Why Minimum Unit Pricing (MUP) of Alcohol is a Bad Idea

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Proposals to introduce MUP for alcohol just do not stack up in economic or public policy terms. Establishing a State regulated cartel, which is what MUP amounts to, is not a sensible way to target alcohol abuse. There are alternative and more effective ways of reducing alcohol consumption than MUP. MUP is unlikely to significantly reduce consumption by those who drink most and will increase the profits earned by pubs, off-licences and supermarkets on sales of alcohol at consumers’ expense. MUP will divert revenue from the Exchequer into higher profits for pubs, off-licences and supermarkets. Oh, and by the way, the EU Commission and the European Court of Justice (ECJ) have indicated that it is contrary to EU law.

Shortly before Christmas, Minister for Health, Leo Varadker T.D. initiated the second stage debate on the Public Health (Alcohol) Bill which provides for the introduction of MUP in the Seanad. Six days later the European Court of Justice handed down its judgment in respect Scotland’s MUP legislation in a case brought by the Scotch Whisky Association (SWA). (We have to be up-front and acknowledge that Compecon prepared a report on MUP for the SWA). The Court’s judgment indicates that MUP legislation is likely to be in breach of EU law. The Minister responded in media interviews indicating that he intended to press ahead with his proposed legislation despite the ECJ judgment. The Minister ought to think again.

The EU Commission stated in an opinion issued on 25th September 2012 that Scotland’s MUP legislation constituted a quantitative trade restriction within the meaning of Article 34 TFEU which could not be justified under Article 36 TFEU. The Commission opinion was in response to a Scottish Government notification under the terms of Directive 98/34/EC of an order setting a minimum price of 50 pence per unit of alcohol. The Commission opinion has been largely overlooked in the Irish MUP debate.

The more recent ECJ judgment makes clear that a Member State may introduce MUP provided it does not go beyond what is necessary for the protection of human life and health but is precluded from doing so if the latter objective could be achieved by alternative means such as higher excise duties that are less restrictive of trade and competition within the EU.

There is a basic contradiction contained in the arguments advanced by proponents of MUP. On the one hand it is suggested that MUP will affect only a minority of consumers who drink harmfully and that the majority will not be affected. Almost simultaneously, however, we are told that a large number, possibly a majority of the population are harmful drinkers. The Minister, for example, told the Seanad that:

“The majority of people who drink do so in a harmful way.”

If the majority of people drink in a harmful way, it does not make a lot of sense to introduce a measure that will supposedly only affect a minority. In reality claims that only a minority of people will be affected are just plain wrong and are probably designed to minimise consumer opposition.

The facts show that alcohol consumption in Ireland has been declining for more than a decade. Alcohol consumption in Ireland in 2013 was 26% below its peak 2001 level and was even below its 1994 level. (Consumption may have increased slightly in 2014). Similar declines have been recorded in Britain. Average consumption in England and Wales is also back to where it was in 1994, while consumption has been falling in Scotland since 2007. The decline in alcohol consumption in Ireland has been much more dramatic than that recorded in Britain, although Irish consumption levels are still above those in England and Wales but are similar to Scotland.

The key point is that the sharp decline in alcohol consumption in Britain and Ireland has been achieved without MUP.

A real decline in alcohol prices, i.e. after adjusting for inflation, was a key factor behind the rise in UK consumption levels up to the mid noughties. This price drop was partly due to the fact that successive UK Governments allowed excise duties on alcohol to decline in real terms over a long period of time up to 2008. In 2008 this policy was reversed when the then UK Government increased alcohol duties by 6% in real terms and committed itself to increasing alcohol duties by 2% per annum in real terms (i.e. 2% above the general rate of inflation) until 2014, a commitment which it honoured. The increase in UK excise duties has coincided with sharp falls in consumption.

Research carried out for the Scottish Government reported that alcohol consumption had also declined in countries such as France and Italy over the past 10-20 years. The Scottish Government report stated that the reasons for the decline in alcohol consumption in France were not entirely clear. What is clear is that in both France and Italy the reductions in alcohol consumption were achieved without MUP.

One of the arguments advanced in favour of MUP is that harmful alcohol consumption by individuals imposes significant costs on society in terms of increased health costs, crime, work absenteeism and lost productivity. Such costs are usually exaggerated, Nevertheless, they are real. They are a classic example of what economists refer to as negative externalities because individuals consuming alcohol impose additional costs on society which are not reflected in the price of the product. Economic theory has long recognised that if private consumption costs are lower than the social cost this will result in excessive consumption from society’s point of view. Economics states the best way to address such negative externalities is to tax consumption so that the additional social costs are internalised. This not only reduces consumption but means that harmful drinkers would compensate society for the negative effects of their behaviour and reduce the cost borne by taxpayers in general. MUP will, however, reduce Exchequer alcohol excise receipts.

MUP adherents frequently claim that increasing taxation on alcohol will not work because retailers will not pass on tax increases. Such claims do not stack up. The February 2012 report on a National Substance Misuse Strategy concluded:

“Increasing excise duties is one of the most effective methods of reducing alcohol consumption.”

The Report stated that there had been 3 increases in excise duty rates since 2000; cider in December 2001, spirits in December 2002 and wine in October 2008. What happened? According to the report

“After each excise duty increase a decrease in consumption of the affected beverage was observed in the following years. In December 2009 excise duty was reduced. In 2010 alcohol consumption increased by 5.3 per cent.”

Incidentally the ECJ, in its judgment, expressed the view that higher taxes are ultimately passed on.

It is also suggested that tax increases do not represent an appropriately targeted measure, as they affect all consumers not just problem drinkers. Wrong – those who drink most would pay the most tax. The evidence indicates that problem drinkers are less price sensitive, i.e. have a less elastic demand, and higher taxes are more likely to be passed on when demand is inelastic. Indeed retailers are likely to raise prices by more than the rate of the tax increase when demand is inelastic.

The drinks industry tends to be opposed to higher taxes on alcohol. However, the test set by the ECJ is whether alternative measures such as excise are likely to be equally if not more effective than MUP in reducing alcohol consumption given that they are less disruptive of trade. The evidence on this point clearly favours excise duties over MUP.

MUP will substantially increase the profits earned by pubs, off-licences and supermarkets on alcohol sales. Research carried out by the School of Health and Related Research (ScHARR), whose work is regularly cited by MUP proponents, estimated that an MUP of 50p in Great Britain would increase profits on alcohol by £1.2-£1.8 billion per annum. Other studies estimated that profits would increase by even more. The Regulatory Impact Assessment (RIA) of the Scottish legislation stated:

“Although the driver for minimum pricing is the protection and improvement of public health, we note that the effects of price increases may not be disadvantageous to the alcohol industry as a whole because the estimated decrease in sales volume may be more than offset by the unit price increase, leading to overall increases in revenue.”

Not surprisingly therefore, publicans’ bodies in Ireland have been in favour of MUP while simultaneoulsy opposing increased taxes on alcohol, which sort of gives the game away. A policy that will increase profits on drink sales while reducing Exchequer revenue from drinks’ taxes makes no sense.

A further negiatve aspect of MUP is that it will disproportionately affect those on lower incomes. UK evidence indicates that those on higher incomes tend to consume higher levels of alcohol.

Minister Varadker informed the Seanad that MUP would not lead to additional profits.

“The whole point is to reduce consumption. If consumption is reduced, less alcohol will be sold and there should not be more profits”.

The Minister seems not to understand a basic economic fact that underlies all cartels – charging higher prices increases profits despite a decline in sales. One can only hope that Minister Varadker is not assigned to an economics portfolio if Fine Gael is returned to Government after the coming election.