§ 7.10 p.m.
§ The Earl of Northesk rose to ask Her Majesty's Government, in the light of the Chancellor's Budget provisions with respect to excise duties, what impact these are having and will continue to have upon independent retailers and wider society.
§ The noble Earl said: My Lords, my purpose in tabling this Question is to bring the attention of your Lordships to the issues of cross-border shopping and smuggling. Of course, these have an economic context. In 1995–96, UK revenue receipts from alcoholic product amounted to some £9.5 billion and from tobacco product some £9 billion. But it is an error to view these issues from the economic perspective alone. They have infinitely wider consequences than this. They have implications with respect to law and order, health and social cohesion. They have implications for the formulation of UK/European policy in so far as there may or may not be merit in obtaining harmonisation of excise duties within the Union. It is perhaps no accident that these threads are so topical at the moment and I look forward to the possibility of some of them being expounded in greater depth by others of your Lordships during this debate.
§ Let me begin with cross-border shopping. I can accept that this legitimate activity acts neutrally in pure terms upon the Treasury. Yes, it creates a diminution in revenue take, notably from alcohol and tobacco 1339 products, but this is compensated for by the desire of some of our continental neighbours to come to our shores to purchase other products, principally, as I understand it, a number of luxury items. Scandinavian expeditions to the north-east are a case in point. That said, while the Treasury may be relatively unaffected by this trade, I am less certain that the small retailer is similarly blessed. For example, it is worth noting that 9.5 per cent. of the UK market share for wine is currently accounted for by cross-border shopping. However, suffice it to say that relative to smuggling, I do not believe this to be a particularly acute problem.
So what of cross-border smuggling? Customs and Excise revealed the results of its survey on excise evasion through smuggling in a news release dated 19th September last. It revealed that:
the total revenue—excise duty and VAT—evaded on alcoholic drinks and tobacco products smuggled from other European Union member states could amount to some £770 million a year".
It further states that:
The amount evaded is substantial but nevertheless represents less than 5% of the annual excise duty and VAT collected on alcohol and tobacco".
The inference to be drawn is that while cross-border smuggling is, in the words of my honourable friend the Customs Minister, an,
activity [which] damages legitimate UK businesses and defrauds the ordinary British taxpayer",
at least it remains under relative control. This perception is perhaps endorsed by the further observation from the news release that:
some of the smuggling is likely to represent additional consumption, rather than substituting for similar goods bought in the UK".
The news release also provides an overview of some more specific detail. Thus:
Of the £770 million total, £210 million is for alcoholic drinks … and £560 million for tobacco products".
Indeed, the survey's analysis of market share reveals that, whereas somewhere between 1.5 and 2.5 per cent. of UK beer, wine, spirit and cigarette consumption is represented by smuggled product, the corresponding figure for hand-rolled tobacco stands at 59 per cent.
Reading between the lines, it may be that the Customs and Excise survey understates the problem. For example,
The estimate for smuggling does not include amounts for commercial fraud (where revenue is evaded by use of false documentation).
Perhaps the Minister is in a position today to quantify the loss to the Exchequer arising from such activity. The survey covers only product smuggled from other European Union member states. What is the scale of smuggling from other territories throughout the world?
§ Furthermore, the survey gives no indication as to whether any discernible trend as to an increase or decrease in smuggling activity can be extrapolated from its figures. I am mindful here that in November of last year Customs staff uncovered their biggest ever excise duty fraud: a single haul of 20 containers of cigarettes and alcohol worth £65 million. Again, perhaps my noble friend the Minister may wish to comment on that aspect in due course.1340
§ I accept, of course, that my right honourable friend the Chancellor in his Budget last November held excise duty for wines and beers at the previous year's levels. He even reduced the duty on whisky and he made allowance for the increased staffing levels at Customs points in the south-east. All these measures are, in my view, to be applauded. In addition, they are a tacit admission on the part of the Treasury that cross-border smuggling of dutiable product is a problem that requires redress.
§ More than this, Customs officers are the front line in our battle against drugs and pornography. The fight against the importation of these illegal materials to our shores should, of necessity, take precedence over that against dutiable product. By inference, without in any way understating the extremely valuable work of HMC and E in this area, addressing the problem of cross-border smuggling must, to a greater or lesser extent, play second fiddle to this priority.
§ What of the impact upon the small independent trader? The BRC has estimated that the lack of growth in the UK trade of alcoholic drinks against the pre-single market trend was £1.25 billion in 1995, directly attributable to cross-border shopping alone. Indeed, there is evidence that annual losses to individual shopkeepers may be running as high as £20,000 of turnover per annum. In addition, a national survey of 3,515 independent retailers has revealed that 89 per cent. of those surveyed believe that the situation with respect to cross-border smuggling will get worse.
