Finance Bill

Public Bill Committee, 14 May 2002.

Standing Committee F

(Except Clauses 4, 19, 23, 26 to 29, 87 to 92, 131 and 134 and Schedules 1, 5 and 38)

Roger Gale (Conservative, North Thanet)

Order. Before we start, there are a couple of housekeeping matters. First, hon. Members who have not already done so may, while I am in the Chair, remove their jackets. I cannot speak for Mr. Benton, who will decide whether to afford the Committee the same concession.

Secondly, would hon. members please switch off their mobile phones when they take their seats? It would be helpful if they did not ring during our proceedings.

Thirdly, there is no timetable motion, but I am reliably informed that we may complete our proceedings in time to enjoy the summer. However, there is a sittings motion and I call the Minister to move it.

Dawn Primarolo (Labour, Bristol South)

I beg to move,

That, during proceedings on the Finance Bill (except Clauses 4, 19, 23, 26 to 29, 87 to 92, 131 and 134 and Schedules 1, 5 and 38), the Committee do meet on Tuesdays at half-past Ten o'clock and half-past Four o'clock and on Thursdays at half-past Nine o'clock and half-past Two o'clock.

Good morning, Mr. Gale. I welcome you to the Chair. I speak for the whole Committee in saying that we welcome your expertise and know that you will keep us on the straight and narrow while not allowing us, however much we may be tempted, to stray on to matters that are not strictly relevant. I know that you and Mr. Benton will have a light touch so long as the Committee conforms to required conduct.

I welcome the hon. Member for Buckingham (Mr. Bercow), who will lead for the Opposition. I know that he relishes the opportunity of scrutinising Government business and I look forward to the many ways in which he explains, describes and challenges it with his vast vocabulary. I know that my right hon. Friend the Financial Secretary, too, is looking forward to those discussions.

I also welcome the right hon. Member for Fylde (Mr. Jack), who is an experienced member of the Committee, having been Financial Secretary and having participated in most of our Finance Bills since 1997. I look forward to thoughtful and challenging debates with him.

Roger Gale (Conservative, North Thanet)

Order. We cannot have people who are not Members in the body of the kirk. The Rope delineates the body of the Committee and perhaps the person concerned would take a seat.

Dawn Primarolo (Labour, Bristol South)

I note that the hon. Member for Aylesbury (Mr. Lidington) has escaped the pleasure of being a member of the Committee and I put on record

our congratulations on his new appointment as rural affairs spokesperson for the Opposition. It is his loss that he will not experience the thrilling detail of debate in this Committee.

This my sixth Finance Bill as a Minister. They run into one another and I think that I have taken part in eight—two as an Opposition Treasury spokesperson. The hon. Member for Arundel and South Downs (Mr. Flight) has participated in three and the way in which he has conducted business in the past—usually in good humour, but not always—bodes well for the Committee and our debate on the details of the Bill. I welcome the hon. Member for Kingston and Surbiton (Mr. Davey), who has been on every Finance Bill since 1997; he is an expert on many of the issues and is gathering further expertise quickly.

I welcome the many talented, able and excellent Labour Members, who I know will support the Government and ensure that we are properly scrutinised. I also welcome Opposition Members who have already proven themselves in debates on the Floor of the House. I am indebted to my right hon. Friend the Financial Secretary and my hon. Friend the Economic Secretary for making progress for the Government as the ministerial team leading the Finance Bill.

It is a good idea to get off to the right start, so may I welcome the Whips? My hon. Friends the Members for Basildon (Angela Smith) and for Bradford, South (Mr. Sutcliffe) will keep us in order. I welcome the hon. Member for Mid-Worcestershire (Mr. Luff), who is the Opposition Whip; he enjoys Finance Bills so much that he cannot remember whether he has been on three or four because each of them has been such an ecstatic experience. I welcome the police officers, the Hansard writers and the Clerks, who will ensure that we keep to the business.

Let me quickly address a few details in the motion. The Committee will proceed from clause 1 through the Bill in an orderly fashion. The motion suggests that there should be some movement of clauses to facilitate debate—I hope that Opposition Members agree to that. Clause 36 follows clause 33 because it is a consequential clause on minor benefits and employer-subsidised bus services. Clause 39 will follow clause 37—

Roger Gale (Conservative, North Thanet)

Order. I am sorry to have to interrupt the Minister again, but she is moving on to the order of consideration, which is to be debated shortly, and away from the sittings motion.

Dawn Primarolo (Labour, Bristol South)

Thank you, Mr. Gale. In my desire to conclude this part of the business, I have got ahead of myself.

As we begin consideration of the Finance Bill, I should like to echo your point, Mr. Gale: I hope that we do it in an orderly fashion, but in a way that will ensure that we see some of the English summer. I welcome you, Mr. Gale, and members of the Committee.

John Bercow (Conservative, Buckingham)

It is a pleasure to join the Paymaster General in supporting the sittings motion.

I should like to begin my remarks, as she began hers, with a warm welcome to you, Mr. Gale. From past experience, many hon. Members will be able to testify that the Committee will be chaired with a combination of firmness, discretion and humour, which are the guarantors of good progress and a harmonious atmosphere. I am also pleased to return what I shall choose to interpret as a compliment from the Paymaster General. It is a pleasure to joust with her. We spoke earlier about how many Finance Bills she had been involved with—they number no fewer than eight. I can honestly say—I speak for my hon. Friend the Member for Arundel and South Downs as well—that the hon. Lady has built up a formidable reputation as somebody who knows her onions and does her homework. We treat that with respect and consideration.

The fact that the hon. Lady and I go back some way should not remain a state secret, as it is important to put to rest any uncertainty about the matter. I fought the Bristol, South constituency in 1992, long before the consideration of the sittings motion. From my point of view, the downside was that the constituency of Bristol, South fought back. The hon. Lady converted a marginal Labour seat into a safe Labour seat, and I had to pursue my parliamentary peregrinations elsewhere. I believe that I can safely say that things have moved on somewhat since that time. The hon. Lady and I enjoy better relations now than we did in those days, because I am marginally more civilised than I was then, although I emphasise the word ''marginally.''

It is also a pleasure to debate the Bill with the Financial Secretary and other Committee members. I wish to echo what the Paymaster General said about the importance in the process of the respective Whips. My Whip for this Committee, my hon. Friend the Member for Mid-Worcestershire, is decent, considerate and keen that we make proper progress. I know that the same can be said of the hon. Members for Bradford, South and for Basildon. The hon. Member for Bradford, South is one of the true gentlemen of the Government Whip's office. I do not wish to wreck his future prospects in making the observation that he commands respect and, indeed, affection among many Conservative Members. I hope that that is also true among Liberal Democrats and members of other parties. I have regularly jousted with the hon. Member for Basildon. I believe that her political activities before she entered the House fully justify my innocent observation that, in addition to all her other qualities, she is renowned as a foxy lady.

The Bill is lengthy—it is 488 pages long and consists of two volumes—and 604 pages of explanatory notes accompany it. There are many important issues to consider, and there is scope for considerable and, perhaps, extensive discussion. However, we want to enjoy the summer months. We do not want to take excessive time if it is not necessary, which is why I join the Paymaster General in underlining the commitment to make timeous progress. I am sure that when you, Mr. Gale, are not here, Mr. Benton will also chair the Committee with consummate skill.

My final observation is that I am joined by an admirable team on the Conservative Benches. I single out my right hon. Friend the Member for Fylde, who is a distinguished former Financial Secretary to the Treasury. His contributions in Finance Bill Committees carry weight and are listened to with respect. There will be many occasions in the next few weeks when we on the Conservative Benches will be the better for his guidance, and I look forward to the benefit of it.

I am also assisted by my hon. Friend the Member for Arundel and South Downs. Many will know not only of his experience with Finance Bills but of his day-to-day involvement in the work of many of the institutions that are the subject of parts of the legislation. In other words, my right hon. Friend is not merely a theorist but someone with practical know-how that is born of his commercial acumen and the track record that goes with it.

I am delighted to be assisted as well by a former Minister, my hon. Friend the Member for Christchurch (Mr. Chope), and by my hon. Friends the Members for Cities of London and Westminster (Mr. Field), for Epsom and Ewell (Chris Grayling) and for Fareham (Mr. Hoban). The Finance Bill Committee is an enticing prospect. We should now proceed without delay to consideration of the clauses.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I do not wish to disappoint the hon. Member for Buckingham, but I wish to add a few remarks before we proceed to the next motion. I begin by welcoming you, Mr. Gale, to the Chair. We look forward to the next six—possibly seven or eight—weeks of Committee sittings under your guidance and the guidance of your fellow Chairman, Mr. Benton. We hope that he will be as generous as you have already been in allowing us to remove our jackets when appropriate.

I welcome all hon. Members to the Committee. The danger of a sittings motion is that the Committee can turn into an Oscar night in which thanks become welcomes, and I will therefore not single out too many individuals. However, I particularly welcome the Paymaster General to the Committee. She and I are possibly the only members of the Committee, and certainly the only members on the Front Benches, who have served on every Finance Bill Committee since the 1997 election. Unlike her, I was not on Finance Bill Committees before that, but I acted as a researcher for my right hon. Friend the Member for Berwick-upon-Tweed (Mr. Beith) on Finance Bills between 1989 and 1993. If I add those four Finance Bills to the six in the past Parliament, I have a pedigree, or perhaps a sentence, to declare.

I welcome the Conservative Front Benchers led by the hon. Member for Buckingham, who will, I hope, be present in many of our meetings. I look forward both to jousting with him and to enjoying his jousts with others. I am sure that he will joust in a way that excites and interests the listener. When I listen to him I always think that he ought to apply to appear on ''Just a Minute'', as he is the Member of Parliament most

qualified to speak in the way required by that wonderful radio programme. I would be happy to act as his referee if he were looking for another job.

I welcome my hon. Friend the Member for Torridge and West Devon (Mr. Burnett), who brings to the Committee his expertise as a former tax lawyer. I have enjoyed his pertinent contributions in previous Finance Bill Committees.

I look forward to many contributions from Labour Members. I am sure that they will want not only to extol the virtues of the Government's legislation, but to join the Opposition in trying to find the problems that lie therein. I am sure that the Whips will give them leave to speak for as long and as often as they want.

It strikes me that prior to some of our morning proceedings a few football matches will take place. We shall see whether or not the World cup enters into our discussions, but I am sure that a few pagers will be vibrating with results.

It is worth making a serious point in this short debate. I shall not make a long point because the Paymaster General is well aware of my thoughts on this subject. Accountants, tax lawyers, tax advisers and business people look to Parliament to improve the way in which we develop tax law. One of their observations is that the proceedings of the Finance Bill Committee often do not help them when they are considering the interpretation of the law and trying to apply it. We have an onerous task, and we should recall the number of people who will trawl through our speeches—especially those by Treasury Ministers—to see the original intention behind the many words added to the statute book. Our proceedings are serious, and I hope that we can do better than many of our predecessors.

Michael Jack (Conservative, Fylde)

I rise, first, to salute your chairmanship of the Committee, Mr. Gale, and that of Mr. Benton, and I appreciate the kind words from both Government and Opposition Front Benchers.

In furtherance of the agenda laid out in the Finance Bill, the Government will undoubtedly get particular help from the hon. Member for Glasgow, Maryhill (Ann McKechin). When we discussed oil taxation in the House, I was struck by her willingness to join in and justify increases in tax. There are rising stars on the Back Benches, as well as established stars on the Front Benches.

In all seriousness, I hope that much of the Bill touches upon matters connected with business. When Opposition Members ask for detail and justification on how numbers, rates of tax and effects of tax have been arrived at, I hope that we shall have the benefit of full and cogent explanations from the now veteran performer, the Paymaster General. As she rightly said, she has undertaken many Finance Bills. If there were medals of honour going, I think she would be first in line to receive a long service medal for such Bills.

If the going gets tough, I note with interest that the hon. Member for Basildon is one of the Government

Whips. I have had the pleasure of competing with her, but from another dimension—the front wheel of a saloon racing car. In spite of the rigours of the Lords v. Commons race at Donnington, she proved capable of conducting herself with aplomb under pressure. If there are any pressures during the Bill, we will look to her to guide our proceedings.

Question put and agreed to.

Resolved,

That, during proceedings on the Finance Bill (except Clauses 4, 19, 23, 26 to 29, 87 to 92, 131 and 134 and Schedules 1, 5 and 38), the Committee do meet on Tuesdays at half-past Ten o'clock and half-past Four o'clock and on Thursdays at half-past Nine o'clock and half-past Two o'clock.—[Dawn Primarolo.]

Roger Gale (Conservative, North Thanet)

I am grateful to all right hon. and hon. Members for their kind remarks. Looking around, I am absolutely certain that the Committee will proceed with the customary courtesy and good humour.

I have several announcements before we proceed. Copies of the Ways and Means and money resolutions agreed to by the House, on which the Bill is founded, are available on the Dais behind me. In view of the resolutions of the House relating to the declaration of interests, right hon. and hon. Members are required to declare relevant interests when they table amendments as well as when they speak to them. Copies of those rules are available from the Clerk. As usual, because of the quantity of paperwork on the Bill, boxes are available to store papers between sittings. Members making use of that facility should note that the filing cabinet that contains the boxes will be locked when the Committee is not sitting.

I draw attention to the fact that adequate notice of amendments must be given. As a rule, neither Mr. Benton nor I shall call starred amendments, including any that may be reached during an afternoon sitting. I have already mentioned, but will remind right hon. and hon. Members again, that they should turn off mobile phones and other noisy electronic equipment prior to taking their seats.

Finally, to avoid any further confusion and embarrassment, the Bar of the Committee Room is the Rope in front of me. The area beyond that is for the use of the general public and the area on this side of the Rope is the Committee Room. Members will notice that there are only two Officers of the House and that there are three Doors. It would be helpful if Members could use the central Door, with the broadcasting light over it, and avoid clambering round the Rope to speak to assistants or research staff beyond. If Members wish to make contact with their assistants, will they please be kind enough to use the central Door and have their discussions outside the Room? That will enable the Officers of the House to maintain proper order and security at both ends of the Room.

Dawn Primarolo (Labour, Bristol South)

I beg to move,

That the Order in which proceedings in Standing Committee on the Finance Bill are to be taken shall be Clauses 1 to 3, Clause 5, Schedule 2, Clause 6, Schedule 3, Clauses 7 to 12, Schedule 4, Clauses 13 to 18, Clauses 20 to 22, Clauses 24 and 25, Clauses 30 to 33, Clause 36, Clauses 34 and 35, Clause 37, Schedule 6, Clause 39, Clause 38, Clauses 40 to 42, Schedule 7, Clause 43, Schedule 8,

Clause 44, Schedule 9, Clauses 45 and 46, Schedule 10, Clauses 47 to 50, Schedule 11, Clause 51, Clause 117, Clause 52, Schedule 12, Clause 53, Schedules 13 and 14, Clauses 54 and 55, Schedule 15, Clause 56, Schedules 16 and 17, Clause 57, Schedule 18, Clause 58, Schedule 19, Clauses 59 and 60, Schedule 20, Clauses 61 and 62, Schedule 21, Clause 63, Schedule 22, Clauses 64 to 66, Clause 101, Clauses 67 to 78, Schedule 23, Clause 79, Schedule 24, Clauses 80 and 81, Schedule 25, Clause 82, Schedules 26 to 28, Clauses 102 and 103, Clause 105, Clause 83, Schedules 29 and 30, Clause 104, Clause 84, Schedule 31, Clause 85, Schedule 32, Clause 86, Clauses 93 to 100, Clauses 106 and 107, Schedule 33, Clauses 108 and 109, Schedule 34, Clauses 110 and 111, Schedule 35, Clauses 112 to 114, Schedule 36, Clauses 115 and 116, Clauses 118 to 129, Schedule 37, Clause 130, Clauses 132 and 133, Clauses 135 to 140, New Clauses, New Schedules, Schedule 39.

I shall explain the pasting together of some clauses for the convenience of the Committee. As the Bill is currently laid out, if we proceeded through it from clause 1, we would find that some clauses dealing with the same issues are in different places. To facilitate discussion and to debate the same issues in one go, the order of consideration makes the following suggestions, which I hope the Committee will accept.

Clause 36 will follow clause 33, so consequential and minor benefits will be in the same debate as the employer-subsidised bus service. Clause 39 will follow clause 37. Those clauses are on minor amendments to the Schedule E charge and to the employee share ownership plans, prior to the tax law rewrite projects work on Schedule E.

Clause 117 will follow clause 51, which covers the same issues about variations of dispositions taking effect on death, with regard to capital gains tax and inheritance tax. Debate on clause 101 follows debate on clauses 63 to 66. Those refer to accounting practice, periods of account and tax accounting change. It makes sense to deal with those debates in one go. Clauses 102, 103 and 105 will follow clauses 68 to 82. Those relate to discounted securities, financial trading stock, banks in compulsory liquidation and forex and loan relationships. That will also enable us to deal with the debates in one go. Clause 104 follows clause 83. Those cover valuation trading stock on transfer with trade and intangibles.

That process will help Committee members to focus specifically on those debates at the most convenient time and ensure that our consideration runs as smoothly as possible.

John Bercow (Conservative, Buckingham)

The proposed order of consideration as outlined by the Paymaster General seems sensible and, on behalf of the Opposition, I commend it to the Committee.

