The Opportunity

There are a set of policies that can improve health outcomes, reduce health inequalities, support economic growth – and actually raise money for the Treasury. 

They involve increasing taxes on the companies that produce unhealthy goods and services: alcohol, tobacco, and gambling. Taxing harmful products is well established as one of the most effective ways to reduce their harm, while boosting the economy by increasing workforce participation and productivity. The revenue generated by these taxes can be used to support investment, which in turn can support growth. This strategy also reduces the need to impose taxes that might weaken private investment and economic activity. 

These taxes have been neglected for different reasons. Repeated cuts and freezes to alcohol duty have been used by previous governments as a populist fig leaf to make it easier to sell Budgets that might otherwise seem harsh or regressive – even though polling suggests modest public support for higher alcohol taxes. Gambling has been under-taxed in part because of addressable complexities over VAT, and in part because of an increasingly outdated liberalising approach. Taxes on cigarettes have generally gone up over the years, but tobacco companies still make substantial excess profits that the Treasury could and should tax. 

While increasing taxes is rarely popular, alcohol, tobacco and gambling duties are generally perceived by the majority of people to be fair, and enjoy a remarkable level of support across the ideological spectrum (for example, they are similarly popular among Remain and Leave voters). Concerns over regressivity are also often overstated. Alcohol tax accounts for a broadly similar share of household spending across the income distribution, while new tobacco taxes are aimed primarily to reduce company profits. Meanwhile, the health benefits that would arise from lower consumption accrue overwhelmingly to poorer groups in society. 

Alcohol duty

Over 20,000 people die each year of alcohol-related causes in England, and this rate has spiked dramatically since the pandemic. Drinking kills people young: on average in their late 50s. Alcohol is the single leading risk factor for death, ill health and disability among 15-49 year olds in the UK. This means that alcohol has a disproportionate effect on people of working age. In 2018 – before the significant increase in harmful drinking that accompanied the pandemic – Public Health England estimated that alcohol accounted for 180,000 lost years of working life in England, around 18% of the total. It is estimated that the cost to the economy from alcohol is around £5 billion a year, between the loss of workers to premature death, unemployment, sickness absence and presenteeism (impaired performance of those in work). 

The single most effective policy lever to reduce harmful drinking is raising alcohol taxes. The evidence is well synthesised by David Roodman in a review where he concludes “the preponderance of the evidence says that higher prices do correlate with less drinking and lower incidence of problems such as cirrhosis deaths”. As a rule of thumb, every 1% increase in the price of alcohol reduces consumption by around 0.5%. 

Figure 1: Real Duty Rates, Indexed: 2012/13=100

Between 2008 and 2013, Alistair Darling’s ‘alcohol duty escalator’ ensured that alcohol taxes rose by 2% above inflation each year. Over that period, the rate of alcohol-specific deaths fell from 12.7 to 11.2 per 100,000 people. The figure had risen to 11.8 on the eve of the pandemic, and now stands at 16.6. Modelling to isolate the impact of alcohol duty cuts and freezes between 2012 and 2019 suggests that the policy was responsible for over 2,000 deaths. A separate analysis (soon to be published by University of Sheffield researchers) suggests that the decision to freeze alcohol duty in the 2024 Spring Budget will cause over 16,500 hospital admissions and 1,500 deaths over the next five years. 

Higher alcohol taxes would also be expected to reduce the rates of crime and violence relatively quickly, contributing to Labour’s mission to “take back our streets”. Around 40% of violent crime can be linked to drinking. A recent paper found an ‘April effect’ in rates of violent injury, which tended to fall when alcohol duty was increased in the Spring Budget. Their analysis suggests that a sustained 1% increase in alcohol prices would reduce emergency department attendances due to violence by 7,000 a year. 

The gradual decline in alcohol duty rates has cost lives, and harmed GDP by limiting the country’s productive capacity. It has also been expensive for the Treasury, and increased pressure on public services. If the previous government had stuck to Labour’s plans for alcohol duty – retaining the duty escalator until 2015, and raising duty in line with inflation thereafter, alcohol duty would be raising £2.3 billion more a year for the exchequer. 