§ In this context we should not lose sight of the fact that the small independent retailer, the corner shop, often provides the focus for a community's social cohesion. I should add at this point that the phenomenon of smuggling is also impacting very seriously upon the pub trade. Factors which act detrimentally upon the trade of such enterprises also seriously damage the community in which they operate. If such businesses cannot sustain themselves, the services they provide—the local post office, the National Lottery outlet, the focal point of their community—are then denied to that community.
§ I do not question the desirability of the competitive marketplace. That is an entirely worthy ambition. However, in this context the capacity of the multinationals to weather the storm of the smuggling phenomenon—it is salutary to reflect upon the selling presence of some of our major retailers in places such as Calais—is in stark contrast to the experience of the small independent trader. For these businesses, it is one thing to feel the cold competitive chill from the major supermarket operators. It is quite another to feel the weight of fiscal policy, albeit inadvertently, bearing down on them as well.
§ It is also salutary to reflect that the potential size of profit to be derived from the smuggled product, combined with an apparent minimal risk, is so great that it is a market that has attracted organised crime. We are not simply talking about individuals being somewhat over-generous with their duty-free allowances here. The problem is much bigger than that, as evidenced by, for example, the circumstantial evidence suggesting that 1341 some independent traders are being intimidated into accepting delivery of smuggled product. In effect, they are damned if they do participate in this illicit trade—in terms of the legality of so doing—and damned if they do not, not only in terms of compromising their viability but also in terms of incurring the wrath of the smugglers.
An article that appeared in the Sunday Telegraph on 15th December last year provides us with a snapshot of the current situation. It reported on HMC and E's Christmas blitz against cross-Channel bootleggers in these terms:
There is concern … among some officers, at how many bootleggers continue to escape. One said: 'There is room for only eight vans in the examination area and at peak bootlegging time-4 to 5 a.m.—you see 30 to 40 vans rolling off those ferries—.
It may well be that there is much to commend the opinion expressed by my noble friend the Minister on 4th June last that he is,
convinced, as are the Government, that the health reasons for imposing considerable duty on tobacco are unanswerable".
It is a moot point whether a similar argument could be applied to alcohol products. However right my noble friend's contention may be, the differentials created in excise duties between ourselves and our continental neighbours are now pitched at levels which are extremely difficult to justify—more so if we measure them against the scale of and damage being done by cross-border smuggling and shopping. I would go further. It is not unreasonable to suggest that those differentials are now beginning to act almost as an inducement to smuggling.
Nor would I wish to take issue with the Minister in his observations that,
we should not get the size of the problem out of proportion".
It is interesting to note that VAT and excise duty raise around £80 billion a year—£10 billion more than income tax. Nonetheless, I trust that my comments today—based, as they are, upon the Government's figures—go some way towards persuading my noble friend that the proportionality of the problem is such that it requires further and more appropriate action to be taken to stem the tide of cross-border smuggling before it becomes a flood and before it does irreparable damage.
§ 7.20 p.m.
§ Lord Harris of High Cross
My Lords, I am glad of the opportunity provided by the noble Earl, Lord Northesk, to discuss some of the consequences of high taxation of tobacco and alcohol. I am sorry to keep the Minister from his dinner; I had rather hoped that either the noble Viscount, Lord Long, or the noble Baroness, Lady Trumpington, would have been let loose on the Treasury Benches on this occasion—they being rather more smoker friendly.
Since I shall be speaking mainly about tobacco, I am pleased to declare a number of interests. I have been chairman of FOREST since 1989; I have been a pipe smoker for half a century, and a lifelong member of the "awkward squad". In all those capacities I am seriously outraged that the Government's rake-off from smokers 1342 alone now exceeds £10,000 million a year. That is equivalent to over £1 million during the short hour allotted to this debate. Smokers finance one-fifth of the entire cost of the National Health Service. Of the retail price of a packet of cigarettes, 80 per cent. is taxation. It is as though the Government help themselves to 16 cigarettes out of every packet of 20. It is the highest level of tax in Europe and, perversely, the Government are widening the gap with each Budget.
I must say at the outset that tobacco has become something of a fiscal racket. The attitude that politicians display is more than tinged with hypocrisy. They rely on this huge revenue to finance their bloated budgets, while parading their political correctness by boasting of a high-minded assault on the unfavoured smoker. Yet if they succeed in extinguishing the last cigarette and dousing the last pipe, the Exchequer stands to lose £10,000 million.
This is not a party matter. Politicians on both the Government and Opposition Benches are equally guilty. I say without meaning any personal offence that they are like pimps: living well off immoral earnings while protesting that their higher charges are only intended to reduce demand and spread virtue.
