What is Minimum Unit Pricing?
On 5th May the Government announced that minimum unit pricing (MUP) for alcohol will come
into force from January next. MUP sets a floor price below which alcohol cannot legally be sold.
Section 11 of the Public Health (Alcohol) Act 2018 set the MUP at 10c per gram of alcohol.
However, this provision has not been implemented, until now.
Why is MUP Being Introduced?
According to the Government and MUP advocates, MUP is designed to reduce harmful drinking
by increasing the price of “cheap” alcoholic drinks products. Announcing the decision to bring
MUP into force from January next, Health Minister, Stephen Donnelly T.D. stated:
“The Act is designed to reduce alcohol consumption, to reduce the harms caused by the
misuse of alcohol and to delay the initiation of alcohol consumption by children and
young people.”
The case for MUP does not, however, stack up in economics terms. (We have to be up-front here
and acknowledge that Compecon prepared a report on Scottish MUP legislation for the Scotch
Whisky Association (SWA). Click here to view 2012 presentation by Compecon Director Patrick
Massey to the European Parliament on the Scottish legislation). Establishing a State regulated
cartel, which is what MUP amounts to, is not a sensible way to target alcohol abuse. MUP will
divert revenue away from the Exchequer and generate higher profits for pubs, off-licences, and
drinks producers at consumers’ expense.
What We Do
Apply state of the art economics in the analysis of competition law mergers and regulation.
How Much Do Irish People Drink?
Irish people have been drinking less for the past 20 years as the following chart, which is based on data from the Health Research Board, demonstrates.
Alcohol consumption in Ireland measured in terms of litres of pure alcohol (lpa) consumed per person aged 15 and over (which is the standard measure applied internationally), increased significantly in the late 1990s peaking at 14.3 lpa in 2001 and it has pretty much declined ever since. Preliminary estimates indicate that alcohol consumption per head in 2020 was 10.07 lpa. This is a decline of 30% on 2001 consumption levels. That’s right. Alcohol consumption per person in Ireland has fallen by 30% over the past 20 years. Not only that, consumption in 2020 was the lowest recorded for over 30 years. Bizarrely Alcohol Action Ireland (AAI), a group which describes itself “as the national independent advocate for reducing alcohol harm” described the 2020 outturn as “very disappointing”. AAI subsequently announced that alcohol consumption in the first three months of 2021 was 18.7% lower than in the same period in 2020. The evidence clearly indicates that alcohol consumption in Ireland has fallen significantly, raising serious doubts about the need for MUP.
The following chart compares alcohol consumption in Ireland and the UK.
In 2001 alcohol consumption per person in Ireland was 29% higher than in Scotland and 42% higher than in England and Wales. (Click here to access UK consumption data). While alcohol consumption in the UK has declined since 2005 (in England and Wales) and 2007 (in Scotland), alcohol consumption in Ireland began falling earlier and has fallen faster. Irish consumption in 2020 at 10.07 lpa was just 2% higher than Scotland’s 2019 figure (the latest available). Irish consumption per capita is still 10% higher than in England and Wales but the gap has narrowed considerably over the past 20 years.
MUP is Bad for Consumers.
MUP proponents have sought to downplay the impact of MUP by claiming it will only affect harmful drinkers and understating the impact on price. The Department of Health have been rather coy to say the least in downplaying the impact of MUP on prices. For example, they claim that the average price of a can of beer would increase to €1.32 but this is based on a 440ml can of beer with 4% abv when most cans are 500ml and have a higher abv. When challenged by the Irish Independent the Department responded.
“The volume of cans of beers, ales and lagers that are available for sale range from 330ml to 500ml. A 440ml can of beer is one example used to demonstrate the impact of minimum unit pricing.”
According to paper the price of most cans of beer will move closer to €2. MUP means the price of drink will increase significantly.
There is a basic contradiction contained in the arguments advanced by proponents of MUP. It is also regularly claimed that MUP will only affect 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. When the legislation was before the Oireachtas, then Minister for Health and current Tanaiste, Leo Varadkar T.D. 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 only affect a minority. In reality claims that only a minority of people will be affected seem designed to downplay the impact in order to minimise consumer opposition until the legislation has been implemented.