Question put and agreed to.

Resolved,

That the Bill be considered in the following order, namely, Clauses 1 to 3, Clause 5, Schedule 2, Clause 6, Schedule 3, Clauses 7 to 12, Schedule 4, Clauses 13 to 18, Clauses 20 to 22, Clauses 24 and 25, Clauses 30 to 33, Clause 36, Clauses 34 and 35, Clause 37, Schedule 6, Clause 39, Clause 38, Clauses 40 to 42, Schedule 7, Clause 43, Schedule 8, Clause 44, Schedule 9, Clauses 45 and 46, Schedule 10, Clauses 47 to 50, Schedule 11, Clause 51, Clause 117, Clause 52, Schedule 12, Clause 53, Schedules 13 and 14, Clauses 54 and 55, Schedule 15, Clause 56, Schedules 16 and 17, Clause 57, Schedule 18, Clause 58, Schedule 19, Clauses 59 and 60, Schedule 20, Clauses 61 and 62, Schedule 21, Clause 63, Schedule 22, Clauses 64 to 66, Clause 101, Clauses 67 to 78, Schedule 23, Clause 79, Schedule 24, Clauses 80 and 81, Schedule 25, Clause 82, Schedules 26 to 28, Clauses 102 and 103, Clause 105, Clause 83, Schedules 29 and 30,

Clause 104, Clause 84, Schedule 31, Clause 85, Schedule 32, Clause 86, Clauses 93 to 100, Clauses 106 and 107, Schedule 33, Clauses 108 and 109, Schedule 34, Clauses 110 and 111, Schedule 35, Clauses 112 to 114, Schedule 36, Clauses 115 and 116, Clauses 118 to 129, Schedule 37, Clause 130, Clauses 132 and 133, Clauses 135 to 140, New Clauses, New Schedules, Schedule 39.—[Dawn Primarolo.]

Clause 1 - Rates of tobacco products duty

Paul Boateng (Labour, Brent South)

May I add my voice, Mr. Gale, to the Committee's chorus of approval and satisfaction at the privilege of serving under you during the course of our proceedings. I heard you say in response to a remark by the hon. Member for Kingston and Surbiton that it was for you to referee the Committee. We have heard a lot, not least from the hon. Member for Buckingham, about jousting. I must confess that I do not associate the hon. Members for Buckingham or for Christchurch so much with jousting as I do with the World Wrestling Federation and all that goes with it. Therefore, I fear that your skills as a referee may well be sorely tried in the course of the proceedings, but I have no doubt that you, who have wrestled with the best of them, will be able to keep us all under control.

I do not think that such refereeing will be necessary in relation to clause 1. It is an innocuous clause. Smoking is the single largest cause of preventable illness and premature death in the United Kingdom, killing about 120,000 people every year. Research has consistently shown that the price of cigarettes does affect demand, so maintaining the high price of tobacco encourages people to stop smoking and deters people—particularly the young—from taking up the habit. As a result of the large real-terms increases in duty under this, and previous Governments of all political persuasions, cigarette prices in the UK are now at historically high levels. Our decision to raise duties in line with inflation this year will help to maintain the real price, and will discourage people from smoking. I believe that the whole Committee would share that sentiment.

The clause increases rates of excise duty on all tobacco products by approximately 1.9 per cent. in line with inflation, with effect from 6 pm on 17 April 2002. The representations that we have received from health and anti-smoking groups in the run-up to the Budget made clear that they believe that

''greater emphasis should now be placed on raising prices through addressing the trends that tend to drive price down rather than increasing headline tax rates for cigarettes.''

Those trends include the supply of cheap, unregulated tobacco through the smuggling market. As hon. Members know, that problem had been worsening rapidly before the financial year 2000–01 and, without action, it was estimated that smuggling would account for more than a third of the market by 2003. Therefore, I am happy to report to the Committee that, as a result of action taken in our tackling tobacco smuggling strategy, we are now on track to put the smuggling problem into reverse by 2003. In our view, that will help to increase the average price that

consumers pay for cigarettes in the United Kingdom. There is, therefore, widespread support among health and anti-smoking groups for our duty policy on cigarettes and our so far highly successful efforts to clamp down on the unregulated supply of cheap, smuggled tobacco.

I hope that hon. Members will feel able to echo that support and take this concrete step to ensure that we continue to bear down on the problem and send a clear public health message to would-be consumers of this product. I commend the clause to the Committee.

Christopher Chope (Conservative, Christchurch)

I, too, welcome you to the Chair, Mr. Gale. The Financial Secretary thinks that we are engaged in a wrestling match. I assure him that there will be nothing sham about what Conservative Members will do in the Committee: we will want to discover the facts and look at the evidence. On that basis, I have some questions that I hope he will be able to answer.

First, why does the Red Book projection for yield from tobacco duty in the coming year show a reduction of £100 million compared with the yield last year? Is that because there has been a reduction in tobacco consumption, or because the Government have not got as far as they would have liked in dealing with the problem of smuggling? What will the impact of the measure be on consumption?

The Financial Secretary says that the Government have been successful. I think that he said they are on track to put the smuggling problem into reverse. In 1996–97, smuggled cigarettes were 4 per cent. of the cigarette market. Now they are 21–23 per cent., and the loss of revenue is about £3.5 billion each year. This is a Labour problem. There was no problem on this scale when the Conservatives were in power, and I hope that the Financial Secretary will address that serious issue.

The evidence from the tobacco manufacturers is that, since 1997, consumption, which up to then had been on a decline since the early 1970s, has increased by about 5 per cent. Why is that? I suspect that it is because there is easy access, particularly by young people, to imported, illegally smuggled and cheap cigarettes, which are available at the school gate, and indeed inside the school ground in many places. Therefore, young people have access to much cheaper cigarettes than those available at retail tobacconists. As the Financial Secretary said, we have by far the highest tobacco tax, not simply in Europe but anywhere in the world. As a result of the clause, duty on cigarettes will be more than £3.50 out of a retail price of about £4.50.

I hope that the Financial Secretary can answer some of the questions that arise from the clause. Although we have not tabled an amendment seeking a freeze in tobacco duty this year, we are waiting for the information from the Treasury on the present situation. I understand that, normally by this stage in the year, the information on the impact of anti-smuggling measures has been produced. Perhaps the

Financial Secretary can tell us what progress has been made and whether there has been a reduction in smuggling in the past year or a continuing increase. Perhaps he can tell us whether consumption has gone up or down. Can he also explain why in countries such as Spain the smuggling level is 5 per cent., while in this country it is more than 20 per cent.? To what extent is that related to the level of tax that the Government insist on imposing on legitimate smokers? Has the Treasury now abandoned the belief that additional taxation has an effect on the level of smuggling? That seems to be implicit in the clause.

I hope that the Financial Secretary will be able to answer some of those questions and address the problem of the £3.5 billion of lost revenue. That is the total yield from national insurance contributions. An enormous sum is missing. It is feeding a black market involving criminal gangs on a scale unprecedented in this country. It is a serious issue on which to start the Committee's proceedings.

I lack the experience of many Committee members, having served on a Finance Bill Committee only once. That was in 1986 when I had a non-speaking part. I noticed that the then Opposition concentrated on speaking at great length because that was all they could resort to as a form of opposition. We intend to speak briefly, to the point and to try to persuade the Government to respond to the serious issues that we raise.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

During the previous Parliament, we had many debates in this Committee on proposals to increase tobacco duty. The Liberal Democrats gave qualified support to the Government's proposals gradually to raise tobacco duties, and the Conservative party was against that. The hon. Member for Christchurch has not made it clear whether the Conservatives are against the measure, and said that that depends on the Government's reply to this debate. I look forward to their reaction to that reply. I want to put on the record that the Liberal Democrats remain in favour of the Government's policy of increasing excise duty on tobacco products, primarily for health reasons. Every year, 120,000 people die of tobacco-related illnesses, so the matter is serious.

During the previous Parliament, we had many debates on whether that policy was beginning to have the reverse effect of that intended and whether the proliferation of smuggling was resulting in children and adults having access to cheap tobacco and smoking more than they would have done if duties had remained unindexed or been cut. Those debates backed the Government's position, but gave them a warning.

We had a long debate on elasticity of demand, the tax elasticity of smuggling, cross-priced elasticity and revenue elasticity to duty rates. I shall not reiterate that debate, but the conclusion was that if the Government raised duties there would be a net gain to the Exchequer, so they are justified in continuing that policy. However, the hon. Member for West Dorset (Mr. Letwin) made a powerful argument about the social effect of undermining law and order with the increase in smuggling. He argued that unless the

smuggling were tackled, whether or not there was a revenue gain for the Government from increasing excise duty on tobacco, there would be an undermining of social order and that that should be costed into the Government's equations. He was right to make that point and he did so powerfully. That was the major reason for us saying loudly to the Government that their anti-smuggling policy must be shown to work and be continued with persistence and ferocity.

The pre-Budget report suggests that that policy is beginning to work. We were told that Customs and Excise seized nearly 2 billion cigarettes in 1999–2000 and nearly 3 billion in 2000–01, which clearly indicates that there have been greater seizures, although it also shows that smuggling is still there. I wonder what happens to those 3 billion cigarettes.

John Bercow (Conservative, Buckingham)

It is important to be clear about the philosophical underpinning, if such a term can be used in relation to a Liberal Democrat, of the hon. Gentleman's position. His support for the Government's position is on the ground of health rather than that of revenue raising. For the avoidance of doubt, will he confirm that if—I am not saying that this is the case—the evidence were to show that the Government's policy was not effective in terms of health but only in terms of revenue raising, he would change his position?

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I would indeed, and the Government would too. Like previous Conservative Governments, they have said that the purpose of raising tobacco excise duty is to reduce the demand for smoking. An awful lot of evidence from the World Health Organisation and other bodies not only in this country but internationally supports the thrust of their policy, and that of the previous Conservative Government, on tax duty. If that evidence were to change, it would be incumbent on all hon. Members to change their positions.

I refer members of the Committee to the pre-Budget report, which indicated that the Government's anti-smuggling policy is having an effect. The Financial Secretary said that the tide of smuggling may be turned by 2003, and the pre-Budget report suggested that it is currently stable. I am sure that he would agree that smuggling is still at a very high level because 21 per cent. of the UK market is believed to consist of smuggled cigarettes, which is a very large percentage. We need to see that figure pushed down even further.

I hope that the Financial Secretary will tell us what other measures are being taken and how he imagines that the measures that are already in place will continue to push down on smuggling, whether it consists of cross-Channel passenger smuggling, the white van trade or the organised crime part of the smuggling market. I hope that he can provide good evidence that Liberal Democrat Members are right to continue to support the Government in their dual approach of increasing duty on cigarettes for health and having an anti-smuggling policy to tackle fraud.

One specific measure in the clause surprised me because recent Finance Bills have frozen the duty on hand-rolling tobacco. The differential between the

price of hand-rolling tobacco in the UK and its price in Belgium, France and one or two other EU countries was far greater than the differential between the price of a packet of 20 cigarettes, which resulted in a greater propensity to smuggle hand-rolling tobacco. Indeed, hand-rolling tobacco became a substitute for rolled tobacco, and tobacco manufacturers experienced a major substitution from packets of cigarettes to hand-rolled cigarettes. I was therefore surprised to see a change in policy in the Budget to move from non-indexation of duty on hand-rolling tobacco to indexation. Previous Budgets have contained a real-terms cut in excise duty on hand-rolling tobacco. I wonder whether the Minister can explain why policy has changed and how the Government justify that.

Howard Flight (Conservative, Arundel and South Downs)

I add my welcome to your chairing of our deliberations today, Mr. Gale. I should probably declare an interest as perhaps one of the few smokers present.

Does the Financial Secretary have any estimates of the Government's objective in terms of reducing smoking? We know that the revenue objective is a reduction of £100 million, but we do not know what reduction in smoking they expect to achieve.

I shall, for what it is worth, fall in line with the general middle class view that smoking is a bad thing and must be discouraged at all costs, but what has taken place since 1997 is an example of political correctness achieving the wrong objectives. It is clear that a bell-shaped curve applies both to discouraging smoking and to tax revenues, and that there is at least a theoretical, optimum position on the tax revenue curve before one begins to encourage widespread smuggling—not just smuggling, but people going over to continental Europe in droves and buying what they are allowed to buy.

Secondly, there is a knock-on bell-shaped curve in relation to discouraging smoking: again, once cheap cigarettes become widely available as a result of smuggling, the price-demand effect goes into negative territory. On both curves there is a point at which the right price and the right duty tend to achieve the optimum on both fronts. What we are achieving is well to the right of that and down the other side of the curve, and the figures were quoted.

It is interesting that up to 1997 we were one of the most successful countries in reducing smoking, which fell by 37 per cent. between 1970 and 1997. Prevalence fell by 40 per cent. The policy of gradual price increases, without getting wildly out of line with continental European prices, worked, as no doubt did all the teaching that smoking is bad for one. However, the estimates are that smoking has gone up about 5 per cent. since 1997, particularly, as I think we are all aware, among younger ladies.

I dislike the regressive nature of this taxation. Let us be truthful: many tax credits will be spent on smoking. In view of the prevalence of smoking in society, it is the biggest regressive tax that we have. A prohibition mentality lies behind the good intentions, and the Government should step back, take stock and do their own analysis of revenues as well as of the

impact of pricing policies on smoking, including the interaction with anti-smuggling activities. Smuggling relates not simply to 21 per cent. of cigarettes and 70 per cent. of hand rolled, but to the 10 to 12 per cent. of people who buy their cigarettes outside this country. Therefore, the smuggling figures do not tell the whole story about the revenue that is being lost and what is being smoked.

The Government must admit that the results of all the effort and money spent on staffing Customs and Excise and so forth are pretty feeble. Even the Customs and Excise target—not that it necessarily expects to achieve it—is to reduce cigarette smuggling to 18 per cent. in 2004–05 from 21 per cent. today. Therefore, I cannot see how the Government can claim that all the cost and effort of greater Customs and Excise activity will have much impact.

What has happened to the hypothesised additional money from the smoking tax for the NHS, which the Chancellor boasted about in 1999? Do the falling tax revenues mean that the money the NHS would have received has also fallen? Has that been forgotten? Was it all just words and spin at the time? What are the numbers here? Is the policy still in place?

We have corrupted society. We have made many decent people participate in smuggling because they regard it as socially acceptable not to pay excessive prices, as I have commented in the past. Exactly the same happened with coffee in the 18th century. We have reduced tax revenues dramatically—the estimate is by about £3.5 billion a year, or some £10 billion since 1997—yet we have increased tobacco consumption by 5 per cent.

Is that a sensible strategy to have followed? To me, it sounds crackpot on all fronts. Merely to recite the chant that we must put up prices because smoking is bad for people, while not considering the effects of what is being done, seems hypocritical and wrong to me, even if the primary objective involves health through reduced smoking. I should like to know the relevant figures.

John Bercow (Conservative, Buckingham)

I am grateful to my hon. Friend for giving way, as he provides a learned disquisition on his subject. The Committee must consider important issues of health improvement and raising revenue, but I was struck by what he said at the outset about bowing down to the middle class consensus on the subject. For the avoidance of doubt, I put it on record that although I gave up cigarette smoking on 25 June 1986, following an especially trying meeting of Lambeth borough council's women's committee, I strongly believe in freedom of choice. I defend passionately my hon. Friend's right to continue to smoke cigarettes, if that is his choice.

Howard Flight (Conservative, Arundel and South Downs)

I thank my hon. Friend. Perhaps I shall give up one day, but to return to wrestling, I am glad to say that I can still wrestle pretty effectively.

It is a great pity that the Government suppressed the key parts of the Taylor report. The strategy followed since 1997 has, very clearly, been to up the duty and up the price of cigarettes by more than is

sensible if the aims are to discourage smoking and to have regard to tax revenue.

Iain Luke (Labour, Dundee East)

On behalf of the newer Members here, who have not served before, may I say how much I have appreciated your chairmanship of Committees, Mr. Gale, and how you have guided us through the intricacies of parliamentary debate? I hope that you keep us in touch with what we should and should not do in this Committee.

I take the points made by the hon. Member for Arundel and South Downs, but smoking is bad for, and affects, people's health. Even if the marked effects of this tax increase are marginal, it will certainly save someone's life and have a good effect on people's health throughout the country. Every family knows of, or is affected by, the abysmal habit of smoking. I am a non-smoker, so I can take that Presbyterian, Calvinist view but, at the end of the day, what the Government are doing must be promoted. We must look at the matter in the round. The recent Bill to restrict or abolish tobacco advertising would have saved the health service £40 million a year and saved 3,000 of the 120,000 lives that we are discussing.

Howard Flight (Conservative, Arundel and South Downs)

Does the hon. Gentleman really believe that such a measure would reduce smoking? The crucial point is that smoking has increased due to the higher prices of the past five years and the resultant impact on smuggling. I have asked the Minister what he expects the outcome to be. Will the angle that the hon. Gentleman advocates be counter-productive?

Iain Luke (Labour, Dundee East)

I shall return to the Customs and Excise situation, but I believe that many hardened smokers who have smoked all their lives cannot give up because they have been hooked for so long. I speak from experience, because my father was such a person and he unfortunately died of cancer. However, the incremental effect of taxes on younger people, who are not yet so involved in the habit, may be positive and they may be deterred from taking up smoking. I am not being critical and I am happy to acknowledge a personal freedom to smoke, but passive smoking has become a big issue in legal and medical terms. I hope that the overall effect is that the number of people who smoke is marginally reduced, people's health improves and costs to the health service reduce.