The Government rely on the demand for tobacco being relatively inelastic, thereby maintaining total revenue as consumption falls. So they pile on the agony in the sly expectation that most customers will go on paying those extortionate, regressive levies. In their zeal to punish smokers—who still make up 30 per cent. of the adult population—Labour should be more troubled than the Government that their victims are drawn disproportionately from social classes C2/DE who can least afford higher prices and have fewer other pleasures to fall back on. At the same time our persecutors have the audacity to boast that it is all for our own good. Tobacco duties are like the sumptuary taxes of a bygone age—imposed by religious bigotry as an alternative to torture and confession, all for the spiritual welfare of the wretched victim.
Predictably, extortion on this scale has provoked the corrective of avoidance and, alas, evasion. As a result of the Government raising taxes so much higher than in the rest of Europe, over 60 per cent. of hand-rolling tobacco is legally bought in Belgium and smuggled into Britain, with a loss of around £650 million in tax revenue. It is sold in pubs, clubs and boot sales, thereby bypassing the retail trade and contributing to the destruction of the corner shop. Hand-rolling tobacco is only 8 per cent. of the total market. But if smugglers were to shift their attention to the much larger cigarette market, it would be far more damaging to industry, employment and tax revenue. On my figures, the total present loss to the Exchequer, including cross-border shopping, is already approaching £1.6 billion.
What is the justification of this tax mayhem? Of course, we all know that tobacco is the greatest single cause of—statistics. But many of those statistics are misleading. One that is finding increasingly wide acceptance by the scientific community is that diet, not smoking, is the largest single cause of cancer. Let me therefore conclude with a question for the Minister and one for the Opposition.
1343 If I can persuade the World Cancer Research Fund to send the noble Lord, Lord Mackay, a list of the most dangerous foods, would the Government consider imposing taxes of 200 or 300 per cent. on the chief offending delicacies? If so, the resulting revenue could be used to reduce the wholly disproportionate tax discrimination against tobacco and alcoholic drinks. That would bring a number of advantages. It would not only strike a blow against smuggling and the decline of the corner shop; it would also help to check the danger of smuggling spreading from hand-rolling tobacco to regular cigarettes. Such a development could otherwise strike a devastating blow at one of the brand leaders of British industry struggling to maintain cigarette and tobacco exports of £1,125 million, earning a net trade surplus of £650 million, directly employing 8,000 people and supporting over 120,000 other jobs in manufacture, distribution and retailing.
Impartial as ever from the Cross-Benches, I direct a final question at the noble Lord, Lord Eatwell. It is simple. If a Labour Government harry smokers further towards extinction, how will Mr. Brown fill the increasing hole in his budget?
§ 7.27 p.m.
§ Lord Lucas of Chilworth
My Lords, like the noble Lord, Lord Harris of High Cross, I too am grateful to my noble friend Lord Northesk for posing this Question and giving us the opportunity to think about the pure statistics involved. Although my noble friend said that the Customs and Excise states in its press release that the amount of money evaded amounts to less than 5 per cent. of the total taxes from alcohol and tobacco, that does not in any way minimize the seriousness of a much wider position.
In his speech, my noble friend referred briefly to the potential profit from smuggling, with minimal risk. He said that it is now so great that it has attracted some organised crime. The evidence available to us in this country is, of course, anecdotal, so far as I am aware. However, it is that aspect of organised crime that I should like to address this evening.
I should declare my interest in this matter in that I have been a member for some four or five years of the North Atlantic Assembly and have served on the Civilian Affairs Committee of that organisation. During 1995-96 the committee engaged upon an inquiry into the effect of smuggling on the stability of society in member countries. As my noble friend said in his opening remarks, this has implications with respect to law and order, health and social cohesion. During the course of the inquiry, five visits were made to seven countries. Indeed, I went on a number of visits during which we talked with law enforcement agencies and in some countries with government ministers.
In both New York and Chicago, law enforcement agencies emphasised the necessity to crack down on any misdemeanour so as to stifle petty crime growing to the greater proportions that both those cities had endured. In New York, new policies were introduced by police commissioner Bratton and are indeed continuing. It was 1344 claimed there that this has resulted in a 27 per cent. drop in seven major categories of crime compared with two years before.
In Chicago, city dwellers expressed greater concern about organised crime than New Yorkers because they see more directly the connection between the insecurity they feel personally and larger criminal organisations. In both those cities the growth of crime stems initially from the peddling of alcohol, tobacco and of course drugs by gangs who create territories. They take over one from the other until they are sufficiently large and wealthy to engage in larger-scale criminal activities. In Germany, tobacco smuggling, particularly from Poland and eastern countries, and car trafficking from the West to eastern Europe through Germany provided what was described to us as "nursery funding". We heard evidence that this leads to a greater evil, the trafficking in people—both migrant and immigrant—largely for prostitution in the West and for the trade in human organs.
What I am suggesting is that trafficking in profit-making goods such as tobacco generates the rolling stock on the back of which criminal gangs engage in other and more evil activities. In so doing they generate even greater wealth, and with it the clout to exercise political and economic influence in societies.
