Scotland now to impose Minimum Pricing for Alcohol

This week the British Supreme Court cleared the way for the Alcohol (Minimum Pricing) (Scotland) Act 2012 to be enacted. The Scotch Whisky Association (SWA) had mounted a legal challenge to try to halt the price hike, which it said was disproportionate’ and illegal under European law. (Daily Mail) The Act will mandate that retailers have to charge a minimum of 50p per unit of alcohol. This will only affect the price of alcohol in off-licences and supermarkets. In the pub, the price of a pint with 5% ABV is already much higher than the implied price of £1.42. I went round three supermarkets – Asda, Sainsbury’s and Aldi – to see the biggest price hikes implied in the rise.

The extra profit is kept by the retailer, though gross profits may fall as sales volume falls. Premium brands only fall below the minimum price in promotions. With the exception of discounter Aldi, the vast majority of shelf space is occupied by alcohol above the minimum price. Further, there is no escalator. The minimum price will stay the same for the six years that the legislation is in place. However, the Scottish Government claims that 51% of alcohol sold in off-trade is less than 50 pence per unit. The promotions have a big impact. The Scottish people will be deprived of these offers. Many will travel across the border to places like Carlisle and Berwick, to acquire their cheap booze. Or enterprising folks will break the law by illegal sales. This could make booze more accessible to underage drinkers and bring them into regular contact with petty criminals. However, will it reduce the demand for booze? The Scottish Government website quotes Health Secretary Shona Robison.

“This is a historic and far-reaching judgment and a landmark moment in our ambition to turn around Scotland’s troubled relationship with alcohol.

“In a ruling of global significance, the UK Supreme Court has unanimously backed our pioneering and life-saving alcohol pricing policy.

“This has been a long journey and in the five years since the Act was passed, alcohol related deaths in Scotland have increased. With alcohol available for sale at just 18 pence a unit, that death toll remains unacceptably high.

“Given the clear and proven link between consumption and harm, minimum pricing is the most effective and efficient way to tackle the cheap, high strength alcohol that causes so much damage to so many families.

Is minimum pricing effective? Clearly, it will make some alcohol more expensive. But it must be remembered that the tax on alcohol is already very high. The cheapest booze on my list, per unit of alcohol, is the 3 litre box of Perry (Pear Cider) at £4.29. The excise duty is £40.38 per hectolitre. With VAT at 20%, tax is £1.92, or 45% of the retail price. The £16 bottles of spirits (including two well-known brands of Scottish Whisky) are at 40% alcohol. With excise duty at £28.74 per litre of pure alcohol, tax is £13.33 or 83% of the retail price. It has been well-known that alcohol is highly inelastic with respect to price so very large increases in price will make very little difference to demand. This is born out by a graphic from a 2004 report Alcohol Harm Reduction Strategy for England of the UK alcohol consumption in the last century.

In the early part of the twentieth century, there was sharp fall in alcohol consumption from 1900 to the 1930s. There was a sharp drop in the First World War, but after the war the decline continued the pre-war trend. This coincided with a religious revival and the temperance movement. It was started in the nineteenth century by organisations such as the Salvation Army and the Methodists, but taken up by other Christian denominations. In other words, it was a massive cultural change from the bottom, where it became socially unacceptable for many even to touch alcohol. Conversely, the steep decline in religion in the post-war period was accompanied by the rise in alcohol consumption.

The minimum price for alcohol is a fiscal solution being proposed for cultural problems. The outcome of a minimum price will be monopoly profits for the supermarkets and the manufacturers of alcoholic drinks.

It is true that a lot of crime is committed by those intoxicated, other social problems are caused and there are health issues. But the solution is not to increase the price of alcohol. The solution is to change people. The Revival of the early twentieth century, (begun before the outbreak of the Great War in 1914) saw both a fall in alcohol consumption and a fall in crime levels, that continued through the Great Depression. But it was not lacking of alcohol that reduced crime on the early twentieth. Instead, both reductions had a common root in the Christian Faith.