I take the point on Customs and Excise. This week, much concern has been raised in the Scottish press on Customs and Excise coverage in remote northern and north-eastern areas of Scotland. It has been run down so badly that smuggling of different types of banned goods has increased. I hope that the Treasury focuses on Customs and Excise having balanced coverage to ensure that smuggling and its ill effects—rlspecifically, those of tobacco—are countered.

Michael Jack (Conservative, Fylde)

I congratulate the Financial Secretary on his introduction of the clause, which showed his keenness for debate and his awareness of the facts. I am sure that we shall hear more during the debate.

I follow hon. Members on both sides of the Committee in probing the Government further on the reason for the clause. In table A.1 of the Red Book on page 155, the straightforward assumption is that the proposed revalorisation will have a zero revenue

effect. If that is so, it brings into question note five of the notes on clauses, which states:

''Research has consistently shown that the price of cigarettes affects demand.''

The hon. Member for Kingston and Surbiton said that we have previously discussed the demand elasticity of tobacco products; perhaps we should discuss it again. I am not a smoker, but I am aware of the struggle by smokers to give up. I am also aware, from inspection rather than from objective proof, that more young people are starting to smoke. It would be helpful to have the facts before us. We do not know what effect a 6.3p increase per packet will have on a young first-time smoker as opposed to a more established smoker who has taken a personal decision on the risk. That argument follows the one on tobacco advertising.

People in the tobacco business closely follow proceedings in Parliament on this matter. It has always been argued that tobacco advertising does not persuade people to smoke, but shifts them between brands. One can make of that argument what one wants, but in the context of price, is the Government strategy designed to raise revenue, to dissuade newcomers from starting to smoke or just to make life difficult for those who have already discounted their exposure to the health risks of tobacco? I suggest that if one wants to dissuade people from smoking, one might go beyond simple revalorisation. If one is looking for a method of raising money, one might adopt a different strategy.

The clause and its notes do not make clear the strategy that the Government are following. We do not even know whether we are into the world of diminishing returns because, in many cases, indirect tax has almost become part of the tax firmament—every year a revalorisation will take place not only for tobacco, but for alcohol products. Whisky can reach a point of diminishing return for revenue, and the Chancellor made great play of a reduction in which he was involved, just as my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) did.

The notes on clauses do not conduct us through a cost-benefit analysis, which the hon. Member for Dundee, East (Mr. Luke) started to do. The Treasury could say that we do not have a hypothecation of tax, but last night, on Second Reading of measures connected with national insurance, we got as near to a gigantic hypothecated tax as we have been for a long time.

If the Government's objective in raising revenue through national insurance is substantially to increase national health service funding, it is correct to ask precisely what is the relationship between revenues raised from the variety of tobacco products in subsection (1) and the associated health costs. That debate involves not just health costs, but revenue loss to the economy due to people who are ill as a result of smoking-related diseases and who are not productive. I could go on, which is why a cost-benefit approach may be the right one. It would be helpful to know the elasticity factors on which the Treasury bases its proposals. Do they vary with the age of the smoker or potential smoker?

It would be useful to have information about the measurable effects on smoking trends in the United Kingdom; Government and Opposition Members have made points about that. It would also be helpful to contrast that with information about other European countries with different tax regimes, which, in their own way, have given rise to some smuggling. The Treasury is taxing through an indirect and, by definition, regressive tax. Therefore, it is important to know the justification for the Government's proposals, so that the Committee might have a proper and well-informed basis on which to judge what it may be asked to support.

Roger Casale (Labour, Wimbledon)

I welcome you to the Chair, Mr. Gale, and look forward to serving under your chairmanship. This is the first time that we have come into contact. On occasion, because of the similarity of our names, our post has been misdirected, but I hope that no one in Committee confuses our identities.

I speak as one who gave up smoking some years ago. I am not the kind of reformed smoker who tries to persuade everyone else to give up. Nevertheless, I succeeded in quitting, but not as a direct result of price increases, although they had an indirect effect, as family members noticed that the cost of my habit was eating up more and more of the family income. A serious point that has been well made is that the smoking tax has a disproportionate effect on people on lower incomes, and the cost of cigarettes represents a substantial part of some families' budgets. We must bear that in mind when we consider measures such as clause 1.

Nevertheless, I welcome the measure, which will result in more revenue for the Government. It will also help to reduce cigarette consumption, which is good for public health. Most importantly, it will generate more income that can be invested in the NHS. However, we must be aware of the social impact of the tax, which is different for different sectors of the population. To counter the disproportionate effect, perhaps we ought to make more help available by offering, for example, nicotine replacement treatment through GPs and the NHS to those who genuinely wish to give up smoking.

In previous Finance Bill debates, we have discussed the influence of smuggling—it has been mentioned today—and how it can decrease revenue. However, there is an error at the heart of the argument. Many things cause people to smuggle cigarettes, alcohol and other goods, not least increased freedom of movement and greater ease of shopping in other European countries using technology such as the internet. Of course, we must be aware of smuggling's effect, but we cannot blame it all on increased tobacco prices. A balance must be struck that considers the objectives of raising revenue, protecting public health and counteracting smuggling. In the fight against smuggling, the Government have invested many new resources to increase the number of Customs and Excise employees and, through the Home Office, to clamp down on criminal activity.

The hon. Member for Christchurch contends that the indexation of cigarette prices was not a Tory policy. We all remember that, under the Tory Government, there was not only indexation of tobacco prices, but the introduction of the escalator that created above-inflation cigarette price increases. To strike a proper balance between protecting public health, raising revenue and discouraging smuggling, we have removed the escalator, but it is still right to have an inflationary increase this year.

Christopher Chope (Conservative, Christchurch)

The hon. Gentleman misrepresents me. I said that under the Conservatives, the incidence of smuggling was less than 5 per cent. of cigarette consumption. Now, it is well over 20 per cent. Under the Conservatives, tobacco and cigarette consumption were falling, but they have increased by about 5 per cent. over the last five years. Those two changes have come about since the election of a Labour Government. The hon. Gentleman may think that they have nothing to do with the Labour Government, but surely someone should take responsibility. I suggest that the Government should.

Roger Casale (Labour, Wimbledon)

It is a long time since we had a Tory Government, and I hope that the next Tory Government are a long way in the future. However, several other factors have changed in the meantime. The increase in smuggling is a general phenomenon and we must do something about it. If the hon. Gentleman is so concerned about smuggling, I hope that he favours the extra measures and investment that will counter it.

John Bercow (Conservative, Buckingham)

The omens from the 1997–2001 Parliament are not auspicious for the hon. Gentleman's thesis that excise duty rises will lead to decreased tobacco consumption. Can we please have it on the record, therefore, whether he predicts that tobacco consumption will be lower at the end of this Parliament than it is today, as a result of increased excise duties?

Roger Casale (Labour, Wimbledon)

The laws of economics are such that if the price of a good is increased, demand is reduced. On smuggling, price is one of several factors that we must take into account. If the hon. Gentleman is so concerned about smuggling and thinks that the only way to reduce it is to reduce tax, he must pursue that argument to the end and say that we should have no tax on cigarettes, or only very little.

I have found in the comments that we have heard this morning a reluctance to accept such tax. Again and again, we hear arguments against particular taxes, but perhaps what lies behind them is a general antipathy to any tax at all. The Government have struck the right balance. We must take account of the need to discourage smuggling, and we were right to come off the tobacco price escalator. The measure is the right response, and I support it.

Mark Hoban (Conservative, Fareham)

I add my welcome to those of other hon. Members, Mr. Gale, and I look forward to working under your chairmanship in the weeks ahead. I tackle my first Finance Bill with some trepidation, having had occasion from time to time, as

an accountant, to bemoan its predecessors for their impact on the clients that I dealt with.

On cigarette duties, I hope that the Government explain in more detail how they have come to consider the revalorisation of excise duties on tobacco. Valid points have been made about the impact of the increase on smuggling. It would be valuable if the Financial Secretary explained what process the Government went through and their thinking on the balance between the impact of increased tobacco duties on smuggling and on consumption in respect of those who buy tobacco from normal outlets. That is an important issue, although I wish to avoid a debate on elasticities that I last encountered as an economics student at university. There are important trade-offs to consider here.

As the hon. Member for Wimbledon (Roger Casale) said, in addition to the more normal smuggling routes, such as white vans crossing the channel, there is now the internet, which facilitates more efficient and perhaps more anonymous cross-border cigarette transactions. In the context of the Government's tobacco smuggling strategy, what action are they taking to reduce the internet's impact on smuggling and importing cheap tobacco to the UK to avoid the very high duty rates incurred in this country?

The hon. Member for Dundee, East alluded to the resources available for Customs and Excise to tackle smuggling, referring to north-east Scotland. Will the Financial Secretary outline what additional resources will be available to Customs and Excise to tackle any smuggling increase and to ensure that we claw back some of the lost revenue to which my hon. Friend the Member for Christchurch referred? Tackling smuggling is important, but my concern is that Customs and Excise is under-resourced for that, so I should be interested to hear in more detail what plans there are to tackle it. If we increase tobacco tax, that will increase the incentive to smuggle to avoid the high duty. We must ensure that counter-measures are in place to restrict that.

Paul Boateng (Labour, Brent South)

We have had an interesting debate, with a parade of smokers and non-smokers—past and present, reformed and unreformed, repentant and unrepentant and, in the case of the hon. Member for Christchurch, deep-dyed blue and unreconstructed. If that is the tone and nature of the contributions that we can expect from that quarter in the weeks ahead, we shall have a very interesting time indeed.

I turn straight to the—

John Bercow (Conservative, Buckingham)

Kernel of the argument.

Paul Boateng (Labour, Brent South)

I would not choose to use that word; I would prefer to use the word hub.

John Bercow (Conservative, Buckingham)

That is not focused.

Roger Gale (Conservative, North Thanet)

Order.

Paul Boateng (Labour, Brent South)

I shall refer to the hub of the proposition made by the hon. Member for Christchurch—that this is, somehow, all Labour's fault. I suspect that, whatever we are debating, we shall hear from the hon. Gentleman that it is all Labour's fault. [Hon. Members: ''Hear, hear''.] That

is the level of intellectual engagement with the Finance Bill that we shall have to tolerate in the weeks ahead.

On reflection, the hon. Gentleman might want to revisit that argument. Why people smoke, why they give up smoking and why people's inhibitions over breaking the law when it comes to cheating the Excise are, perhaps, lower than in other areas of law-breaking are interesting questions raising complex issues. Over smuggling, there is a misplaced romantic notion of baccy for the parson, brandy for the squire. [Laughter.] I see that the hon. Member for Arundel and South Downs, no doubt of the squire class, thinks that that is rather a good idea, but for some of us, who do not aspire to the lofty heights of the squirearchy, the breaking of the law is not to be sanctioned under any circumstances. I know that the hon. Gentleman accepts that; I am just pulling his leg.

Howard Flight (Conservative, Arundel and South Downs)

I greatly thank the Financial Secretary for giving way and I endorse what he said. However, does he therefore think that it has been a good idea to follow tax policies that have led to large numbers of people thinking that it is okay to break the law?

Paul Boateng (Labour, Brent South)

I shall come to that. I do not think that an examination of the policies on tobacco, or on anti-fraud and avoidance strategies generally, that Labour Governments have pursued since 1997 bears that interpretation. I do not want immediately to get into the hurly-burly of party political debate, but I feel that I must respond to the suggestion that we are soft on smuggling. My hon. Friend the Paymaster General had responsibility for that area way back in 1997 and has a very long institutional memory. When she assumed her responsibilities, one of the first things that she had to do was to reverse a cut of 300 front-line staff that had occurred during the tenure of office as Financial Secretary of no less a person than the right hon. Member for Fylde. The Conservative Government had cut 300 staff and were going to cut another 300. She had to reverse both of those cuts.

That fact says something about the priority that has been given to the issue of smuggling. I should not suggest that all smuggling prior to 1997 was the fault of the Tories because that would be grotesquely simplistic. As the right hon. Member for Fylde knows, the matter is not as simple as that. It is not, however, fair to suggest that we are soft on smuggling because we have sought to bear down on it by taking the necessary measures.

The hon. Member for Kingston and Surbiton called for the ferocity required—I think that those were his words—to deal with the issue. His contribution was interesting and I appreciate his constructive approach. I must say that I heard a different story from a deputation of Liberal Democrat MPs from the south-west.

John Bercow (Conservative, Buckingham)

Ah!

Paul Boateng (Labour, Brent South)

Ah yes. Those MPs came to see me in the Treasury and said that our measures were too draconian. [Interruption.] I know—I was surprised. They said that far too many white vans were being stopped. However, the contribution by the hon. Member for Kingston and Surbiton will be there for all to see in Hansard, and I shall draw it to the

attention of the next deputation from the Liberal Democrats that makes its way to the Treasury. His contribution was, nevertheless, important and I accept his analysis. It is important to have an appropriate focus on the problem. The approach taken by Customs and Excise has been described in the High Court as reasonable and proportionate, and is a reasonable response to a menace that undermines legitimate trade.

Had we not taken tough action to tackle tobacco smuggling, according to estimates confirmed by the National Audit Office, the market share of smuggled cigarettes would have reached 25 per cent. in 2000–01 and risen to 35 per cent. in 2003–04. Instead, as a result of our anti-tobacco-smuggling strategy, the market share of smuggled cigarettes was 21 per cent. in 2000–01 and early indications are that Customs has reached its key target of reducing the market share of smuggled cigarettes to 20 per cent. by 2003–04, which is 15 per cent. lower than it would have been without the necessary action. As part of the routine annual publication of figures and estimates, we shall publish the detailed outcome of the strategy for this year in due course.

Michael Jack (Conservative, Fylde)

For the benefit of the Committee, will the Financial Secretary tell us the retail value of the one fifth of the cigarette market to which he referred?

Paul Boateng (Labour, Brent South)

I will certainly drop the right hon. Gentleman a line to give him the exact figures on the value of one fifth of the market. If he will excuse me, I do not have that figure immediately at my fingertips.Given the strong upward trend in smuggling before the strategy was implemented, reducing the smuggled market share by 2003–04 was an ambitious target and meeting it would be a considerable achievement. We do not underestimate the scale of the problem. Right hon. and hon. Members who have drawn attention to the corrosion that such lawlessness causes to the social fabric of our country make a good point. We must roll it back and we are determined to do so.

The hon. Member for—

John Bercow (Conservative, Buckingham)

Fareham.

Paul Boateng (Labour, Brent South)

The hon. Member for Fareham made an interesting point about tobacco smuggling through the internet. It is important always to be one step ahead of those who engage in such fraud and as part of our strategy for tackling it, Customs and Excise has developed a co-ordinated response involving increased operational activity designed to seize as many cigarettes as possible, advertising on the internet to inform would-be purchasers that cigarettes bought through the internet are subject to United Kingdom duty and VAT and that cigarettes purchased without UK duty would be seized, contacting the websites to inform them of the correct legal procedures for supplying tobacco over the internet, contacting internet service providers to ask whether those websites conform to their conditions of trading, and working with other Government Departments and enforcement agencies in the UK and abroad to identify what further action can be taken against those

websites. The hon. Gentleman was right to identify the problem and we are determined to stay ahead of those who seek to use the internet to break the law.

Mark Hoban (Conservative, Fareham)

On internet smuggling, will the Financial Secretary outline the locations that have been used as a base for suppliers of cigarettes through the internet? Will he explain whether they are based in Europe or outside and what co-operation exists with European Union agencies to tackle the matter?

Paul Boateng (Labour, Brent South)

I am able to say that some are in the EU and others are outside. There is a concerted EU strategy on smuggling and there is real concern among our partners in Europe to find ways of working together. I and my hon. Friend the Paymaster General have been in contact with other Ministers and the European Commission. China is a source of much tobacco from outside the EU and we have good relations with Ministers and Customs and Excise in China in bearing down on the problem from that end. The problem is one of international criminality and the criminals involved are determined and ruthless, and operate at various levels.

I am grateful to my hon. Friend the Member for Dundee, East for drawing attention to the problem in Scotland with its islands and remote coastal areas. We have developed a flexible and mobile UK response that is intelligence-led and can move to areas under assault to provide a determined response to those who try to breach frontiers. At any one time, we have a cutter in Scottish waters that can intercept illicit contraband that is being taken to Scotland's shores. The problem involves not just the supply on estates and from the back of vans, but bringing the stuff in along the coastline. Therefore, it is a national problem. I was asked about the level of new resources applied to tackling it. Some £209 million has been invested in a strategy to tackle the problem, and we are confident that that will help to deliver challenging targets.

I know that hon. Members do not want me to go on at great length about the issue of elasticity, but I cannot ignore it completely. Customs and Excise estimates that a 10 per cent. real increase in price results in a 3 per cent. decline in consumption. The right hon. Member for Fylde will be interested to know that Customs and Excise does not make, as I suspect that it did not do in his time—he may be able to share his experience with us—separate estimates for different age groups. Perhaps that should be considered a useful piece of work, if it could be done at reasonable cost. We know from other research, as I recall from my time in the Department of Health, that young women, in particular, are taking up smoking much faster than young men. We do not know why. It will not be enough for the hon. Member for Christchurch to say, ''It's all down to a Labour Government'', and I am sure that even he would not suggest that. We do not know why, but they are doing so. That requires a response and it may be well be that, as part of that response, we should commission research into the effect of a price rise on that section of the market.