On Friday 14th February, the Financial Times carried a short report of a conference in Prague. The report stated:Mr. Bickford, a former legal adviser to UK intelligence agencies and the Foreign Office, said the US mafia grossed criminal profits which made it the 20th richest organisation in the world—'richer than 150 sovereign states'The report also stated:The 'gross criminal product' from global organised crime and drug trafficking reached $1,000 bn … last year".From the figures given by my noble friend, the total revenue excise duty and VAT evaded on alcohol and tobacco products smuggled from other European Union member states could amount to £770 million a year. That figure may appear insignificant against a world total, but it is nevertheless sufficiently significant to warrant action before a much greater problem presents itself. Indeed, turning a blind eye on this aspect of crime can only encourage other and more pernicious criminal activities which we in this country have fortunately so far avoided. Nevertheless, the influence of the money generated by this crime is already evident in this country. I believe that the necessity to shield citizens from this influence is one that the Government cannot shirk.
§ 7.35 p.m.
The Viscount of Oxfuird
My Lords, my noble friend Lord Northesk has placed the nature of the problem in context. I am grateful to him.
The numbers associated with the Government's revenue are impressive and the numbers associated with the incidence of smuggling are disturbing. However, behind the numbers lurks a question, and that is: what function is taxation designed to perform? At its most simplistic it can be defined as the price that qualifying 1345 citizens have to pay for the services and goods provided by the state which are administered by the government of the day. It could be stated that the payment of tax is a straight commercial deal. That being so, excise duty on alcohol and tobacco products would seem to be set at levels where the consumer—or call him the taxpayer—is being overcharged, and the vendor—or call him the Government—is profiteering. This is underlined by the rationale that both cross-border shopping and smuggling appear to be on the increase. Obviously, product being "sold" by our continental neighbours is proving to be more attractive to our taxpayers because in terms of duty it represents better value for money.
If we look at this situation in purely commercial terms we find that if the price of a product is consistently pushed up in order to sustain the levels of revenue, the purchasers will seek either alternative product or cheaper sources of supply, thereby resulting ultimately in a serious diminution of revenue. Because excise duty is perceived to be a mechanism that can dictate the viability of a market, it is also perceived as the mechanism that can shape the attitudes of those purchasing into that market. Thus excise duty on tobacco product is used to prevent people taking up or continuing to partake of the "dreaded weed". Leaving aside any ethical arguments, this can only have a very limited impact on anything other than an entirely closed market. Where alternative sources of supply at better value for money exist, the market will sniff them out. The proliferation and apparent growth in smuggling bears this out.
For example, smuggled product, as indicated by my noble friend, accounts for 59 per cent. of the hand rolling tobacco sales in the United Kingdom. The inference must therefore be that this is an entirely unregulated market with many sales being made to those most at risk and to those who are most vulnerable; for example, the under-16s. It may therefore be said that in a perverse way the maintenance of high excise duty differentials in a free market works against the best interests of both the Government and the health lobby—so far as putative medical aspirations are concerned—by militating against reduced consumption of tobacco and alcohol by minors and others.
I follow the noble Lord, Lord Harris of High Cross, when I comment that it will be interesting to gather the views of the Opposition in this matter, particularly as Members on the Benches opposite are assuring your Lordships and the country at large that, should they ever have the opportunity, it is their intention not to raise taxes above their current level.
§ 7.40 p.m.
§ The Earl of Liverpool
My Lords, I should like to join with other noble Lords in thanking my noble friend Lord Northesk for giving us the opportunity of discussing tonight matters relating to excise duty. As has already been pointed out, the scale of revenue which accrues to the Treasury each year from excise duty and VAT is enormous. For beer, the figure is some £5.5 billion or, if one includes corporation tax, income tax and business rate, the figure is 1346 £11.4 billion; for tobacco, as we have already been told by the noble Lord, Lord Harris of High Cross, it is £10 billion. So, without taking into account wines and spirits, this represents a massive figure of approximately £21 billion.
I suppose it may have crossed the mind of my right honourable friend the Chancellor of the Exchequer to wonder, if he were to reduce the burden of tax on these products, where would he get the funds he would need to replace the shortfall. But I believe that it is necessary to question whether a reduction in excise rate would lead to a diminution of revenue to the Exchequer. Moving towards equalising cross-border tax would remove the incentive to smuggle, thereby quite possibly maintaining the tax take overall. There is no doubt, as other noble Lords have said, that the current high level of excise duty is at best an incentive to indulge in creative buying sprees in France and other countries and, at worst, an incentive to crime. So far as beer is concerned, I understand that the amount brought into this country each day from France is 1.1 million pints. That amounts to 16.5 per cent. of the entire UK take-home market. It is estimated that 33 per cent. of that is imported for illegal resale. This illegal trade is costing the country £210 million in lost beer duty and VAT, as has already been said by my noble friend Lord Northesk, but it can also be argued that it is costing a further £540 million in lost retail sales.
