so, we have taken a different approach. F'or example, the Chancellor froze duty on hand-rolling tobacco in his first three Budgets in response to a difficult smuggling problem, as hon. Members recognised. However, with £209 million invested in an anti-smuggling strategy, the revenue lost as a result of cross-channel passenger smuggling of hand-rolling tobacco declined from around £700 million three years ago to just £95 million last year. Duty rates policy was adjusted accordingly, precisely the linked decision that the hon. Member for Billericay (Mr. Baron) wanted.

In two years, Customs and Excise has succeeded in not only halting the growth in cigarette smuggling and keeping the illicit market share to 21 per cent., but reducing the volume of cigarettes successfully smuggled into the UK by almost 1 billion. That is a reduction of nearly 5 per cent. and the first time in more than a decade that that has happened. If we had not made the investment and taken that action, the forecast for the illicit market would now be around 31 per cent. That means that 7.5 billion cigarettes were prevented from entering the illicit market in the UK in 2001–02 through the efforts of Her Majesty's Customs and Excise to bring the problem under control.

My hon. Friend the Member for Hemsworth (Jon Trickett) serves in a distinguished way on the Public Accounts Committee. I pay tribute to his work and to that of the hon. Member for Tatton, especially for their important inquiry into tobacco smuggling and the export activities of Imperial Tobacco. The hon. Member for Tatton asked about a memorandum of understanding. The company has worked closely with Customs and Excise. They have made good progress and there is a reasonable prospixt of its signing a memorandum of understanding shortly. However, as the PAC and hon. Members on both sides of the House acknowledged, internationally organised gangs smuggle the majority of tobacco into the UK. It enters the UK in large volumes through freight, and no duty whatsoever is paid on the product. About 70 per cent. of that smuggled tobacco is unaffected by the duty rates in our neighbouring European Union countries.

3 pm

We are concerned about wider issues such as smuggling, but for this Budget, we decided to maintain the real level of duty across all tobacco products in support of the Government's health objectives. That is what the clause seeks to do, and that objective would be undermined by the amendments in two ways. First, they would reduce the cost of the products in question in real terms by preventing the level of duty from keeping pace with inflation. Secondly, they would increase the price differential between cigarettes and other tobacco products. That may encourage cigarette smokers to engage in down-trading—rather than giving up, smokers may respond to the relative increase in price by shifting their consumption from cigarettes to cheaper products. There is already a trend for smokers to down-trade from cigarettes to hand-rolling tobacco in particular, as my hon. Friend the Member for Cardiff, West (Kevin Brennan) pointed out in his intervention. The amendments would only reinforce that trend.

Indeed, the representations that we received from health and anti-smoking groups such as Action on Smoking and Health, the Royal College of Physicians and Cancer Research UK in the run-up to the Budget made it clear that they believed the tax rate on hand-rolling tobacco should be increased to reduce the incentive to switch from cigarettes". Likewise they believed that cigar prices should be kept in line with cigarettes and increase at the same rate". They may have wanted us to go further, but that sensible approach coincides with our policy of keeping prices high. A duty freeze would only encourage greater consumption.

Mr. Laws

I am grateful to the Economic Secretary for giving way again, and accept the argument that he is developing. However, he seems to be suggesting that we have arrived almost by accident at exactly the right rate of duty on tobacco products. He said that the Government have dumped the 5 per cent. escalator. How did they reach the verdict that tobacco duties now are exactly right in real terms, and will he publish the evidence for that?

John Healey

The hon. Gentleman's assertion that we feel we have got the balance exactly right is absurd. As I have explained, our policy operates Budget by Budget, and was set out in the 1999 pre-Budget report. We have taken a particular decision for this Budget.

My hon. Friend the Member for Hemsworth (Jon Trickett) clearly outlined the health consequences of accepting the amendments. Smoking is the largest single cause of preventable illness and premature death in the UK. It kills 120,000 people each year and costs the British taxpayer about £1.5 billion a year in treatment bills alone. The amendment would only add to the smokers' death toll and increase NHS costs for the treatment of smoking-related diseases. On that basis, I urge the House to reject the amendments if the hon. Member for Eddisbury presses them to a vote, and to support clause 1 unamended.

Mr. Stephen O'Brien

The Minister's response demonstrates the stubborn approach to the Taylor report that has caused widespread disappointment for a number of years. When he checks the Official Report, he might like to reflect on the point made by my right hon. Friend the Member for Fylde (Mr. Jack), not least because it will be pursued by other people. It would therefore be appropriate for the Government to answer it fully and properly.

My hon. Friend the Member for Tatton (Mr. Osborne) asked whether the Government used a model when they looked at the complex interrelation of health policy, revenue raising, smuggling, cross-border retail and wholesale trade and freedom of choice under a civilised and democratic system of Government, which has been challenged in the past day or so. It would be good if that model were publicly aired so that when Members on both sides of the House looked at these difficult and important issues on behalf of their constituents they had a common basis of information and understanding. A lot of arguments and interventions today, including those made in response to my speech, queried the veracity of the evidence base, so it would be of great benefit if the Treasury produced that model so that we could all be better informed when making such arguments in future.

I hope that the Minister does not resent the fact that we have had this debate in Committee of the whole House, as we have heard a particularly good exposition of pressing issues that affect the health of our constituents and the prosperity of people who run corner shops and other outlets. We have also heard great concern about the loss of revenue properly raised on smoking products by all Governments. I am glad that those important points were taken seriously. I am also encouraged by the Minister's decision that the rates applied by the Government were for this Budget alone. He put particular emphasis on the word "this", and we are clutching at that straw. Perhaps some of the serious arguments made in today's debate will find favour in future and, in light of the publication of the Taylor report, it would be particularly helpful if the Treasury model were made available. With those comments, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 1 ordered to stand part of the Bill.