This year's inflation-only increase is designed to meet our historically higher level of taxes, with the expectation that demand will not increase. I was asked why there was a reduction in the Red Book for next year. Revenue receipts are forecast to decline slightly next year as a result of a range of factors, including an estimated small decline in consumption. Recent estimates show that the proportion of the population who smoke has fallen a bit. Again, we do not know why, but we welcome the fact that it has fallen from 28 per cent. in 1998 to 27 per cent. in 2000. That makes about 12.55 million adult smokers in the United Kingdom—still too many. I give way to one.

Howard Flight (Conservative, Arundel and South Downs)

Could the Financial Secretary make it clear whether the 27 per cent. figure is for recorded cigarette sales or whether it includes an allowance for the expected assessment of smuggled tobacco?

Paul Boateng (Labour, Brent South)

I believe, and I shall be corrected if I am wrong, that it includes an allowance for the expectation of smuggled tobacco. I sense from movement to my left that I am right in that belief.

This is a complicated and complex issue. We believe that we have got the balance right. My hon. Friend the Member for Wimbledon (Mr. Casale) was spot on—

Chris Pond (Labour, Gravesham)

As usual.

Paul Boateng (Labour, Brent South)

As usual, as my hon. Friend, who sadly must be silent through these Committees normally, says from a sedentary position. The Government of whom the right hon. Member for Fylde was a member introduced the tobacco duty escalator, which ensured above-average inflation price increases. It was 3 per cent. in 1993 and it was increased to 5 per cent. in 1997, when the right hon. Gentleman was Financial Secretary to the Treasury. We abandoned that in November 1990, although there was, as has been said, the 5 per cent. increase in Budget 2000. That has historically been the pattern of taxation in this country, as the right hon. Member for Rushcliffe—

Howard Flight (Conservative, Arundel and South Downs)

And learned.

Paul Boateng (Labour, Brent South)

The right hon. and learned Member for Rushcliffe—although it has been some time since he practised the arts of the law. He has always been an inveterate practitioner of the arts of politics—and a smoker, too, which I suspect some in his party might have wished he had given up, but he has given up neither of those activities. He pointed out with a great deal of force that

''traditionally, for I think about 200 years, we have always raised far more revenue from alcohol and tobacco. We are entitled to make our choice; it is our national pattern of taxation and it always will be''.—[Official Report, 8 December 1994; Vol. 251, c. 486.]

That is what the right hon. and learned Member for Rushcliffe said in December 1994, and it is what I say now. On that basis, I commend the clause to the Committee.

Christopher Chope (Conservative, Christchurch)

I am grateful to the Financial Secretary for being so open with the Committee and giving us much of the information for which we asked. I am convinced that the Government wish to get tough on smuggling, but I am less convinced that they are

prepared to get tough on the causes of smuggling. Conservatives are concerned that one of the main causes of smuggling may be that we have the highest tobacco tax in the world.

The right hon. Gentleman said that, according to information from Customs and Excise, a 10 per cent. increase in price leads to a 3 per cent. reduction in consumption. For the legitimate market, the price of cigarettes has gone up by about 45 per cent. since 1997, yet consumption has gone up by about 5 per cent. That suggests that the rules that normally apply, which are used by officials in Customs and Excise, are not operating in the UK market. In 1997, a child who wished to smoke cigarettes would have bought them at £3.12 for 20. Today, because of the enormous market in illegally imported cigarettes, a child can buy cigarettes at £2 or £2.50 for 20. That is a concern. We shall consider the right hon. Gentleman's comments in deciding whether we wish to come back with a specific amendment on Report.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

The Financial Secretary failed to answer my question about the change in policy on excise duties for hand-rolling tobacco. I hope that he will write to me about it if he is unable to take the opportunity to answer now.

Question put and agreed to.

Clause 1 ordered to stand part of the Bill.

Clause 2 - Rates of duty on cider

Paul Boateng (Labour, Brent South)

I hope that the Committee will unite in agreement on the clause, which reduces the excise duty rates on cider and perry by 2 per cent. with effect from 28 April 2002. The duty reduction represents a real-terms cut of 3.9 per cent., which, including VAT, is equivalent to a penny per pint of cider or perry. The reduction will boost the traditional cider industry, which is an important part of the rural economy that accounts for half of UK apple production and provides a steady source of income for many farmers. The reduction has already been warmly greeted by many outside the House, including John Thatcher—no relative—who is chairman of the National Association of Cider Makers. He says that

''given the fragile state of the industry this reduction is most welcome.''

I hope that that welcome will be shared and echoed by all Committee members.

Christopher Chope (Conservative, Christchurch)

Conservative members of the Committee certainly welcome the reduction. I should be grateful if the Financial Secretary would explain where the reduction fits into the concern that the Government express about under-age and binge drinking. Jean Coussins, director of the Portman Group—a highly respected body that works closely with the Government to try to reduce binge drinking—said:

''All major research studies have shown that the most popular drinks amongst regular underage drinkers are traditional beers, ciders and lagers''.

For cider with a strength of more than 8.5 per cent., the duty paid on a 275 ml bottle—about half a pint—is some 10.6p. For ciders with a strength of less than that, duty is significantly less. In any event, the duties are much lower than the proposed duties for so-called ''spirit coolers'', which we shall address in clause 3. One justification that the Government have offered for the changes in duties on spirit coolers is the evidence of the proliferation of under-age and binge drinking. Can the Minister explain the link between that and the rationale to reduce the rate of duty on cider, which, according the Portman Group, is a beverage more traditionally consumed by young people.

Kevin Brennan (Labour, Cardiff West)

Surely, the point is not what is the most popular drink among young people, but what is the rate of market growth for particular drinks. The evidence is that the market for alcopops and spirit-based coolers has grown hugely in recent years. Beer and cider may remain the most popular, but that is not necessarily where the growth in drinking is.

Christopher Chope (Conservative, Christchurch)

The argument that the hon. Gentleman deploys is extraordinary. He says that a product, even though it has no greater alcohol content, should be penalised because it is more popular; perhaps we should drive people towards products with greater alcohol content, such as cider. I am happy to defend the traditional British cider industry, and I hope that even more of the apples used in cider will be grown in the United Kingdom instead of elsewhere. The Financial Secretary quoted the statistic that half the UK apple production goes into the cider produced in this country. A heck of a lot of the apples from France and overseas also goes into our cider production, but that is a separate issue.

If we want to link the issue of binge drinking with spirit coolers, we must be logical. The debate will probably demonstrate that the fact that spirit coolers are popular among people is no basis for penalising them; penalising cider producers because many people find that cider provides the maximum amount of alcohol for the minimum duty would not be sensible either.

Kevin Brennan (Labour, Cardiff West)

The evidence is that consumption of spirit-based coolers has more than doubled between 1999 and 2001. Surely, that is what is important.

Christopher Chope (Conservative, Christchurch)

Unless there is something inherently wrong with those drinks, the hon. Gentleman's comment is like saying that the demand for lemon barley has increased and the demand for orange squash has decreased. So what? What is important is whether the individual drinks are regarded as inherently dangerous because of their alcohol content. Cider and cider products have more alcohol content than most spirit coolers. The argument that the Government are trying to deploy in sustaining the increase in duty on spirit coolers is that such drinks cause binge drinking, but that is not compatible with clause 2, which we support. The clause provides for a modest reduction in duty on cider, which would cost only about £6 million. I think that the answer to the hon. Gentleman's intervention is that the Government can secure some publicity for £6 million, particularly in the rural parts of the country that produce cider, but they would more than recoup that through a £170

million tax increase on those who consume spirit coolers. However, we shall tackle that debate in more detail when we come to the next clause. I hope that the Financial Secretary can explain the rationale behind the relatively low duty that is payable on cider—even cider of a strength in excess of 8.5 per cent.—compared with equivalent drinks.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

May I back up the request by the hon. Member for Christchurch that the Government give some rationale for their alcohol taxation policy? Are the Government following the previous Government's view that spirits and cider have been taxed more heavily than other forms of alcohol and that a gradual adjustment was needed? During the period since 1995, we have seen a significant real-terms reduction in the excise duty on cider through measures taken by both the previous Conservative Government and this Government. That may fit in a rational framework, but it is important, particularly as we are thinking about the debate on the next clause, that the Government show us that it does. I hope that the Financial Secretary can describe that, so that we can have a clear strategy and guidance on policy in that area.

It seems that the representation from Liberal Democrats from the south-west are having an effect.

Chris Grayling (Conservative, Epsom and Ewell)

May I echo some of the comments made by my hon. Friend the Member for Christchurch? There seems to be a great inconsistency in the Government's approach to using excise duties to combat the issue of binge drinking in our society, of which we are undoubtedly aware. Undue levels of alcohol consumption have a corresponding knock-on into antisocial behaviour in far too many town centres on Friday and Saturday nights. The clause that we shall debate subsequently contains a clear indication that the Government are minded to use excise duties to tackle that problem, but there is a stark inconsistency in the provisions related to cider.

I would not want in any way to take steps that had an adverse effect on the cider industry, but it seems clear that there is a difference in social impact between standard cider, which is a popular drink throughout the country, and some of the strong ciders that are undoubtedly used as cheap access to strong alcohol by teenagers at the weekend. It is surprisingly inconsistent for the Government to cut the duties on strong ciders and raise the duties on alcopops.

The Government need to take a long, hard look at how they use excise policies. During the past 20 or 30 years, strong alcohol has become more prevalent in our society. It is cheaper in volume and price terms to get drunk today than it was when I was a teenager—[Hon. Members: ''Ah!'']—or when hon. Members across the Committee were teenagers. It is far easier today to buy a pint of strong cider or lager, which may be, as my hon. Friend the Member for Christchurch said, as strong as 8.5 per cent. compared with half that level for a conventional bitter or cider.

Excise duties should be structured in a way that discourages excessive alcohol consumption and does not steer young people in one direction rather than another in terms of which strong alcohol they choose to purchase. I hope that the Financial Secretary has an explanation for that apparent contradiction and can show the Committee that the Government are mindful of the role that strong alcohol plays in some of the antisocial disorder that our society is experiencing, and will give us a sense of how his strategy for excise duties will help to tackle that.

Roger Gale (Conservative, North Thanet)

Order. I understand that hon. Members need to communicate with each other, but there is a limit to the number of private conversations that this Chairman is prepared to tolerate.

Before I ask the Financial Secretary to respond, it has been pointed out that some of the matters raised apply to clause 3. It is inevitable in such a debate that arguments will interrelate. It is up to the Financial Secretary whether he chooses to respond to some of the issues relating to alcopops now, or to reserve that response until the proper debate on the subject under clause 3. I am fairly relaxed on the subject.

Paul Boateng (Labour, Brent South)

I am grateful to you, Mr. Gale. I am looking forward enormously to the debate on alcopops, and I shall address the wider points on them then.

Hon. Members have asked me to give a rationale for the Government's approach to the taxation of alcoholic drinks. That is to be found in paragraph 5.88 of the Red Book, and is that we seek to take ''consistent steps to deliver'' what we describe as

''a fairer balance in the burden of taxation falling on different alcoholic drinks and different types of drink-producers.''

We are not motivated, in introducing the proposals, by the rosy recollection of our youthful drinking habits. We are not summoning up the happy memory of 14 pints a day, which the right hon. Member for Richmond, Yorks (Mr. Hague) shared with us. It might well be that the hon. Member for Epsom and Ewell (Chris Grayling) can beat that—I do not know. Perhaps there is a macho competition among Opposition Members to determine who can drink the other under the table. I know not, and I do not particularly care. It is not for us to base our policy on alcohol taxation on the fancies, foibles, fads and fixations of right hon. and hon. Members.

Chris Grayling (Conservative, Epsom and Ewell)

I have to say, representing a constituency in which antisocial behaviour is becoming an increasing problem and where my constituents are very concerned about increasing trouble caused by the over-consumption of alcohol, that they will listen to the Financial Secretary's comments with some dismay and think that he should take the subject more seriously. Does he accept that the much greater presence of strong alcohol in our society, which has increased during the past 20 years or so, is a significant contributor to the troubles in town centres across the country on Friday and Saturday nights?

Paul Boateng (Labour, Brent South)

The hon. Gentleman is going to spend many more weeks in close proximity to us all and I suggest, for his own happiness and that of the rest of us, that he lightens up a little. Be that as it may, of course we take seriously antisocial behaviour and binge drinking. What we are addressing here, on the basis of the rationale that I have outlined, is our specific decision about cider.

Why cut the duty on cider? Cider makers' production costs are higher than those of beer makers. Cider makers face the same problems in bringing their product to market as small brewers. A cut in duty will give them a much needed boost in a traditional industry that accounts for half of UK apple growing, forms an important part of the rural economy and has given a commitment to seek to increase the amount of UK apples that it uses to 67 per cent. The hon. Member for Christchurch made the legitimate point, as I should expect of him on the matter, that the industry could do more. It has given an undertaking that it will.

Michael Jack (Conservative, Fylde)

Could the Financial Secretary confirm that it has also given an undertaking that the full value at retail of the tax reduction will be passed on to the consumer?

Paul Boateng (Labour, Brent South)

No, I cannot. As I said before, on a very interesting and widely followed debate on beer that we had on the Floor of the House, that is a matter for the industry. The right hon. Gentleman would be the last person on earth to expect the Financial Secretary to go around dictating to brewers or cider makers how much of any particular cut in duty they pass on to their customers. That would not be sensible. It is a matter for the markets and for decisions by individual brewers and cider makers.

John Burnett (Liberal Democrat, Torridge and West Devon)

I welcome you to the Chair, Mr. Gale.

Will the Financial Secretary circulate a copy of that undertaking? It would be interesting if members of the Committee could see it.

Paul Boateng (Labour, Brent South)

I shall certainly drop the hon. Gentleman a line about the basis on which I can tell the Committee that the cider industry has pledged to increase the amount of UK-grown apples that it uses. If the matter is of interest to other members of the Committee, they should see the note too. I can see at least one Liberal Democrat Member—the hon. Member for Kingston and Surbiton—who, I should have thought, would normally have a discourse with the hon. Gentleman, but I am happy to send the hon. Gentleman a special copy to share with him.

It is welcome news and an assurance that the Committee is perfectly entitled to seek from the industry, because we want the rural economy to be supported in every way possible. One would want to see that without the cynical motive suggested by the hon. Member for Christchurch. I hope that, in light of that news, the clause will find favour with the Committee.

Question put and agreed to.

Clause 2 ordered to stand part of the Bill.

Clause 3 - Duty on beverages made with spirits

Christopher Chope (Conservative, Christchurch)

I beg to move amendment No. 1, in page 2, line 18, leave out subsection (1) and insert—

'(1) The Treasury shall lay before Parliament on or before 31st December 2002 a report on the operation of duties on alcoholic beverages that shall include—

(a) information about the market in lower-strength alcoholic beverages;

(b) an estimate of the impact on consumption of the rates of duty on beer, cider, wine and spirits in comparison with the rates of duty on those beverages falling within the provisions of section 1(9) of the Alcoholic Liquor Duties Act 1979;

(c) a summary of any representations received by the Treasury after the day on which this Act is passed relating to section 1(9) of the Alcoholic Liquor Duties Act 1979.'.

Roger Gale (Conservative, North Thanet)

With this we may take amendment No. 2, in page 10, line 27, leave out column 5.

Christopher Chope (Conservative, Christchurch)

The purpose of the amendment is to draw out the Treasury and the Minister further on this issue. Unlike on most occasions when there is a dramatic change in a duty regime, there was no consultation with the industry, as I understand it, before the Budget, and the Chancellor's Budget statement came out of the blue. Let us remind ourselves of what the Chancellor said. He said:

''From 28 April, premium package coolers which contain spirits not wine will be taxed not as low-alcohol wines, but as they should always have been, at the same rate as spirits.''—[Official Report, 17 April 2002; Vol. 383, c. 584.]

If the Chancellor believed that premium package coolers should always have been charged at the same rate as spirits, why did he not divulge that view a little earlier? After all, he has been Chancellor for five years and he had time before he came to office to pledge that his Government would do that as a revenue-raising measure; but not a bit of it.

It is also significant that in the Budget statement the Chancellor devoted all of three and a half lines in Hansard to the extra tax on coolers, which will generate £170 million of extra revenue for the Exchequer this year. That was half the lineage that he was prepared to devote to small beer, which will cost the Exchequer a mere £10 million this year. That is another example of the way in which the Chancellor, in his Budget statement, tends to place an enormous amount of emphasis on areas where he is reducing taxes in a gimmicky way, but pays the minimum amount of attention to areas where he is imposing a sharp increase in tax. Indeed, this is a very sharp increase in tax—£175 million a year. Later, we shall discuss whether it can be justified.

I want to draw the Committee's attention to the background to the issue. It is more correct to refer to these spirit coolers as flavoured alcoholic beverages. I understand that that is the modern terminology. I know that the Financial Secretary always likes to be as modern as possible. If he wants to be as modern as possible, I suggest that he begins to refer to these drinks as FABs—flavoured alcoholic beverages. The origin of the tax was the concession on the UK production and importation of coolers, which was introduced in October 1988. It was intended to

encourage the development of the market for lower strength alcoholic drinks. The concession achieves its objectives, and on that basis one company, Bacardi-Martini, has made a sustained investment of £10 million, which has created 200 new jobs.