The situation is just as bad as regards tobacco products. The revenue loss from smuggled tobacco—I apologise if my figures do not exactly coincide with those of other noble Lords—is £560 million a year. Customs and Excise figures for seizures indicate that smuggling is on the increase. It is estimated that 60 per cent. of all hand-rolled tobacco consumption arises from cross-border trade, the majority of which is illegally imported. Once smuggled goods are peddled that leads to widespread subversion of the rule of law and is socially damaging. We must not forget that the uncontrolled sale to children is a serious problem which we really must face up to.
I believe that these trends are very worrying indeed and we cannot afford to ignore them. The point made by my noble friend Lord Northesk—and I paraphrase—about the impact the excise duties are having on independent retailers and on society at large is a very pertinent one. I am sure that no one, including my right honourable friend the Chancellor of the Exchequer, wants to encourage crime, but with beer duty approximately seven times higher here than in France, what else can one expect?
Apart from the Exchequer, independent retailers are generally the hardest hit financially by illicit trade in alcohol and tobacco. The typical corner shop—and this has been mentioned by other noble Lords—is already under threat from the ever-increasing numbers of out-of-town superstores, and their plight will only get worse if the smuggling trend continues to grow. So I hope that my noble friend the Minister can reassure the House that every effort is being made to 1347 establish greater tax harmony with our neighbours by reducing our excise rates, thereby removing the root cause of crime in this sector.
§ 7.45 p.m.
§ Lord Eatwell
My Lords, the Red Book published at the time of the Budget contains a summary of the Government's objectives with respect to taxation. Included in the list of tax objectives are,apply it fairly and evenly, closing loopholes so that commercial decisions are not distorted by attempts to avoid tax".There then follows,raise revenue in ways which do least harm to the economy and take account of the competitive position of UK business".I think it will be evident from the discussion this evening that the Government have singularly failed to meet either of those objectives with respect to the excise duties levied on alcohol and on tobacco.
What have been rather less clear, apart from calls for those duties to be reduced, are the reasons for the Government's failure in this case. I would like to suggest that there are two reasons. First, during their time in office and until this past year, the Government have been notably complacent in their attitude towards the problem of tax and revenue evasion. If only the same effort had been put into reducing tax evasion as has been put into the campaign against social security fraud, the problems that we are discussing this evening would be far less severe. The neglect of the Customs Service, manifest in the significant reductions in the numbers of customs officers, is an important element in the growth of smuggling.
The second reason for the Government's failure to meet their objectives is the fact that their influence in Europe, due to their general haphazard European policy, is really negligible. Also, the Government have shown a general hostility towards all questions of fiscal harmonisation. They have therefore totally failed to secure appropriate action from other EU governments to reduce the bizarre differentials in taxation on drink and tobacco which are, of course, the main motivation for the smuggling which has been discussed this evening. I note that in his Budget speech the Chancellor made a nod towards harmonisation in respect of the duty on spirits, but the Government have achieved little in that direction in respect of action by EU partners.
As a corollary, the Government also obviously stand accused of failing to anticipate what was a totally predictable outcome of the completion of the single market. Perhaps I may deal with tax differentials first. It is clear that Britain is suffering from substantial revenue losses from what might be called the legal cross-border shopping, which was one of the outcomes of the single market Act. These losses are of course to be expected in any single market in which there are different sales and excise tax regimes. For example, it is a familiar problem on the borders between US states.
The problem is generally regarded as "bearable" because the advantages of the single market, and for the individual states of the fiscal regime, are felt to offset losses caused by smuggling. Will the Minister tell us what is the Treasury's current estimate of the revenue 1348 losses due to "legal" cross-border shopping? If these are balanced out by shoppers coming from the Continent to Britain, what is the estimate of the loss of jobs in Britain due to cross-border shopping and does the Minister consider this loss of jobs to be a price worth paying?
Of far greater importance, of course—and it has been referred to this evening—is the illegal import of alcohol and tobacco. The incentive to smuggle derives from the differential in duty. Yet, despite the fact that many EU members are desperately short of fiscal revenue, in an attempt to reduce their deficits the Government have totally failed to persuade other states to raise their duties to reduce the incentive to smuggle. Why have the Government failed? Does it have anything to do with hostility towards fiscal harmonisation? Can the Minister tell us what steps are being taken to encourage other member states to raise their excise duties on alcohol and tobacco?
It cannot be emphasised too strongly that what we are discussing this evening is an illegal trade, which is doing considerable harm to British retailers, damaging British producers and which is costing British jobs. As noble Lords have already commented, it creates a culture of criminality surrounding the distribution of alcohol and tobacco which can do nothing but harm, particularly to young people.
The fundamental question which the Minister must answer this evening is why the Government are condoning systematic illegal acts which are costing the Treasury such enormous amounts of money? What action are the Government taking to reduce the incidence of those illegal acts and is that action proving effective?