Tax on gambling

The UK’s current system of gambling tax and regulation dates back to the early 2000s, established with the primary aim of "maintaining the viability and competitiveness of the industry". Since then, as recognised by the current government, there has been significant "evolution of the gambling landscape" – primarily marked by the rise of online gambling. It is increasingly argued – most prominently by Public Health England – that gambling should be considered a public health issue, analogous to smoking, alcohol and obesity. At least 0.5%, and perhaps as many as 2.5%, of adults suffer from problem gambling – somewhere between a quarter and 1.3 million people. Around 7% of the British population are believed to be negatively affected by someone else’s gambling. Problem gambling can bring a range of costs to individuals and wider society, causing financial hardship, mental and physical health issues, crime, relationship breakdown, and job loss or poorer work performance.

The UK charges a range of duties on different types of gambling, in partial recognition of these harms and costs. However, gambling currently is exempt from VAT, which means that it is under-taxed relative to goods that don’t carry these sorts of social costs. “Traditional” VAT systems like the EU have tended to deem services like gambling, which don’t have a clear ‘price’, as too complicated to tax. However, more “modern” systems like those in New Zealand and Australia demonstrate that it is possible to tax gambling. There, the tax is applied to operators, on the difference between stakes collected and winnings paid out. In Europe, Belgium has followed suit by applying VAT to online gambling. Online gambling is a particularly appropriate target for additional taxation because problem gamblers account for a greater share of online gambling. 

Extending VAT to online gambling (or increasing remote gaming duty to achieve the same objective, which would be a simpler way to achieve the same end) could raise hundreds of millions of pounds. Gambling taxes are less studied than alcohol and tobacco taxes, so it is unclear how much of an increase in tax would be passed onto consumers by operators in the shape of less generous odds, and how responsive demand would be. However, academic estimates suggest that the price elasticity of gambling is around -1, which would imply that (for example) a doubling of remote gaming duty would reduce gambling spending by around 17%. Even with such a reduction, on a conservative estimate the measure would raise around £600 million a year in revenue, not to mention the mitigation of gambling harm. Even if the tax increase is not passed through, operators might still be forced to cut back on marketing costs to pay the bill, which could reduce customer acquisition and thus indirectly reduce harm. 

Tax on tobacco companies

Unlike alcohol duty, duty on cigarettes has generally increased in recent years. That is good, because tobacco taxes have predictable benefits for public health. Yet manufacturers continue to rake in huge profits. Analysis by Dr JR Branston of the University of Bath has estimated that the four biggest firms in the UK make around £900 million a year in profit. Margins are huge: 70% of the UK net revenue of market leader Imperial Tobacco in 2021 ended up as profit. That reflects an uncompetitive market, but we do not want new entrants to come in and force prices down – we want cigarettes to stay expensive so people do not smoke.

Since we do not want tobacco company profits to be competed away, we should tax them – in a similar vein to taxes on oil and gas producers’ excess profits. Former Treasury adviser Tim Leunig has proposed a scheme whereby tobacco duty would be set at 73% of the retail price, with a minimum duty of £8.46. This would have no effect on the cheapest, lowest margin cigarettes, but would significantly cut into the profit margins of more premium cigarettes. For example, a pack retailing for £17.55 would generate £15.74 tax, up from £12.15 today, with the retailer and manufacturer getting £1.81 rather than £5.40. The All-Party Parliamentary Group on Smoking and Health has proposed a separate (somewhat more complicated) mechanism to achieve a similar end, involving explicit regulation to limit producers’ profits to 10%, and introducing a ‘health promotion levy’ to capture the rest. The upshot is the same: hundreds of millions of pounds in revenue for the Treasury (the All-Party Group anticipates £700m; Leunig £900m), taken from the profits of one of the most harmful industries in human history.