I know Bacardi-Martini because it used to be in my constituency when I represented Southampton, Itchen, which is now represented by the Minister for Police, Courts and Drugs. Last year, just before the general election, he opened the £10 million investment in the production line at Bacardi-Martini. At the time, the local press did not report the Chancellor's view that duty should always have been charged on those products at the same rate as spirits, and the Minister for Police, Courts and Drugs was full of enthusiasm for the new production line and the new investment in innovative products.

Bacardi-Martini has launched a number of new products designed to compete directly with bottled beers, lagers and ciders. Clause 3 would distort the market and remove the coolers industry's ability to compete, which it has done since 1995. It has been very successful, and I did not realise that it was part of the Government's policy to penalise entrepreneurial success, which is what they seem to be doing in clause 3. The concession is being removed without any consultation with the industry, which has continued to invest on the assumption that the market would be stable but now finds that it has been totally mislead.

The implications of what has happened go wider than that particular industry, important as it is. Investment in innovative drinks is something that we should encourage in this country. If industry finds that it invests and suddenly, without any advance warning, the Government come along and cut the ground away from under it, it is right to be concerned.

Howard Flight (Conservative, Arundel and South Downs)

Does my hon. Friend agree that that is analogous to the 10 per cent. additional oil tax after a pilot scheme had encouraged smaller companies in particular to commit to developing new fields in the North sea? That tax was similarly sprung on them without consultation.

Roger Gale (Conservative, North Thanet)

Order. We are beginning to stray a little wide of amendments Nos. 1 and 2. I have always taken the view that it is possible to have a clause stand part debate at either the start or the end of a clause, but not both. We appear to be heading down the former road.

Christopher Chope (Conservative, Christchurch)

I thank you for your tolerance, Mr. Gale.

Specifically, the amendments would put the Government back in the position in which they should originally have been. If they intend to change the taxation regime for a particular product line, they should consult the industry and have proper information available on which to base their decisions. Amendment No. 1 states:

''The Treasury shall lay before Parliament on or before 31st December 2002 a report on the operation of duties on alcoholic beverages that shall include—

(a) information about the market in lower-strength alcoholic beverages;

(b) an estimate of the impact on consumption of the rates of duty on beer, cider, wine and spirits in comparison with the rates of duty on those beverages falling within the provisions of section 1(9) of the Alcoholic Liquor Duties Act 1979;

(c) a summary of any representations received by the Treasury after the day on which this Act is passed relating to section 1(9) of the Alcoholic Liquor Duties Act 1979.'.''

If the industry had had a chance to make representations before the Budget, they would have included those to which I have referred from Bacardi-Martini on the proposal's impact on its investment and the damage that it would do to its confidence in the Government.

A firm called Halewood has recently spent £2.5 million on two new bottling plants; not all of that was its own money. It received Government grant—regional selective assistance—from the Department of Trade and Industry because it is in an area of high unemployment in Liverpool. It received Government subsidies to invest in plants to bottle the very coolers to which the Government now seem to be cold. GBL International is likely to postpone the purchase of an additional bottling line at the Mansfield brewery. It currently employs 80 people and was planning to expand up to 200. The Bacardi-Martini group has around 65 per cent. of its business in those products, which are very successful.

The result of the announcement being made without consultation is that the industry is in a state of flux. Amendment No. 2 would prevent the clause from coming into effect for the time being and until there has been some consultation.

I shall give an example to explain the state of flux. Each recipe for flavoured alcoholic beverages must be approved by Customs and Excise before it can be put into production. Following the Budget, producers asked what recipes can be authorised, but as of 13 May Customs and Excise has been unable to give clear guidelines and agreement on new recipe formulations. That shows that the impact of the measure has not been thought through by Customs and Excise. Recipe experts, monitors and approvers are sitting on their hands not knowing what they can or cannot do. Meanwhile, the industry is waiting for a lead. Had there been proper prior consultation, the industry would not be in that state of flux.

Equally important, production will be severely affected, which will have an impact on jobs, consumers and exports. The Government's justification for the measure is that the price of coolers in the retail trade and pubs has increased by 60p during the past two years and that that shows that there is sufficient price flexibility to absorb a significant increase—more than 60 per cent.—in the rate of duty. I have been told that it is impossible for the industry to find out from Customs and the Government where they obtained the information that coolers have increased in price by 60p in the past two years. I was told that the price had risen by around 20p rather than 60p, and I hope that the Financial Secretary can explain the basis of that assertion, which the

Government are using to justify the introduction of the measure.

I should also be grateful if the Minister would explain why the Government think it reasonable to single out those products instead of others. We had part of that debate under clause 2 when we discussed cider. Last Friday, I carried out something of a survey in the Christchurch Conservative club.

David Wright (Labour, Telford)

A representative sample.

Christopher Chope (Conservative, Christchurch)

It was a very representative sample. It so happens that the favourite tipple of none other than the Secretary of the Christchurch Conservative club, who is certainly no teenager, is WKD, a vodka-based iron brew with a proof level of 5.5 per cent. In the Christchurch Conservative club, it is available at £1.65 a bottle. As a result of the Chancellor's measures, it is inevitable that that price will increase by about 20p.

It seems, however, that the Government have information suggesting that in some other parts of the retail trade, the cost of a WKD, a Bacardi Breezer, a Reef or an Archers Aqua might be more of the order of £2.50. We know that in clubs—perhaps less Conservative than the one that I referred to—drinks tend to be served at prices that are nice round figures, so that the people serving do not have too much trouble with the change. They are normally priced at £2, £2.50, £3 and so on. The consequence of the change in duty that the Government propose is that, in an average club, the price of one of those flavoured alcoholic beverages will increase from about £2.50 to £2.70. It might even be rounded up to £3. The drinks will be unable to compete on a level playing field with others that are priced at £2.50 but have an equal or higher alcoholic content. How can that be fair? Surely it is thoroughly unreasonable.

Iain Luke (Labour, Dundee East)

Obviously, the hon. Gentleman is talking very competently about prices, but does he not realise that many cooler drinks are sold through the vehicle of happy hours? I do not know what happens at his Conservative club; I know that his is not a happy party. The cost of the coolers drunk by many people, including students, is reduced considerably. The increase in tax will have very little effect on the uptake, given that most such drinks are retailed to a younger market, through such conventions, on student nights out on a Friday and Saturday.

Christopher Chope (Conservative, Christchurch)

The hon. Gentleman, who represents a university town, will know all about that market. I can certainly tell him that in Christchurch Conservative club, every hour is a happy hour. [Laughter.] The hon. Gentleman asserts that the measure will make no difference to take-up. How can he be so sure? The amendment seeks to make the information available so that a rational person such as the hon. Gentleman is in a position to say whether there will be any difference to the take-up.

Iain Luke (Labour, Dundee East)

Having previously been involved in academic life and invited by many students to their evenings out, let me point out that these are fashion drinks. Obviously, they are not bridled by advertising, as is the case with smoking, and the market for them is limitless. They are a fashion statement rather than a drink. That is where the crux of the argument lies.

Christopher Chope (Conservative, Christchurch)

I am not quite sure where that takes us. The hon. Gentleman says that the drinks are fashionable, and I accept that many members of the Conservative club in Christchurch are fashionable. The Government are justifying a sharp increase in duty on the basis—among others—that the chief medical officer has expressed concern about the association of coolers with binge drinking among young people. There seems to be no evidence of that whatever. As I said in the previous debate, the person in charge of the Portman Group, a highly respected body, has said that the popular drinks among young people—particularly under-age drinkers—are the traditional beers, ciders and lagers and not the flavoured drinks that we are debating.

We do not have the information, and I shall allow other people to participate in this important debate. One of the biggest concerns is that the Red Book says that there will be a yield of £170 million this year as a result of the change in duty. Even that figure does not seem to be substantiated by any discussion between the industry and Customs and Excise. I should be interested to hear from the Minister how he justifies that figure, because it implies that Customs and Excise thinks that the present market in such products is much larger than it is, and that it expects the market to expand even more than the most optimistic producers think that it will.

In conclusion, I ask the Government to think again about the increase. It might have seemed an easy, last-minute initiative for the Chancellor, who suddenly found that he needed to raise even more money and wanted to do it in a way that would not be seen to impact too heavily on people. He was able to announce £10 million for beer drinkers at the time of the World cup, but at the same time he announced an increase of anything between 20p and 50p on the price of a flavoured alcoholic beverage for someone who wishes to use such a beverage to toast the England team. How can that be justified? The amendments give the Financial Secretary the opportunity to explain and justify the Chancellor's action. He has a tough task on his hands, but we look forward to hearing what he has to say.

Kevin Brennan (Labour, Cardiff West)

Before discussing the amendments, I should declare an interest. I am a member of the Canton Labour club in my constituency of Cardiff, West, where one can buy those drinks at a much lower price than in the Christchurch Conservative club. At the Canton Labour club, there would not be the sort of scam that the hon. Gentleman described as occurring at the Christchurch Conservative club, where if there were an increase in tax of 20p, the price of the drink in question would increase by 50p. It would not sell Archers Aqua, named after the former chairman of the Conservative party. He describes the sort of scam one might expect in the sale of a drink called Archers Aqua sold in the Christchurch Conservative club.

I want to speak against the amendments because the current treatment of such drinks represents a tax anomaly. One reason for the huge expansion in the market is that the discriminatory, favourable tax treatment of those drinks has allowed manufactures to increase prices significantly and still enjoy a massive

growth in demand. Demand for the drinks has doubled over the past few years at a time when manufactures have been able to raise prices. Even if the hon. Gentleman did not accept the Treasury's figure of 60 per cent., which he mentioned earlier, the manufacturers are quoting a figure of 20 per cent. during the past few years, which is a figure well ahead of inflation, suggesting that the products are under-taxed.

I read carefully the representations that hon. Members have received from the industry, particularly the one from Bacardi-Martini Ltd., from which the hon. Gentleman quoted. After reading the letter, I sent it to a few of my constituents who teach economics in secondary schools as a useful tool for illustrating taxation and other economic fallacies. The letter states:

''We will have no option but to pass this cost to the consumer.''

Anyone who knows anything about the matter knows that that is absolute nonsense. Earlier, the right hon. Member for Fylde mentioned that a reduction in an excise duty—a change in the opposite direction—would not necessarily be wholly passed on to the consumer. An increase will not be wholly passed on, either. For that to happen, there would have to be complete inelasticity of demand and, as we know, that is not the case with such products. Some of the cost may be passed on, but it is not true that all of it will be passed on.

There is clear evidence that change in demand for the products is a movement not along the demand curve but of the demand curve. It has shifted to the right during the past few years because of changes in taste and fashion, and because of heavy advertising. As my hon. Friend the Member for Dundee, East said, the products are fashionable. There has been a huge expansion of demand for them, as a result not of reductions in price but of changes in fashion and drinking, particularly among young people. For the Opposition to say that such drinks are principally enjoyed by the rather elderly members of the Christchurch Conservative party—I apologise to them if they are not elderly, but I know that the average age of Conservative party members is much higher than that of the other parties represented in the House—and not by young people is absolute nonsense. The products are aimed at young people. Beers and ciders with a high alcohol content are not used in binge drinking because one would not last very long if they tried to binge drink with them. It would not be much of a binge.

Ann McKechin (Labour, Glasgow Maryhill)

Is not it the case that those drinks, unlike cider and beer, are specifically targeted at young female drinkers? There has been a worrying increase in alcohol addiction among young women and binge drinking among women in recent years.

Kevin Brennan (Labour, Cardiff West)

I am sure that my hon. Friend is right, and we should be concerned about that increase. To take the Portman Group's carefully worded claim

that the majority of drinking among young people involves consumption of beer and alcohol and to say, therefore, that we should ignore a doubling in the demand and consumption of lower-strength alcoholic drinks by young people is to support the argument of the industry and the Opposition without addressing the facts. The facts are that, although it may still be the case that the majority of alcohol consumption by young people is of beer and cider, the huge increase in consumption is due to lower-strength alcoholic beverages.

Chris Grayling (Conservative, Epsom and Ewell)

Does the hon. Gentleman not accept that, in its own right, the measure in the Bill is a one-off? Were it to come as part of a strategy to examine the consumption of different types of alcohol and to consider ways of adjusting the excise structure to tackle the problem of binge drinking across the whole range of alcohols, particularly strong alcohols, there would be some coherence in the proposal. For example, the measure is entirely incompatible with the reduction in duty on strong cider, and it appears to have no strategic dimension to it at all, except for raising revenue from a particular part of the market.

Kevin Brennan (Labour, Cardiff West)

The measure is evidence based. There is a huge amount of evidence of the increase in consumption of such products. There has been no similar rate of increase in the consumption of cider. As I said earlier, binge-drinking problems are not caused by strong cider or drinks with a high alcohol content, but by lower-alcohol products, which one can consume for a longer period of time. There may be a case for reviewing the alcohol content of some beers and ciders, and I would be willing to entertain that proposition, but there is an evidence-based reason for putting right the anomaly of treating these products like beer and cider instead of what they are—spirit-based products.

I welcome the clause and urge the Committee to oppose the amendments. This is an important step, first, towards rectifying an anomaly and, secondly, towards dealing with what is becoming a significant problem, as evidenced by the doubling of consumption in recent years.

Edward Davey (Liberal Democrat, Kingston and Surbiton)

I support these modest amendments, which simply ask the Government to think again and to undertake the consultation that they should have undertaken before bringing the measures before the House. Many other aspects of the Bill have been widely consulted on. Indeed, that is something on which the tax professions have commented positively in regard to the Bill. It is a great shame that, when the Government are embarking on a major policy change, they have not undertaken adequate consultation.

The Committee must be aware that it is a major change in policy. The duty on this type of drink is being increased by more than 60 per cent., a huge one-off increase by any standards. It goes against a previous cross-party agreement—that low alcoholic beverages would have this concessionary rate. If the Government are to object to such consultation, they must say why. They may argue that the announcement had to be made clear on Budget

day because it might have affected the share prices of the companies involved. I doubt that the Government will make that argument, because it is my understanding that it would have had a marginal or neutral effect on the share price. No Budget secrecy issue related to the tax, so the Government could have consulted, had they chosen to do so.

The other reason why I am moved towards supporting the amendments is that the evidence that we have received from Bacardi-Martini Ltd. and the Wine & Spirit Association seems to contradict the limited evidence provided by the Government in the notes on clauses and the Budget itself. When there is a conflict of evidence—quite a serious conflict in some cases—we are justified in asking the Government to think again.

Let me give the Committee an indication of two of those conflicts. The first relates to the change in retail price of these products over recent years. In the notes on clauses the Government say that there has been a 60p increase in the past two years. We have seen evidence from ACNielsen that the increase is a third of that—20p. Clearly, that relates to the Government's justification for the measure, because the notes on clauses say:

''Tax as a proportion of the retail price is now lower for spirit-based designer drinks than for any other type of alcoholic drink''.

If that is the Government's justification, but it is based on incorrect evidence, they need to think again. Therefore, I hope that the Financial Secretary will tell the Committee where the estimate of 60p comes from, because it flies in the face of the evidence that Committee members have been sent, which I am told comes from independent research. The Government have a case to make.

That is not to say that, if the Government went through that consultation exercise and came back to the House, I representing the Liberal Democrats and, I am sure, the hon. Member for Christchurch representing the Conservatives would be against such a move. If the industry has been widely consulted and the evidence exists, there may be a case—the case put by the hon. Member for Cardiff, West (Mr. Brennan). The concession may have resulted in this class of drink being over-consumed relative to other classes of drinks, leading to binge drinking and antisocial behaviour. If so, this may be one of the measures that we should take. I hope that we shall take it with a range of other measures, because other hon. Members who have had cause to investigate antisocial behaviour in their constituencies will have noticed that it has many causes, one of which is the price of alcoholic drinks. In my constituency, I have seen examples of retailers not acting responsibly by allowing people to purchase huge amounts of alcohol that are clearly intended for binge drinking, which leads to antisocial behaviour. In the last Parliament, new legislation was introduced to enable trading standards departments such as that at Kingston council to investigate disreputable retailers who sell to under-age drinkers. We need to pursue that type of policy to crack down on antisocial behaviour. The Government's policy might

be well coupled with that, but we need to see the debate in a wider context.

We also need to consider licensing practices, whether in relation to pubs or off-licences, to make sure that we crack down on underage drinking, which, and let us make no bones about it, is a major problem. The question is whether we should allow the Government to introduce a measure that conflicts with the evidence. On antisocial behaviour, for example, we have heard evidence from the Portman Group, which says that many problems attributed to that class of drinks have decreased because certain parts of the alcopops market have reduced. Some initial experiments in that market were seen to cause problems and have therefore finished. If the industry has acted responsibility, it would seem particularly odd to penalise it.

We need evidence such as that from the chief medical officer, and we need the Government to go away and look at evidence on price, social effects and health. As is proposed in the amendments, they should come back to the House with a proper report to allow us to make a decision while being better informed than we currently are.