Will the Minister begin by telling the House what has been the scale of staff reductions at Customs and Excise over the past 18 years and will he confirm that there has been a systematic reduction in staff year on year to the detriment of both revenue protection and protection against the illegal import of narcotics? The Minister will, of course, confirm that that policy was reversed only this year when the sheer scale of damage which had been done to the ability of the Customs and Excise to protect revenue had become evident even to this complacent Government.
In the Budget the Chancellor announced a number of measures which were designed to reduce tax evasion. However, of the total expenditure of £680 million, only £88 million was directed towards Customs and Excise although the table on page 106 of the Red Book makes it clear that that is by far the most cost-effective means of tackling tax evasion. When we turn to the Customs and Excise press release which accompanied the Budget, we are told that there are to be a grand total of 100 new staff to combat cross-border smuggling. What a pathetic reaction! The noble Earl, Lord Northesk, quoted a Customs officer's assessment of the inadequacy of the Customs protection provided to this country by this Government.
We were told at the time of the Budget that there would be 100 new staff, so will the Minister tell us exactly how many new staff have been hired to date? What has been the net gain in staff in the Customs 1349 Service since the Budget? Will the Minister tell us the number of additional staff assigned to combat and control smuggling and the total number of Customs officers as compared to two years ago? How many successful prosecutions have there been for the smuggling of tobacco and alcohol?
Several times during this debate noble Lords have directed questions at me. It is unusual for the Opposition to be asked questions in this House, but given that we have only three months before the general election, perhaps I ought to get in a little practice. I can assure noble Lords that there will be no holes in Labour's Budget of the sort that have been exposed in the Government's Budget in this debate. This short debate has revealed that the Government have not only failed to meet their own declared tax objectives, but they have failed to display even a minimum level of competence in dealing with a fiscal problem which was totally predictable prior to 1st January 1993. In particular, the Government have failed to provide the Customs protection against illegal activity that this country deserves. It is the Government's failure which is doing such damage to small retailers and which is costing jobs in Britain's shops and factories. The Government are again letting down the small businesses of this country.
The Viscount of Oxfuird
My Lords, before the noble Lord sits down, perhaps he could answer my question and tell the House his intentions in this regard or those of his party.
§ Lord Eatwell
My Lords, our intentions are to maintain the fiscal probity which will give this country the level of monetary and fiscal stability which it deserves but which this Government have failed to provide.
§ 7.52 p.m.
§ The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish)
My Lords, we have had an interesting debate. Perhaps I may advise my noble friend Lord Oxfuird that the real answer to the question that he has just asked is that the party opposite is saying that in the unlikely event that it becomes the Government, it will over the next two years follow the expenditure totals laid out by my right honourable friend the Chancellor in his Budget. That means inevitably that there will be no further spending above that which we have planned. I take that to be a vote of confidence by the Opposition in the spending plans that Her Majesty's Government have laid out for the next two years.
I cannot resist starting with the noble Lord, Lord Eatwell, who as usual was extremely good at scattering your Lordships' Chamber with questions. He then said that he would answer some questions, but I suspect that some of your Lordships who asked him a question will feel that you did not receive much, if anything, in the way of an answer. Perhaps I may try to answer some of those questions. Inevitably, however, I shall not be able to answer all of the questions put by the noble Lord because he can ask questions at a far faster rate than 1350 I am capable of answering them and given the time limit on this debate, I do not think that I shall manage to answer all of the detailed questions that he asked.
This has been an interesting short debate and I congratulate my noble friend Lord Northesk on introducing the subject. From the Treasury's point of view, the yield on duty alone last year from alcoholic drinks was £5.5 billion and £8 billion from tobacco. That gives a total on duty alone of £13.5 billion. If value added tax is added to that, we are talking about a total of £19.5 billion from those two sources alone. I must advise some of my noble friends that significant reductions to those duties would leave an awkward gap to be filled by increased taxation elsewhere. I shall read the comments of the noble Lord, Lord Eatwell, with interest because I was puzzled about whether he was suggesting that we should reduce the duty and value added tax on those items. That would certainly add to the £12.5 billion hole which we already know to be in Mr. Gordon Brown's theoretical Budget.
If we were to reduce the rates in this country to French levels, it would cost in the region of £7 billion—I underline the fact that that is the figure for duty. I repeat that £7 billion of the £13.5 billion would be lost if we were to reduce our rates to the level of the French. That would be a significant budgetary problem and we would have to find that sum from taxation elsewhere. As I shall show later, it would also have significant social consequences for the policy that we are pursuing on smoking.