MUP in Scotland
It is worth noting that Scotland introduced MUP in May 2018, although alcohol consumption in Scotland had been falling since 2007. Scottish alcohol consumption per capita in 2017 was 11% lower than in 2007. Alcohol consumption per capita in Scotland in 2019 (the latest year for which figures are available) was 4.8% lower than in 2017 suggesting that MUP has had relatively little effect. A Public Health Scotland survey of under 18s who reported that they drank alcohol found that MUP had no impact on survey participants’ purchases and consumption of alcohol. One of the stated objectives of MUP is to reduce underage drinking.
Research carried out for the Scottish Government prior to its introduction of MUP reported that alcohol consumption had also declined in France and Italy over the previous 10-20 years. These reductions in alcohol consumption were achieved without MUP.
Alcohol and Negative Externalities
One of the arguments in favour of MUP is that harmful alcohol consumption by individuals imposes costs on society in terms of increased health costs, crime, work absenteeism and lost productivity. One can debate the magnitude of these costs, but they are significant. Such costs are a classic example of what economists refer to as negative externalities. This describes a situation whereby 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 the private costs of consuming a product are lower than the social cost to society 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 social costs are internalised. This is similar to the “polluter pays” principle. This not only reduces consumption but means that harmful drinkers would in effect compensate society for the negative effects of their behaviour and reduce the cost borne by taxpayers in general. MUP is actually predicted to 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. The evidence clearly indicates otherwise.
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 HRB also concluded that excise taxes affect alcohol consumption. Commenting on the steep increase in alcohol consumption up to 2001, the HRB noted:
“Alcohol may have been more accessible to consumers during this period due to increased disposable income combined with no increases in excise duty on alcohol.”
A December 2002 increase in excise duty on spirits “likely contributed to the 6.3% decrease in consumption between 2002 and 2003.” The economic downturn following the financial crash resulted in a sharp decrease in alcohol consumption in 2008 and 2009. In
December 2009, excise duty on all alcohol products was reduced by 20–21% and alcohol consumption increased by 5.5% the following year. In December 2012, excise duty on alcohol products was increased by 37–62% and alcohol consumption in 2013 declined by 8.7%.
As in Ireland, alcohol consumption in the UK increased in the early noughties as the real cost of alcohol declined due to the fact that excise duties had declined in real terms over many years. In 2008 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 alcohol consumption.
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.
MUP Increases Drink Industry Profits
MUP will substantially increase the profits earned by pubs, off-licences and supermarkets on alcohol sales while reducing Exchequer tax revenue. According to a 2015 report prepared by the Oireachtas Library & Research Service, MUP will reduce Exchequer revenue by €34.43 million while simultaneously increasing annual profits in both the on- and off-trade by €9 million and €69 million, respectively. That’s right MUP will increase the profits of off-licences, including supermarket multiples, by €69 million a year. Then Minister for Health Leo Varadkar informed the Seanad that MUP would not lead to higher profits on drink sales.
“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’s statement not only ignores the evidence provided by the Oireachtas’ own research service but demonstrates a failure to understand a basic feature of cartels, that charging higher prices increases profits. The extra profit from selling a smaller amount at a higher price, exceeds the loss from any drop in sales.
The Regulatory Impact Assessment (RIA) on Scotland’s MUP legislation heralded the fact that it would lead to higher drink industry profits as a benefit.
“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, the drinks industry in Ireland have largely been in favour of MUP, (NOffLA Urges Government to Swiftly Enact Public Health (Alcohol) Bill), while strenuously opposing increased taxes on alcohol, which sort of gives the game away. They have changed their position of late due to concerns about increased cross-border traffic now that the Government has decided to implement MUP in the absence of similar rules in Northern Ireland. Drinks Ireland have claimed that MUP will mean off-licence drink prices in the Republic would be double those in Northern Ireland. If correct we can expect a big increase in cross-border shopping. A policy that will increase profits on drink sales while reducing Exchequer revenue from drinks’ taxes is not a sensible way to reduce alcohol consumption which has been declining for the past 20 years anyway.