Michael Jack (Conservative, Fylde)

The amendment is a not-unreasonable request for the Treasury to lay before Parliament information to justify a tax change. I was struck by an interesting sentence in paragraph 5 of the explanatory notes on clause 3:

''Tax as a proportion of the retail price is now lower for spirit-based designer drinks than for any other type of alcoholic drink, in both the on and off-trades.''

That caught my eye because it seems to move us to a basis for determining tax on alcoholic beverages that is equivalent to the deemed taxable potential of a particular product. I am intrigued by that because it opens up—I will not trespass into this too much, Mr. Gale—a very interesting new philosophy for taxation.

Howard Flight (Conservative, Arundel and South Downs)

May I put this interesting point to my right hon. Friend: a gin and tonic might be described as a FAB. It is gin mixed with various other non-alcoholic groups. If I understand FABs, that is exactly what they are. The point needs to be made that the tax on the spirit element should be in accordance with the tax on all other spirits; that which is not a spirit should not be taxable.

Michael Jack (Conservative, Fylde)

My hon. Friend leaps ahead with the logic that I was beginning to expound. My thought process triggered his excellent piece of analysis.

I am intrigued to know whether there is a new philosophy based on taxable potential. If the Treasury and Customs and Excise are to spend their time busily looking at retail prices, I might equally ask that the information that we seek in amendment No. 1 should also reflect the fact that what goes up can come down. If, as the explanatory notes state, the taxation principle is related to retail prices, we are surely moving into an interesting era as far as spirit taxation is concerned. There may be interesting variations about which the Financial Secretary would like to tell us.

That triggers a second line of inquiry: if retail prices are being observed, for how long will the Treasury go before it revisits that territory?

It being One o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Four o'clock.

Standing Committee F

(Except clauses 4, 19, 23, 26 to 29, 87 to 92, 131 and 134 and schedules 1, 5 and 38) - Clause 3 - Duty on beverages made with spirits to be at spirits rate

Joe Benton (Labour, Bootle)

I remind the Committee that with this we are taking amendment No. 2, in line 22, leave out subsection (2).

Michael Jack (Conservative, Fylde)

I begin by welcoming you to the Chair, Mr. Benton. You were absent this morning for the beginning of our proceedings, but tribute was paid to you in your absence. It is nice to be able to do that in your presence. I also acknowledge the Economic Secretary, who is with us this afternoon—a change in Front Bench talents. I have no doubt that we shall enjoy what she has to say.

Before the luncheon interval, we were debating the amendments tabled by my hon. Friend the Member for Christchurch (Mr. Chope). I wish to address the remainder of my remarks to amendment No. 1, which properly asks for more information to be provided to Parliament about the taxation of alcoholic beverages. Just before the break, I was discussing what appears to be a new taxation principle employed by the Treasury and by Customs and Excise of considering what the market will bear. The explanatory notes indicate that the duty on alcopops was increased because it was thought that, as a proportion of the retail price, it was too low for a spirit-based designer drink. The explanation would have been a little more straightforward if the notes had simply said that the Treasury had decided that it was time that the taxation on that spirit-based drink fell into line with other spirits. However, they did not say that but described a new way of determining policy.

The explanation has flushed out some inconsistencies in the way that alcohol per se is

taxed. For interest's sake, I asked for the assistance of the Library of the House to draw up a comparison on a common denominator basis of the way in which different alcoholic beverages are taxed. The Library converted tax into the common denominator of pounds per litre of alcohol. We find that spirits will bear a duty of £19.56 per litre after the measure in the clause comes into play. However, wine with 15 per cent. alcohol content bears a duty of £10.31 per litre of alcohol. A less alcoholic wine by volume bears a tax of £15.47, and beer bears a tax of £11.89. There appears to be a delicious inconsistency in the way that alcohol is taxed, when compared on a like-for-like basis. The amendment gives Treasury Ministers an opportunity to address the inconsistencies.

Paragraph 6 of the explanatory notes refers to the medical implications of a large consumption of alcopops, but the tax on beer will, effectively, be nearly half the now-enhanced rate of taxation on alcopops. If there were genuinely a health case to be made, why not have an equivalence in the tax on alcohol? If we are to understand the logic behind the measure, we need an explanation, and amendment No. 1 provides an opportunity to get one. I look forward to hearing Ministers explain both why there are different rates and why the numbers are what they are, which will allow us to understand the inconsistency in the way in which alcoholic beverages are taxed in this country.

Chris Grayling (Conservative, Epsom and Ewell)

I echo the remarks welcoming you to the Chair this afternoon, Mr. Benton.

I raised a number of issues in the discussion of the cider amendment. I particularly want to pick up on the comments made this morning in an intervention by the hon. Member for Glasgow, Maryhill (Ann McKechin). She referred to the clear fact that the existence of alcopops has generated substantial new drinking among, in particular, young women, and has led to problems of alcoholism. I do not dispute her comments, but in making them she highlighted an important issue that underlies the inadequacy of the step that the Government are taking.

My hon. Friend the Member for Christchurch rightly said that if steps of the kind set out in clause 3 are to be taken, they need to be taken on the back of a proper assessment of the situation. The comments by the hon. Member for Glasgow, Maryhill highlighted the fact that that has not been done. In my experience, women do not originate antisocial behaviour of the kind that is a bane to so many residents of town centres. This is not an exclusive situation, but generally speaking it is not women who go around vandalising property, putting graffiti on walls and smashing up cars late at night, but young men. The hon. Lady unwittingly highlighted the fact that clause 3 will not address the problems of excessive drinking in young men. It will, perhaps, discourage alcoholism in young women, but it will not deal with antisocial behaviour.

If there is to be a proper assessment, it should reflect the point made by my hon. Friend the Member for Christchurch that young men tend to drink beers and ciders, particularly when they are underage, far more than alcopops. A broad-ranging assessment of the

differing impacts of different kinds of alcohol and the differing impacts of differing levels of duty on different kinds of alcohol would lead the Government to come forward with a coherent strategy that said, ''We have a problem in our society. It is not helped by aspects of the excise system, which we therefore need to modify.'' That would give them credible authority to take the steps that they hope to take, but there is nothing in the one-off clause that enables them to do so.

The reference to the chief medical officer's report can be interpreted as an alibi for a revenue-raising measure, which, as my hon. Friend the Member for Christchurch has said, will damage parts of the industry. The Government must do better. They must come up with a clear assessment of the impact of alcohol on antisocial behaviour and put forward proposals, which can be openly and clearly debated, about the way in which the excise system can be structured to help tackle that problem. That argument is not addressed by clause 3. The amendment put forward by my hon. Friend is one way in which to begin a proper debate about the differing impact of excise levels on different kinds of alcohol, and it deserves the Committee's support.

Mark Hoban (Conservative, Fareham)

I also welcome you to the Chair for this afternoon's proceedings, Mr. Benton.

In his amendment, my hon. Friend the Member for Christchurch has addressed the problem with clause 3. When we discussed clause 2 this morning, there was an issue about whether cider should be subject to a higher tax because it has a greater alcohol content. When one compares the contents of that debate with clause 3, there appears to be a discrepancy in the Government's case. It is not clear whether the measure is being brought forward for health reasons to reduce binge drinking, in which case the argument for reducing the duty on cider is not appropriate, or simply to raise revenue.

The explanatory notes state that there has been an increase in demand for alcopops in recent years. If that price increase is to be believed, demand has increased off the back of steep price increases, although I note that my right hon. Friend the Member for Fylde (Mr. Jack) referred to the ACNielsen report, which indicates that the price increase during the past couple of years has been only 20p. I wonder whether the Government are targeting those drinks simply as an easy revenue raiser, knowing that they are popular and in demand and that, even with an increased price, the yield on the tax will continue to be very sound and will benefit the Exchequer. Consequently, it may be misleading to try to dress up the tax increase as though it were on health grounds, given the earlier comments on cider.

We must also consider what will happen if the amendment is rejected and the tax increase goes through. I fear that more young people, rather than using the relatively low alcohol alcopop drinks, will switch straight to drinking shots—neat spirits. Certainly, what I believe are called sidekicks are available in off-licences. They are shot measures of

spirits, which will get people more drunk more quickly, and possibly more cheaply, than alcopops. We must look at the health debate in the wider context of what else is available to young people to get them drunk quickly, cheaply and, from their perspective, efficiently.

The amendment gives the Committee and the House time to pause and think about why the measure has been introduced and about how we can address antisocial behaviour and binge drinking in a more considered and mature fashion, looking at all rates of duty on alcohol, not simply those on cider or, as in this case, alcopops in isolation.

Paul Boateng (Labour, Brent South)

May I join colleagues in welcoming you to the Chair, Mr. Benton? You have arrived in the middle of an informative and interesting debate, with important contributions from both sides. I hope to give you a flavour of it in the course of my response.

Spirits-based coolers are also known as alcopops, premium-packaged spirits, ready-to-drinks, designer drinks, pre-mixed spirit drinks or, as we have now learned from Opposition Members, FABs—I suspect that that will be a new term for you, Mr. Benton, although perhaps you move in more esoteric circles than I—which means flavoured alcoholic beverages. Call me old-fashioned, but I prefer spirits-based coolers. [Interruption.] It has a ring of truth to it, because it is spirits-based coolers that we are taxing. FABs are a much broader category of drink. No doubt we shall come to recipes in due course, because several hon. Members have referred to them.

Typically, the drinks are simply a mixture of a spirit—usually vodka or white rum—a fruit juice or flavouring and water. In terms of their alcoholic content they have been taxed at around the same level as beer. In terms of duty as a proportion of retail price, they have become during the past two years the most lightly taxed of all alcoholic drinks.

While you were away, Mr. Benton, we were given a very interesting insight into the club—the Conservative club—of the hon. Member for Christchurch. That is a very interesting place. Apparently, the people in it are young. [Interruption.] Well, at least, young at heart. We are also told that they are fashionable. According to the hon. Gentleman, we can deduce that by reference to the fact that they drink something called WKD. One does not have to be Ali G to know that WKD, when spoken, is pronounced ''wicked''. I see a look of bemusement on the face of the hon. Member for Christchurch. That is surprising. Given the picture that he painted of his Conservative club, I would have thought that it was full of ageing Ali Gs. I cannot help responding positively to the murmured suggestion by my hon. Friend the Member for Enfield, North (Joan Ryan) that, were it to be allowable under standing orders, we might visit the hon. Gentleman's club.

We are an inclusive Government but we have not yet reached the stage at which fiscal policy is judged by the mores of the Christchurch Conservative club.

John Bercow (Conservative, Buckingham)

I am very grateful to the Financial Secretary for giving way. Would he care to note as he develops his remarks that one of the reasons for the state of permanent happiness in the Christchurch Conservative club, to which my hon. Friend the Member for Christchurch earlier referred, is the fact that my hon. Friend secured on 7 June—as the hon. Member for Kingston and Surbiton (Mr. Davey) will know to his pain—a swing from the Liberal Democrats of no less than 11.7 per cent.? That is why they are so happy; that is why they keep drinking.

Paul Boateng (Labour, Brent South)

I fear that any Conservative club in a state of permanent happiness ought to be investigated by Customs and Excise, but not in relation to any alcoholic beverage.

Be that as it may, we were referred to the drink pronounced ''wicked'', and I am happy to meet the challenge that the hon. Member for Christchurch laid down. In referring us to WKD, he suggested that the Government were putting a stop to innovation in the alcohol industry, and that the measure would in some way inhibit innovation and development of the industry, and the jobs that go with that. That would be a serious charge, and one to be taken seriously, if it had any substance. My attention is drawn to revealing comments made by Karen Salters, the marketing manager of Beverage Brands, the producer of WKD; we should pay some attention to what she has to say. She says that established and well supported brands will be able to withstand the inevitable price increase, and that Beverage Brands is committed to strengthening the coolers category and developing it further through innovation, marketing and business-building with the trade. That was what she said on 26 April in light of the Chancellor's Budget.

I do not think that anyone could argue that the measure will be an inhibitor on the business and will cost jobs. I also do not think that one can get away with suggesting that the Government have done something unheard of in raising tax on a particular category of drinks, or have acted improperly. The treatment of spirits-based coolers has remained largely unchanged since 1996, when the right hon. and learned Member for Rushcliffe (Mr. Clarke) made an announcement—without prior consultation, I believe. The right hon. Member for Fylde is in a much better position than I to know what was in the mind of the right hon. and learned Member for Rushcliffe at the time because he was his constant companion in the Treasury. The right hon. and learned Member for Rushcliffe said that

''the tax on alcoholic soft drinks will be increased by over 40 per cent.,''—

he was proud of that; it was a boast that was made when he made his Budget statement in 1996, and I think that I can recollect it—

''which will put up the price by between 7p or 8p a bottle. That increase will meet public concern about the attraction of the ''alcopops'' for under-age drinkers.''—[Official Report, 26 November 1996; Vol. 286, c. 168.]

That is what he said. There was no consultation and he simply made the announcement. He may have had

good reason to keep those drinks in the bucket category of low-alcohol wines. At that time they accounted for only a tiny fraction of the alcoholic drinks market and many had a non-spirits alcoholic base. That is why I think—I am not just being old fashioned—that the term ''spirits-based coolers'' is better. Such drinks have developed over the years. They started with one called Hooch, which was a major cause for concern because its lemon taste attracted the younger drinker. The hon. Member for Buckingham (Mr. Bercow) may recollect it and perhaps he turned to that drink when he left the women's committee of Lambeth council—[Interruption.]—or possibly in 1992, indeed.

The industry developed and became more sophisticated with more attractive drinks. That sector of the market has changed out of all recognition since the time of the right hon. and learned Member for Rushcliffe. Times change and we must consider the matter in light of prevailing circumstances. We asked ourselves whether that concessionary treatment should continue and after careful consideration it became clear that such drinks no longer deserved to be treated as a niche product and that their concessionary treatment had become anomalous. There is nothing odd, unusual or underhand about that. That part of the drinks market has been the fastest growing for the past three or four years and by some reckoning it is ahead of cider as the fourth largest drinks category after beer, wine and ordinary spirits. So we decided that they should no longer be taxed at the same rate as low-alcohol wines but at the same rate as spirits.

Turning to the point made by the hon. Member for Arundel and South Downs (Mr. Flight) before lunch, we decided that vodka and orange or gin and tonic mixed at the bar should be subject to the same tax as vodka and orange or gin and tonic pre-mixed in a bottle. What is wrong with that? Is it odd or unusual? I am addressing my comment primarily to the hon. Member for Kingston and Surbiton because I suspect that Conservative Members are beyond hope. They will do what they will do, but I know that the hon. Gentleman tries to apply his mind rationally to these issues and that he does not come to the Committee with preconceived notions—

John Bercow (Conservative, Buckingham)

No, he is a Liberal.

Paul Boateng (Labour, Brent South)

That is not fair. The hon. Member for Kingston and Surbiton is a Liberal, but that does not have to carry all the connotations that I fear the hon. Member for Buckingham implied.

If the hon. Member for Kingston and Surbiton and his hon. Friend the Member for Torridge and West Devon (Mr. Burnett) apply their minds, perhaps they can see the rationale for the provision.

John Burnett (Liberal Democrat, Torridge and West Devon)

We welcome you to the Chair, Mr. Benton. It is a pleasure to serve under you again.

The Financial Secretary asserted that these drinks are the most lightly taxed of any alcoholic beverage. Will he elaborate on that to justify his proposition?

Paul Boateng (Labour, Brent South)

It does not take much to demonstrate that. If the hon. Gentleman looks at the figures in the

Red Book he will see that those drinks are not taxed as much as spirits, beer and cider. They are taxed on the basis of an obscure bucket category that was created, understandably, to protect the niche market of British-made wines—the Wincarnises of this world, if hon. Members can recollect that far back. The burden of taxation on them was low.

One of the key issues for consideration was whether the coolers market could support the removal of the concession. Our evidence showed that it could. There is nothing improper about considering whether a market can bear the burden of taxation. Between 1999 and 2001, the consumption of coolers more than doubled, and during that period, the average pub price of a bottle of coolers rose by 60p per bottle. Some hon. Members with peerages suggested that the increase was closer to 20p, but I have to tell them that the figure of 60p comes directly from an analysis of market research data by the Office for National Statistics. Customs has discussed that figure with the industry and I am confident that agreement will be reached to clear up confusion on the part of Opposition Members.

Christopher Chope (Conservative, Christchurch)

Will the Financial Secretary make that documentation available to Committee members straight away so that we have a chance to consider it while we are still sitting?

Paul Boateng (Labour, Brent South)

I am not sure that I can do that, but I shall certainly write to the hon. Gentleman and make reference to the ONS report and the market survey. He can share that with colleagues.

Peter Luff (Conservative, Mid Worcestershire)

If the price has already gone up by 60p a bottle, and binge drinking continues at those price levels, how will putting up tax help to prevent binge drinking?

Paul Boateng (Labour, Brent South)

I am coming to that. It is a mistake for the hon. Gentleman to try to explain our action on tax as a response solely to the phenomenon of binge drinking. We have never presented that argument.

John Bercow (Conservative, Buckingham)

The Financial Secretary is expatiating on the purported rationality of his argument. I do not cavil at that, but may I ask him what assessment he has made of the apparent incongruity between the relatively low excise duty on high alcohol content wine and the relatively high duty on lower alcohol content wine? My right hon. Friend the Member for Fylde referred to that incongruity a few moments ago.