I understand that since January 1993 cross-border shopping and smuggling problems have caused difficulties for British retailers and, to a lesser extent, for British industry. In his last Budget, the Chancellor took careful account of those issues when reaching the decisions that he did. Indeed, in his 1996 Budget, for the second Budget running, the duties on beer, on most wines and on most ciders remained unchanged and the duty on spirits was reduced. I believe that my noble friend Lord Oxfuird mentioned that. However, the duty on alcopops was increased in order to meet two objectives: first, to remove the duty advantage and, secondly, to address public concern regarding teenage and under-age drinking of those products.
Turning to smoking, the Budget increased the duty on hand-rolled tobacco in line with inflation by 2.1 per cent. All other tobacco duties were increased by 5 per cent. in real terms. I suspect that I am in a minority in this debate in being not only a non-smoker but someone who has never smoked. I am not sure whether that makes me a minority of one—but perhaps I am in a minority of two because the noble Lord, Lord Eatwell, is signalling that we agree on that at least. As we do not agree on much else, it is nice to find something on which we do agree. That is in line with the Chancellor's undertaking that tobacco duties will on average be increased by at least 3 per cent. a year in real terms, thus using taxation to reduce smoking and the number of people who take up the habit.
I must advise the noble Lord, Lord Harris of High Cross, that I object to being accused, even mildly, of political correctness. I belong to that minority which 1351 believes that a "chair" is an inanimate object on which one sits and that the person who sits on it is a "chairman". Therefore, the noble Lord was a bit wide of the mark in suggesting that I was being politically correct.
Although this is not really an argument for this evening or this debate, I believe that the argument against tobacco smoking can be made entirely on health grounds. Although I suspect that the noble Lord, Lord Harris, will not agree with me, I believe that the case is unanswerable. Hardly anyone argues against the proposition that tobacco smoking is one of the major causes of cancer, heart disease and other horrible diseases such as emphysema. Tobacco smoking is undoubtedly a major cause—in some cases, it is the major cause—of some of those problems. If a food is discovered to be severely carcinogenic, governments around the world will take steps to prevent it getting into the food chain or to remove the carcinogenic element. I do not make any apology to either the noble Lord, Lord Harris, or to some of my noble friends for saying that I agree absolutely with the arguments advanced by my right honourable friend the Chancellor on tobacco smoking and health, as do vast numbers of the medical profession; and, dare I say, people who, following a lifetime of smoking, in my view self-inflicted and self-decided, proceed to take the tobacco companies to court. I saw on television this morning that there was quite a stir in France along just those lines.
As my noble friend Lord Liverpool has said, if harmonisation or approximation of duties across the European Union comes about, cross-border activity and fraud will wither on the vine (if I may put it that way). We very much favour some movement towards convergence. Equally, we are determined to maintain the position where taxation remains a matter for each member state. I want to make that point clear to the noble Lord, Lord Eatwell. I was not sure whether he was saying that we should give away our tax-raising powers to the European Union, which would be one way of moving towards convergence. For example, we should like to see beer levels move up in countries where they are low at present. The French have just increased their rates, and that is a hopeful sign. We should also like to see the introduction of a positive minimum rate on wine and secure an upward convergence on the duty rates for tobacco. But, like all member states, we have strong views about excise taxation and unanimity is required on tax matters.
There are other potential allies on the Continent. Denmark, Finland and Sweden have high excise duties and much higher VAT. A few years ago Denmark, in order to counter cross-border shopping, brought down its duty rates on beer and wine considerably and as a consequence lost a great deal of revenue. The inevitable result was the introduction of compensation tax increases in other areas. Of course, legitimate cross-border shopping goes on and the excise duty loss there is about £200 million per year. Balanced against that, there is other cross-border shopping that works the other way. For example, in particular people from Scandinavian countries come to Scotland. I have seen 1352 Scandinavians arrive by plane at Glasgow airport in order to do very high value shopping. They come to the north-east of England—the Newcastle area—because of the ferry links. I am informed that people come from France to Kent to take advantage of the supermarkets there. It is difficult to decide those issues on the basis of a balance sheet, but we should not turn a blind eye to the fact that there are some advantages in the other direction.
As to illegal activity, it is difficult to determine the exact quantity. In the case of cigarettes and tobacco products we believe that it accounts for about 1.5 per cent. of the market. The smuggling of hand-rolled tobacco is a cause for concern. It accounts for about 60 per cent. of UK consumption. It was for that reason that the Chancellor did not increase duty on hand-rolled tobacco at the same rate as for other tobacco products.
Clearly, there is an effect on the retail drinks trade but I do not believe that the picture is a simple one. Since 1993 sales through legitimate UK outlets have increased for all drink categories with the exception of spirits. Most major and many regional brewers report increased profit levels. There have been pub closures particularly among smaller pubs that rely mainly on beer sales. Cross-border shopping aside, there are a number of other reasons why this has happened. We can all see the shift of public taste upmarket as hotel chains, restaurants and wine bars increase their stake in the eating and drinking-out markets. The off-licence trade has over the years taken business from the pubs; and within the off-licence sales sector supermarkets have increased at the expense of specialist off-licence shops, as my noble friend Lord Liverpool said.