The Scottish Government will no doubt see a fall in sales of alcohol. But this will not represent the reduction in consumption, as cheaper booze will be imported from England, including Scottish Whisky. All that they are doing is treating people as statistics to be dictated to, and manipulated by, their shallow moralistic notions.

Kevin Marshall

 

Alcohol Concern’s anti-poor campaign

Although I am not in any way a socialist, I vigorously oppose anything where the poor and weak are made to subsidise the rich and the powerful. I also strongly oppose policy being enacted which will be to the net detriment of society as a whole. This is why I strongly oppose the latest report from Alcohol Concern “Binge – Drinking to get drunk: Influences on young adult drinking behaviours“. Before anybody gets the wrong idea, I support their concern about binge drinking, especially amongst minors. I also believe that if there were ways to improve this situation, then they should be enacted. However, if economic price incentives are involved, then one should also look at the unintended consequences.

The policy proposed is again a minimum price for alcohol. This has long been touted by the last Labour Government, the BMA and David Cameron. Yet none really understand the harm that it will cause to society. The proposal it to impose a minimum retail price per unit of alcohol of about 40p to 50p. This will not affect the cost in the pubs and clubs, where the cheapest pint of standard lager is around twice this level. It will dramatically impact the retail prices, in both small off-licences and the supermarkets. Below are some examples.


The way prices work is that premium products have not just premium prices, but larger profit margins both in absolute and in percentage terms. A minimum price for alcohol will invert this position. Suddenly a 3 litre bottle of cheap cider will have the highest profit margins not just in absolute, but also in percentage terms. This will create very perverse incentives for the retailer. One direct consequence will cause a rise in the price of drinks already over the minimum price. Consider the situation of the cheapest wine at £2.99 per bottle and the more mainstream wine at £4.99.


Even at 50p a unit, the cheap wine is still cheaper than the mainstream one. If the mainstream wine price remained unchanged, then the price premium to the consumer has dropped by 75%. Better quality has less of a premium. The retailer gets the margins reversed. The margin on the premium product goes from being 86% more to 48% less than the cheaper product. It makes sense for the retailer to increase the price. This increase might not be proportional to the cheap wine, but a least to make a greater margin in value terms.

Will the retailer end up making greater profit. This depends on something called elasticity of demand. To make less money on the cheap wine, demand would have to drop by over 72%. To make less money on the mainstream wine, demand would have to drop more than 53%.

Will this be of benefit to the supermarkets? It depends on the elasticity of demand. From Investopedia

Definition of ‘Price Elasticity Of Demand’

A measure of the responsiveness of the quantity demanded of a good to a change in its price. It is calculated as:



For the cheap wine the elasticity for break-even 72%/50.5% = 1.43

For the mainstream wine the elasticity for break-even 53%/25% = 2.12

Alcohol is well-known for being highly inelastic with respect to demand. That is elasticity measure is much less than 0.5. The supermarkets and the off-licences will make much, much larger profits on sales of cheap booze. With an elasticity of less than 1, consumers will end up spending more on alcohol than before, even though they are buying a smaller quantity. The biggest proportionate impact will be on those least able to afford that price rise. This is a double-hit. The poor spend a larger proportion of their income on alcohol than those on a higher income. They are also more likely to buy the cheaper forms of booze, which will have the larger percentage price rise.

The more equitable solution is to restructure the excise duties. The tax on alcohol should be shifted not just onto a per unit basis, but in such a way that it specifically targets the low-cost booze which is most attractive to minors. Therefore strong ciders (which I like), alchopops, and strong lagers should all have premium rates that are higher than, say, standard strength beers and wine. Weak taste drinks (Vodka, white cider) should have a premium over strong taste drinks such as real ale, whisky, or full-flavoured cider. This bigger added bonus is that there would a net gain in excise taxes, rather than just a gain in VAT receipts.