Paul Boateng (Labour, Brent South)

I shall not be drawn into such discussions now, but I hope that we have an opportunity later to discuss wines and their respective proportion of tax. Now, we are dealing specifically with spirits-based coolers.

Recent evidence strongly suggests that the sector enjoys sustainable levels of growth and very low demand elasticity, but even so, the assumptions that we made about growth and demand in our revenue projections were cautious. One has but to listen to the firm of market analysts WestLB Panmure, which said:

''We do not believe that the higher tax and higher prices will materially affect demand because we do not believe that demand is price sensitive but led more by brand preference.''

People are attracted by brands, such as WKD, Reef, Barcardi Breezer and Smirnoff Ice. As Opposition Members have said, they are fashion drinks. People's decisions in relation to fashion are not often based on price elasticity. They pay for a name—surprising but true.

Chris Grayling (Conservative, Epsom and Ewell)

Can the Financial Secretary confirm that he believes that the duty increase will not affect demand in the slightest? He has quoted WestLB Panmure, which believes that it will not have a significant impact, so does he accept that the reference to medical factors in paragraph 6 of the explanatory notes on clause 3 is irrelevant? If the increase has no impact on demand, it will not affect levels of drinking or the behaviour of those who drink too much. Therefore, this is entirely a revenue-raising measure rather than a social measure.

Paul Boateng (Labour, Brent South)

I shall come to the hon. Gentleman's argument about whether the measure is revenue raising or health motivated. It is a mixture of both. The hon. Gentleman's specific point goes back to the pertinent point made in an earlier debate, I think by the right hon. Member for Fylde, in relation to particular categories. I have not seen any figures showing what impact prices have on, for instance, young women or young men. If people rely on handouts from mum and dad or on a Saturday job, a price increase may limit their drinking. I have not seen the detailed analysis of that.

What we and the analysts in the industry say is that demand in this area is not price-sensitive but led more by brand preference. The amendments seek to maintain, perhaps indefinitely, the concessionary treatment of these drinks. That is the crux of the debate. Opposition Members apparently believe that the concession should continue. They have made some interesting arguments as to why it should. The hon. Member for Christchurch spoke about the damage that the measure would do to the growth of the sector. I hope that I have dealt with that argument by quoting the view of the marketing manager at Beverage Brands. The reality is that pubs and other retailers are generally responding to the change with an increase of 10p a bottle, in line with our estimates. That does not seem to be having a marked impact on demand.

The hon. Gentleman also suggested that there was confusion in the industry about whether certain drinks are to be treated as spirits. He made the fairly bizarre suggestion that Customs is setting itself up as an approver of recipes. Customs does not approve recipes. It gives assessments of duty liabilities on drinks that have been produced. That is its role.

The only people who know and approve the recipes for these drinks are the manufacturers themselves: it is a commercial decision that they take. They know whether their drinks are based on spirits. The leading brands, which account for most of the market, know that their drinks are spirits. That is precisely how they

market them. If any manufacturer needs advice or guidance from Customs on the proper duty classification for its drink, it can contact Customs. Many have done so over the years. They did so when the right hon. Member for Fylde was in office and they do so now, and they receive a binding classification.

A number of hon. Members referred to the health impact—a significant issue, particularly in relation to certain sections of the community. My hon. Friend the Member for Glasgow, Maryhill referred to the undoubted socially damaging impact on young women, who increasingly binge drink. My hon. Friend the Member for Cardiff, West (Kevin Brennan) likewise expressed concerns about that.

However, we do not consider the primary function of alcohol duties to be the control of alcohol consumption. Most people drink sensibly, and in general the problems of alcohol misuse are best tackled by a combination of social legislation, public policy and trade self-regulation. Reference has been made to the work of the Portman Group. That stands close examination as an excellent example of the way in which an industry seeks to promote socially responsible drinking, and I think that we would all commend it. However, when we are considering whether this type of drink should retain favourable or concessionary treatment, we cannot ignore the fact that, in a report that raised concerns about increased alcohol consumption among young people, the chief medical officer singled out designer drinks. We could not pretend that he had not singled out those drinks in terms of problematic drinking among young people, to return to the point that the hon. Member for Epsom and Ewell (Chris Grayling) made on cider. Of course we have in mind what the chief medical officer said, which was:

''Recent years have, in particular, seen younger drinkers attracted to new ranges of 'designer' drinks with a relatively high alcohol content.''

The right hon. Member for Fylde, among others, commented on the structure of the UK duty regime and competition in the drinks market. Some hon. Members came very close to arguing for what sounded like a system of unitary taxation, where drinks would be taxed according to their alcohol content. We had a rather good debate a few weeks ago on the Floor of the House, in which the right hon. Gentleman shared with us an insight into his contribution to thought at the Treasury. He told us of an idea that was then radical, which he had shared with Treasury officials and his ministerial colleagues. It did not make much headway at the time, but he nevertheless shared it with us. Perhaps during his time at the Treasury he was a great proponent of unitary taxation, although we would not have known it. I would not be made privy to it, because we are never told what our predecessors have tried to do—I am sure with good reason.

Michael Jack (Conservative, Fylde)

Before the Financial Secretary ascribes to me every policy area of the previous Government, successful or otherwise, may I remind him that my principal area of responsibility was, in effect, direct, not indirect taxation? However, like him, I then accepted the collective responsibility of dealing with those policies.

I take the opportunity to ask the Financial Secretary a question. He has suggested so far that alcopops are able, in his judgment, to absorb a higher level of taxation. We are getting an insight into how Treasury thinking on setting taxation levels in that sector operates. Currently, 30 per cent. of the price of beer is taxed, 51 per cent. of that of wine and 61 per cent. of that of spirits. If either of the categories with a lower level shows an increase in sales, will it also have its card marked by the Financial Secretary's approach?

Paul Boateng (Labour, Brent South)

The approach of the right hon. Gentleman, who takes a keen interest in those matters, is intriguing. He attempts to suggest that whether a particular drink could bear an increase in taxation should not be taken into account, that it is unfair to do that, or that if we do that for one drink—one that is, after all, in receipt of a concessionary regime—it opens up opportunities to tax others still further. That is simply not the case. I refer him to paragraph 5.88 in the Red Book, to which I referred earlier, which says that our aim is

''a fairer balance in the burden of taxation falling on different alcoholic drinks and different types of drink-producers.''

That is what we have done here. There is nothing underhand or suspicious about it. The right hon. Gentleman cannot jump from the fact that we have taken this particular action on spirit-based coolers to say that, next in line, we have our eyes on beer or spirits.

I had an exchange with the hon. Member for Buckingham on our respective records on beer. He has promised to write to me about that, and I look forward to it, but I should like to share that discussion with a wider audience. I do not think that, when one examines how the Labour Government have related to the spirits and beer industries, one can truly suggest that we have imposed an unfair burden on them or been anything other than understanding of and sympathetic to the issues and concerns that affect them.

Several hon. Members rose—

Paul Boateng (Labour, Brent South)

A surplus of riches. I give way to the hon. Member for Arundel and South Downs.

Howard Flight (Conservative, Arundel and South Downs)

Will the Financial Secretary be kind enough to clarify my understanding of the clause? I am not entirely clear whether low-alcohol alcopops would end up being subject to the same tax rate as whisky, gin and other spirits. Earlier, I made the gin and tonic point: if an alcopop is one measure of vodka and three measures of fruit juice, the spirits rate should be applied to the spirit element. It would be unfair to tax a low-alcohol alcopop at the same rate as whisky by comparing them volume for volume. For example, wine typically has a 12 per cent. alcohol content, and if an alcopop has a 5 per cent. alcohol content it is nonsense to treat it in that way. Does the clause, as it stands, seek simply to tax the alcohol element and not the rest of the drink?

Paul Boateng (Labour, Brent South)

As is often the case, the hon. Gentleman makes a fair point along a proper line of inquiry. I refer him to my comments about the anomalous imposition of the banded made-wine structure on those kinds of drinks. Under the old

banded made-wine structure, a spirits drink of 4.1 per cent. bore the same duty as one of 5.5 per cent. As the hon. Gentleman has indicated, that does not make much sense bearing in mind the varied nature of such drinks. In clause 3, we have sought to tax according to the nature of the alcohol that a particular drink contains.

John Burnett (Liberal Democrat, Torridge and West Devon)

Will the Financial Secretary give way?

Paul Boateng (Labour, Brent South)

No; I want to finish the point.

Clause 3 will be much fairer than the old system because spirits duty will increase in a linear fashion with the alcohol content, meaning that the lower the alcohol content, the lower the duty. Under the new spirits structure, a producer will be able to save 27p per litre by producing at the bottom, rather than the top, of the range covered by the old duty band of 4 to 5.5 per cent. That is obviously relevant to the point made by the chief medical officer. The unfortunate antisocial and health-damaging consequences of binge drinking are less likely if people choose a lower alcohol drink because of a price differential.

John Burnett (Liberal Democrat, Torridge and West Devon)

I ask the Financial Secretary to justify his earlier assertion that those drinks are the most lightly taxed of any alcoholic beverage. He has just adumbrated the principle behind the tax: the lower the alcohol content of any drink sold across a bar or in an off-licence, the lower the duty. Is that the principle behind the measure?

Paul Boateng (Labour, Brent South)

The principle behind the measure is that it is not right that that particular form of spirits-based alcoholic cooler should remain in the anomalous category of banded made wine. That particular sort of drink was unreasonably lightly taxed as a proportion of retail price, and this is much fairer. Spirits duty increases in a linear fashion, as I have said, with the increase in alcoholic content.

Kevin Brennan (Labour, Cardiff West)

I apologise for being late, Mr. Benton, and am grateful to my hon. Friend the Financial Secretary for giving way. Is not a better analogy a drink such as Baileys Irish Cream, which is a mix of cream and spirits? It is taxed as a spirit. Is not that a more appropriate analogy for a fruit and spirit mix such as the one that we are discussing?

Paul Boateng (Labour, Brent South)

I shall avoid that one, because I do not want to get drawn into it. It would be pleasant to be drawn into a vat of Baileys; one can drown in a butt of malmsey wine or in a butt of Baileys—I know which I would prefer.

I do not intend to be drawn into that discussion. I believe that the measure is fair and that we have met the requirements of the principles that we laid down as the basis for taxation in this area. It is important to recognise that what we have done is completely consistent with what our predecessors—of all political parties—have done. I go back to the days of a former Chief Secretary to the Treasury, subsequently Chancellor of the Exchequer and First Lord of the Treasury, the former right hon. Member for Huntingdon, John Major, when he said in 1989:

''The existing duty system allows the Chancellor the opportunity to take account of changes in the economic conditions affecting each of the drinks industries in setting duty rates.''

In 1990, the right hon. Member for South-West Norfolk (Mrs. Shephard), when she was Minister of State at the Treasury, said:

''we must not lose sight of the fact that the basic purpose of alcoholic drinks duties . . . is to raise revenue for the Government . . . To achieve that, successive Governments have set out to collect revenue from various drinks rather than from alcohol as such . . . To link duties on the basis of alcoholic strength would limit the Chancellor's room for manoeuvre and produce a major upheaval in the market place.''—[Official Report, 20 December 1990; Vol. 183, c. 573.]

That is the Conservative party's track record.

Hon. Members have said that we should have consulted the industry more closely so that we could tell them what we were planning to do and get their views before making the change. That is a Damascene change of attitude on the part of the Opposition. I do not recall their taking that view when they were in government or rushing to consult the taxpayer before they introduced a tax hike. I cannot think of any Government who have ever seen fit to constrain themselves in such a way when taking basic decisions on alcohol duty rates. We saw no value in consultation. We were confident in our decision and saw no reason to delay it, just as we saw no need to consult on our decision to freeze the other alcohol duties and to cut the rate for cider.

There is something else that I know will interest the right hon. Member for Fylde, when he actually looks at the figures. I am mindful that the 10-day period that we allowed for the industry to change its systems was used by some producers to engage in some serious forestalling. That is another reason why I think that an extended period of consultation would have been both unwise and unnecessary. I can make available to Committee members who would like to see it an interesting graph that shows what occurred when the right hon. and learned Member for Rushcliffe announced in 1995 a duty increase that was to come into effect from 1 January. What we then saw was massive trade forestalling before the sector dipped and then renewed its steady growth again. There would have been real dangers in my submission for us to have adopted the rather unusual principle that the Opposition seem to have latched on to during their period in opposition.

We have listened carefully to what right hon. and hon. Members have said, and we understand where they are coming from on the issue, but the measure supports the steps that we have consistently taken to deliver a fairer burden of taxation on different alcoholic drinks and their producers. The clause ensures that the drinks carry their fair share of duty at a rate that probably reflects the nature of the alcohol that they contain. As such, I commend it to the Committee and urge Members to reject the amendments.

Michael Jack (Conservative, Fylde)

I have listened with care to some very good points that the Financial Secretary made in response to the inquiring lines that we put forward. I would say to him that at times there were dangers when, via the means of a question from the Opposition, he began to impute a policy to us. I

think that we have every right, and I speak from the Back and not the Front Benches, to probe the Government about the logic and thought that lie behind that move.

The Financial Secretary showed an unusual degree of sensitivity when I probed him about the percentage of tax that those products will now bear as a proportion of their price in the future. We have had an interesting insight into some of the thinking behind Government policy on alcohol taxation. When the Government set out to raise money, it is not always easy to justify it in an entirely acceptable fashion.

John Bercow (Conservative, Buckingham)

I am grateful to my right hon. Friend for giving way. Does he agree that the Financial Secretary's response on the subject of the proposed amendments should be treated with certain circumspection in the light of the not-very-auspicious debut to the issue of challenges that the Financial Secretary has so far made? Is my right hon. Friend aware that, on 8 May, in consideration in Committee on the Floor of the House, the Financial Secretary—he seems very proud of it because he referred to it a few moments ago—challenged me to identify any period in which there had been a freeze on beer duties in two Budgets—[Interruption.]—Oh yes; it is on the record. The Financial Secretary cannot cavil at my recalling the record. Is my right hon. Friend pleased to be reminded that, between 1985 and 1988, there was indeed a freeze on beer duty? It confounds the Financial Secretary and it does not encourage confidence in the veracity of his judgments.

Michael Jack (Conservative, Fylde)

I am always pleased to be reminded of useful information, and my hon. Friend has given some more to the Committee. I think that it also bears out the fact that, when we were in government, we did consult on spirits. For example, we consulted the Scotch whisky industry about matters relating to its tax.

I want to return to what the amendment is about. It reflects the desire for information to explain Government policy. I do not think that the Government should be upset about providing that information. I fear that the amendment may well be lost, but I would say to the Financial Secretary that anything that helps us to understand better why the Government do what they do is a perfectly sensible and reasonable thing to request, and that is what the amendment is designed to do.

Christopher Chope (Conservative, Christchurch)

May I, too, welcome you to the Chair, Mr. Benton? My right hon. Friend the Member for Fylde has just given a good reason why we should vote for the amendment. In summing up for the Government, the Financial Secretary addressed some of the issues. He conceded that, although the Chancellor said in his Budget statement that at no material time had there ever been a justification for the concession, there has been a justification for the concession in the Government's eyes for quite a long time, so that situation has now changed. At least that is a minor concession.

The Financial Secretary has also been much more moderate in his views about the impact of the measure on binge drinking, and I am grateful to him for that.

However, he has not answered the question that the industry is asking: where spirit coolers compete directly with bottles of Budweiser and Beck's in clubs, why is it fair to increase the tax on one by 60 per cent. while leaving the tax on the other unaltered? They are all fashionable drinks whose alcohol content ranges from 4.5 to 5.5 per cent. Information on that and a wider debate would be facilitated by amendment No. 1.

Question put:—

The Committee divided: Ayes 9, Noes 16.

Clause 5 - Acquisition of information etc.

Michael Jack (Conservative, Fylde)

This is an interesting clause. Lest anybody think that a conflict of interest arises here, I remind the Committee that I am chairman of an agricultural consultancy.

Biodiesel is an interesting agricultural development, and I welcome the Government's decision to give it concessionary treatment in relation to hydrocarbon oil duties. However, I want to take a moment or two to explore with the Financial Secretary the Government's thinking behind the revised level of duty.

A little while ago, I received some correspondence from Cargill plc, not only outlining the potential for biodiesel in the United Kingdom, but making some important points about the factors that would affect the company's investment decisions in this area. I say that against the background of a European directive that sets targets for member states' use of biodiesel. Interestingly, I learned from the university of Aberdeen's helpful environmental information note, published on 13 September 1999, that in Germany

''Sales of bio-diesel, a renewable fuel from oilseed rape, increased to 100,000 tonnes in 1998. 800 German petrol stations now sell that

green fuel. Sales have doubled since 1996 when motorists purchased 50,000 tonnes, available from 500 outlets.''

Biodiesel comprises 1 per cent. of German diesel sales.

I gave that example because in Germany biodiesel is not subject to duty, so there is an outright price advantage for that environmentally friendly form of diesel. The same note states that, in addition to the benefits of diesel in terms of carbon dioxide production and its contribution to reducing greenhouse gases, biodiesel produces sulphur-free emissions, which is a better performance than conventional fuel. There is every reason for the Government to encourage in clause 5 further production of biodiesel, but the success—albeit out of date—described in that note, reveals that a more advantageous tax regime than that proposed by the Government had a remarkable effect in encouraging the use of biodiesel in Germany, certainly for road transport use.