Other factors include a shift in drink preferences from beer to other drinks such as wine. More people are drinking at home because of drink-driving laws, home entertainment but, most significantly, cheaper drinks from off-licences and supermarkets than can be obtained in pubs. It is important that these longer-term trends are recognised and that not all the changes that the industries are experiencing are a direct consequence of the single market. There is loss of trade and duty, but that is only part of the argument.
What are we doing about smuggling? Our top priority is to catch smugglers. The ordinary consumers who go to another EU member state to buy for their own consumption are doing nothing illegal. Smuggling goods from another member state with the intention of reselling them is a crime; dealing in smuggled goods is a crime; buying smuggled goods is a crime. Customers estimates that the revenue evaded through smuggling from other member states is £210 million for alcoholic goods and £560 million for tobacco products. Some of these figures will represent additional consumption. It is interesting to note that, according to Customs estimates, the volume of smuggled wine is less than 25 per cent. of that represented by legitimate cross-border trade. There is no available estimate of smuggling from outside the EU, but evidence from seizures suggests it is not on the same scale as intra-EU smuggling.
1353 In his November Budget the Chancellor announced proposals for the deployment of a further 70 officers specifically to target excise smuggling and illegal trade throughout the country. This will take the number of Customs' single market excise anti-smuggling staff to more than 330 over the next year. Front-line officers are backed up by a specialist intelligence and investigation teams whose resources are also being increased.
§ Lord Eatwell
My Lords, perhaps the noble Lord will allow me to intervene. We are all aware of the Chancellor's announcement. Can the Minister say how many new Customs officers have actually been placed in post since the Budget?
§ Lord Mackay of Ardbrecknish
My Lords, I do not have the figure to demonstrate how we are progressing with recruitment of the further 70 officers. However, I have explained that over the next year we will be approaching the total of 330 Customs officers. I am sure that the noble Lord approves of that. Obviously he would like more money to be spent on that. During the 12 months ending on 31st October Customs recorded 2,600 seizures involving 57.5 tonnes of hand-rolled tobacco and an increased quantity of alcohol. We take the trade concerns very seriously. Customs has a forum with the trade called the Excise Alliance which develops co-operative approaches to smuggling detection and exchanges high level information on smuggling and fraud.
There is no official estimate of the extent of large-scale commercial fraud. By their nature such activities are very difficult to quantify, as I am sure my noble friend Lord Northesk, who raised this matter, appreciates. We take it very seriously and continue to combat it. This will be aided by additional staff, numbering some 130, who are also to be deployed under the Chancellor's Spend to Save initiative.
My noble friend Lord Lucas of Chilworth raised questions about "serious crime" smuggling, in particular smuggling related to other aspects of criminality. He told us about matters that he had learnt as a UK delegate to the North Atlantic Assembly. It appears that the majority of revenue smugglers are individuals who simply look for enhanced profit from their illegal trade. Sometimes they work in very large rings, but there is little proof that such criminals are connected with organised crime or drug smuggling. In the words of my noble friend, there is little proof that the money earned from alcohol and tobacco smuggling is being used as nursery funding for other types of criminal activity. We continue to watch this matter very carefully.
At operational level Customs officials have a very good working relationship with their counterparts overseas. That co-operation has led to significant numbers of seizures of smuggled excise goods. We should pay tribute to the work that is done by Customs and Excise officers in protecting society by the investigation of drug smuggling and dismantling the trafficking organisations, which is one of the department's highest priorities. They work closely with the police. A terrific spirit of co-operation is engendered 1354 in the Government's strategy Tackling Drugs Together, to which both we and HM Customs and Excise are fully committed. Of course, Customs also gives high priority to the smuggling of commercial pornography, paedophilia, firearms, endangered species and other prohibitions and restrictions. The resources available to Customs must be balanced between front-line anti-smuggling officers, investigation officers and intelligence staff. Their joint efforts achieve significant results. For example, to date in this financial year about £1.5 billion worth of drugs have been prevented from entering the UK. The other day in the Scottish courts individuals were brought to justice for some very serious drug smuggling.
To sum up, we recognise the problems of cross-border shopping and the smuggling that we have discussed this evening. We recognise the threat that that poses to UK revenue and to legitimate trade. Consumers are entitled to benefit from the single market but smugglers are not. I assure my noble friends and other noble Lords that we are determined to pursue them with the utmost vigour and will continue to fight our corner with our friends in the Community. In making his Budget decisions, the Chancellor will balance a whole range of factors. One of those factors will be, as in the past, cross-border shopping, the smuggling of goods and the impact that that has on legitimate trade in this country.
This has been a most interesting debate. Again, I congratulate my noble friend Lord Northesk on introducing it.