Let us examine the position in the United Kingdom. Cargill advocates that in agricultural terms it would be a good idea to do better than at present because we have a surplus of wheat production. That surplus is lower grade wheat, which is often exported and requires export restitutions, costing this country money. As a result and because of the changes in agriculture, a high of some 543,000 hectares of oilseed rape—the source of the raw material for biodiesel—in the 1998–99 planting season has fallen to 395,000 hectares in the last full year for which I have figures. Cargill argues that the agricultural potential is clear and that the amount of oilseed rape grown could be increased substantially to satisfy demand for biodiesel by using some of the land that is currently used for surplus production of wheat to the 1998–99 level of harvested oilseed rape. Cargill states:

''With this scenario in mind, and given a domestic food industry oil need of about 500,000 tonnes, there would be approximately 450,000 tonnes of rapeseed oil available for biodiesel. The conversion of that oil to rape methyl ester would provide 450,000 tonnes of biodiesel for road transport fuel, sufficient to make a meaningful difference to greenhouse gas emissions and to air quality.''

That is powerful advocacy for better use of land and environmental benefits, but the economics of the Government's proposals get in the way. In a further letter to me, Cargill acknowledges the Government's concession in hydrocarbon duty in clause 5 and states:

''Whilst we welcome this move, we have constantly stressed that this rate will not be sufficient to encourage companies like Cargill to produce biodiesel in earnest in the UK on a scale that will realise the full environmental and economic potential. In fact''—

this is important—

''this duty rate will only serve to encourage the production of low quality biodiesel generated from recycled vegetable oil.''

That is important because the Government, in the shape of the Prime Minister, recently held a working group meeting at Downing street with Sir Donald Curry, the author of the report of the commission on the future of farming. As the Financial Secretary knows, part of Sir Donald's report put particular

emphasis on innovation in UK agriculture. It laid stress on the development of new crops and new ways of using land. By and large, the Government have welcomed the Curry report. I should have thought that they would want to embrace, with considerable enthusiasm, the opportunity to deflect land producing an unwanted wheat surplus into something that would clearly produce considerable environmental gains and be to the significant advantage of UK agriculture, at a time when grain prices, as the Financial Secretary knows, have reached an all-time low.

Returning to Cargill, its letter says that

''we would prefer duty rates linked to the world price of vegetable oil, but have been informed by HM Treasury that such a formula is too complex. Therefore a further duty rate reduction of 15p, giving an overall rate of 10p per litre, would be sufficient to ensure that a commercially viable biodiesel industry could develop in the UK.''

It concludes with a very important point from a major world player in the field of agri-investment, saying:

''Cargill has a myriad of possible investment opportunities worldwide, and will move our investment elsewhere if we do not receive an indication of the Government's intention to further reduce the duty rate.''

In a way, it is disappointing to have a company that is quite clearly enthusiastic for the development of a biodiesel industry in the UK pointing out that, in its judgment, the concessionary rate referred to in clause 5 is not yet sufficient to encourage the investment in the infrastructure needed to give a boost of the type to which I referred in the context of Germany.

I hope that the Financial Secretary can share with us in some detail the discussion that the Government have no doubt had on this occasion with the industry and the thinking that led them to select the rate of duty that clause 5 invites us to approve. If a company such as Cargill is willing to make an investment but feels that the rates are not yet sufficiently advantageous to encourage it so to do, that has implications not only for its investment but for UK agriculture and the Government's backing of the Curry commission report.

John Burnett (Liberal Democrat, Torridge and West Devon)

Will the right hon. Gentleman address the sufficiency or otherwise of rape available for purchase by companies such as Cargill, and the impact of the integrated administration and control system regime on rape production in the UK agricultural sector?

Michael Jack (Conservative, Fylde)

The point that I made earlier, to which Cargill referred, was that going back to 1998 and 1999 planting levels of 543,000 hectares brings us, if my memory serves me correctly, within the envelope allowed by the controls in the common agricultural policy on the overall planting levels of oilseed rape.

I appreciate that there are different regional planting amounts, but I do not want to get too entrapped in a discussion of agricultural policy when the major focus of my remarks is the inducement to invest in capacity and to take advantage of what the UK agricultural sector clearly could produce—enough rapeseed oil to meet immediate demand. I do not think that Cargill is saying in any way that there is a shortage, although the hon. Gentleman rightly draws our attention to the fact that there is currently a

constraint, under CAP terms, on the overall planting of oilseed rape.

I hope that the Financial Secretary can share with those of us who support the project the reasons why the Treasury cannot go further at this stage and realise the investment that companies such as Cargill and, no doubt, others would like to put into it.

John Burnett (Liberal Democrat, Torridge and West Devon)

The Liberal Democrats welcome the clause too. I am particularly interested in the comments of the right hon. Gentleman, who has, as usual, illustrated graphically and intelligently the problems that Cargill faces. We want, as I am sure do the Government, greater investment in the manufacture, distribution and sale of a product that is environmentally benign and part of a worthwhile provision in the Bill.

I refer the Financial Secretary to ordinary diesel that can be purchased. Can he tell the Committee about the Government's views on diesel duty? We have a high rate on diesel compared with other European countries, although it has been proven for some years that diesel engines produce lower emissions, they are more durable and one generally gets more miles per gallon from them. Diesel should be encouraged. What do the Government have to say about that in formulating their taxation proposals on diesel?

Christopher Chope (Conservative, Christchurch)

I, too, look forward to hearing what the Financial Secretary has to say. Although the clause is a step in the right direction, paragraph 7.30 of the Red Book states:

''There are already signs that this initiative is stimulating activity, including investment in production facilities and plans by one major supermarket chain to use biodiesel in lorries.''

My right hon. Friend the Member for Fylde is on the ball; it is clear that the users of biodiesel do not think that there will be a sufficient financial incentive to switch their vehicles fully to biodiesel. The headline figure of a 20p per litre reduction in fuel duty for biodiesel sounds attractive, but the reality is that it is impossible to put 100 per cent. biodiesel into a vehicle; it must be diluted so that only 5 per cent. per litre of diesel is biodiesel. The effective reduction is therefore only 1p per litre, which means that the cost of biodiesel will be higher because the cost of its production is 2p per litre higher than for standard diesel. That is why the Freight Transport Association says that the reduction will make no impact whatever. Its manager of engineering policy, Geoff Day, says:

''The idea of a 20p per litre reduction in fuel duty for vehicles that may be using many thousands of litres per year is obviously very attractive. However, as no engine or fuel injection equipment manufacturer will approve of pure biodiesel''

it will not make much impact in practice.

If every hon. Member is enthusiastic about the benefits to the environment and agriculture that can flow from the development of biodiesel, we challenge the Government on why they are limiting its reduction in duty. Why are they not going further?

Paul Boateng (Labour, Brent South)

One of the great advantages of a Committee such as this is that it enables all hon. Members to share experiences of their other lives to better inform our debates—[Interruption]—better to inform. The hon. Member for Buckingham is being

pedantic because both phrases are fit for the purpose. We heard an example from the right hon. Member for Fylde, who has a detailed knowledge of the industry and shared with us the particular views of Cargill, to which I shall come in a minute.

Indeed, the hon. Member for Torridge and West Devon brings knowledge of farming, which is valuable, to the Committee.

In bringing the measure forward, we have obviously consulted and worked closely with the Department for Environment, Food and Rural Affairs because we are well aware of the measure's implications for the farming industry and are anxious to get it right in order that it may benefit that industry and contribute towards our international commitments in relation to Kyoto and climate change.

I would caution the hon. Member for Torridge and West Devon about becoming too enthusiastic about diesel, an area in which I was particularly interested when I came into this job. I have considered it in greater detail than at any time since I was a member of the Environment Committee many years ago under the distinguished chairmanship of the then right hon. Member for Hornsey and Wood Green, Sir Hugh Rossi, whom a number of Government and Opposition Members will remember. We looked at some of those issues on the Environment Committee and I revisited them when I came into this job.

At first blush, diesel has the superficial attractions referred to by the hon. Member for Torridge and West Devon because it has some advantages on carbon dioxide emissions. The difficulty is that it has a worse impact on local air quality than petrol. Diesel presents problems for those—there will be many of us in Committee—who have particular concerns about environmental degradation and the impact of road usage on, for instance, children in schools. It is superficially attractive because it produces reduced carbon dioxide emissions and it is undoubtedly more efficient given the sort of engines that are now being produced, but the problem is its environmental impact on local air quality.

That is why we made the policy decision to tax both petrol and diesel at the same rate. The Liberal Democrat party may have come to a different view; it is an area in which one must make a balanced judgment. The view that we took, take and adhere to is that petrol and diesel should be treated alike, which is why we have approached the matter in this way. Clause 5 will introduce a reduced rate of excise duty on biodiesel used as a road fuel to permit the United Kingdom to benefit from its reduced greenhouse gas emissions. The purpose is to help offset the high cost of biodiesel compared with mineral-based diesel.

We launched the Green Fuel Challenge in November 2000 to promote the development of practical alternative transport fuels with environmental benefits, and we invited industry to come forward with practical proposals. In response to the proposals that we received, a series of duty cuts for alternative fuels was announced in the 2001 Budget, including a reduction in duty on biodiesel, which

clause 5 will enact. The reduction will apply to both main types of biodiesel: rape methyl ester—RME—produced from rapeseed oil; and recovered vegetable oil—RVO—produced from waste vegetable oils. In terms of usage, the rate that will apply to biodiesel used as in-road fuel will be 25.82p per litre, which is 20p per litre below the rate for ultra-low sulphur diesel. There will also be a provision for duty paid on pure biodiesel used in certain off-road vehicles and other specified motor engines to be reclaimed. The overall result is that the same amount of duty will be paid on biodiesel as would be paid on road diesel—around 3p per litre. The Committee will discuss road diesel in due course.

Christopher Chope (Conservative, Christchurch)

Will the Financial Secretary address the issue that biodiesel has to be diluted?

Paul Boateng (Labour, Brent South)

Yes, I will.

I should add that the duty incentive on biodiesel used as a road fuel will apply both to pure biodiesel and to biodiesel blended with mineral heavy oil. In the latter case, the incentive will apply in direct proportion to the amount of biodiesel in the blend. The reduced rate will come into effect on Royal Assent, provided that we have European agreement to our request for a derogation from the mineral oils structures directive. Agreement is expected shortly.

The right hon. Member for Fylde asked whether such an incentive was enough. The good news is that there are already signs that the duty incentive is stimulating activity, including investment and production facilities. As the hon. Member for Christchurch has been good enough to recognise, a major supermarket plans to run its delivery fleet on biodiesel, and we look forward to that announcement.

Some members of the British Association for Bio Fuels and Oils—Cargill is one of them—want a greater differential for biodiesel of up to 35p per litre. We have to make a judgment on that. The Government's climate change programme emphasises the need for cost-effective measures to tackle climate change to ensure that there is no disproportionate cost to society as a whole. We decided that a 20p per litre duty cut relative to ULSD was sufficient recognition of the environmental benefits from biodiesel and provided best value for money.

The Committee will want to give the Government some credit for adopting this form of fiscal instrument to promote environmental good. The hon. Member for Christchurch said that we have taken a few steps down the road. I hesitate to draw his attention to the fact that I was not aware that, when he and his right hon. and hon. Friends had governance of this nation's affairs, they took any steps at all. Therefore, there should be some recognition of the fact that the Government are going in the right direction as opposed to going backwards.

Christopher Chope (Conservative, Christchurch)

Perhaps the Financial Secretary can inform Committee members what the state of the biodiesel market was six years ago.

Paul Boateng (Labour, Brent South)

No. We must encourage, develop and stimulate a market. It always makes me laugh in one sense, because there was a time when Opposition Members were constantly giving us strictures—they do not do it so much now—about the values of the market. Yet it is this Government who have made the market work for the environment, and we should have some recognition for that. I shall not go on and on about it, but we should get some recognition for seeking, through the Green Fuel Challenge, to engage with the industry. No one pretends that it is easy, and there are some fine-balanced judgments to be made. We have drawn upon the industry, and it has been generous in proffering information, advice and assistance, which we have used to inform our balanced judgment. We have decided that 20p per litre is right.

The revenues and costs of the measure will depend on the extent to which the duty incentive encourages the production and use of biodiesel. Obviously, we will watch that closely—I take the point made by the right hon. Member for Fylde. We must ensure that the measure has the desired effect, and we must monitor it carefully. We estimate that the initial cost will be about £10 million a year, which is money well worth spending because the incentive will make a real contribution to the environment.

Several hon. Members rose—

Paul Boateng (Labour, Brent South)

I had concluded my remarks, but I am always interested in observations from hon. Members.

Howard Flight (Conservative, Arundel and South Downs)

Does the Financial Secretary agree that the main revolution in creating a market for environmentally friendly fuels was pioneered by the previous Conservative Government when they introduced a substantial duty encouragement of lead-free petrol? Would he be kind enough to address the specific point made by my hon. Friend the Member for Christchurch about dilution? Will 1p be sufficient, or is it the case that for dilution the equivalent of a 2p cut in duty is necessary?

Paul Boateng (Labour, Brent South)

Our judgment is that the cut that we have made will achieve the desired result; no further cut is required. We think that the signs are good and promising but, as I have said, we shall monitor the situation closely.

Michael Jack (Conservative, Fylde)

I very much welcome the Financial Secretary's comments, particularly his assurance that the Government will monitor the situation closely. As he said, it is a matter of judgment. Commercial interests will seek the best investment opportunity and, therefore, will press for a lower rate than the Government judge is necessary, and the Government must strike a balance between their environmental targets and what they think they can afford to do. However, I wish to press the Financial Secretary a bit further.

The assurance that the Government will keep the matter under review is the sort of standard throw-away line that all Ministers use because they think that it will remove a line of criticism. Can the Financial Secretary assure us that a paragraph about reviewing progress will be included in the next pre-Budget report, which will be issued towards the end of this year, so

that we might formally be informed of the Treasury's approach to the development? I appreciate that all taxes are kept under review, but it would be nice to have something more tangible as the result of the Financial Secretary's useful words of assurance.

The Financial Secretary, with his obvious, in-depth knowledge of diesel engine technology, will be aware of the environmental improvements that are the result of the second generation of common rail engines, which are now coming into greater use throughout Europe. If he is interested in helping the Government to achieve and perhaps even exceed their goals for the reduction of carbon dioxide and other noxious emissions from motor vehicle engines, he should consider the strong case for encouraging diesel cars and the even stronger case for fuelling them with biodiesel, for the reasons that I gave earlier. It would be helpful to have a written review, and the pre-Budget report would be an excellent vehicle, without creating a new one, for putting the information in the public domain.

Paul Boateng (Labour, Brent South)

I would not claim for myself an in-depth knowledge of the technology, but I am lucky to work with several men and women who have such knowledge. As the right hon. Gentleman well knows, in this job one often meets—not only in the context of photo calls with various inanimate pieces of technology but generally—people who are real enthusiasts in that field. That is especially true in relation to biofuels, where enthusiasm sometimes borders on obsession. The right hon. Gentleman well knows that phenomenon. I have learnt much about that subject, and am very interested in it.

In the course of my experience in this Committee when in opposition, I learned that Ministers must not, under any circumstances, for one moment allow themselves to be lulled, above party-political consensus, into believing that this is the place to write future pre-Budget reports, or enter into commitments to publish documents of any sort. I do not intend to be lulled by the right hon. Gentleman's blandishments into such a false sense of security. However, I can assure him that, as I think he can sense, such is the interest in that field and in the environment generally, shown not only by this House, in questions, but by the Environmental Audit Committee and others, that the process of review on environmental taxation has of its very nature to be a live one.

There is no hidden agenda here. We all want the same thing: to see the challenging Kyoto targets met. It is in our interests to ensure that we keep the matter under review, to be as open as possible about the processes that make up that review and to invite comment and contribution from as wide a range of informed people as possible. That is the nature of our intention to keep those matters under review. The formula has progressed a little since the right hon. Gentleman's day and now has a meaning that, I fancy, it might not have had when he uttered those self-same words.

Question put and agreed to.

Clause 5 ordered to stand part of the Bill.

Schedule 2 agreed to.

Clause 6 - Regulating trade in rebated heavy oil etc

Christopher Chope (Conservative, Christchurch)

I was expecting the Financial Secretary to speak to the clause first, because I assumed that he would wish to counter the criticism made by the Federation of Petroleum Suppliers, the trade association for the oil distribution industry in the United Kingdom and the Republic of Ireland. It represents the majority of distributors in the UK, from the small family businesses that form the greater part of it to the distribution arms of some of the major oil companies.

The FPS met Customs and Excise to discuss its proposals for tackling misuse of rebated fuels before submitting comments on the consultation document in February. The whole of the industry, I am told, is united in its view that the Customs and Excise proposal

''will not be effective in tackling the problem but simply add to the burdens on industry, being particularly onerous for small businesses, which make up the majority of distributors.''

The FPS is

''very disappointed that the Treasury has gone ahead with its proposed approval scheme for distributors and has ameliorated its original proposal only very slightly in the light of''

the comments that it has made. It says:

''The Government made a commitment not to place excessive burdens on small businesses by way of regulation. With the majority of distributors beings small businesses, the scheme to limit misuse of rebated fuels repudiates this commitment, our view being supported by''

none other than

''the DTI's Small Business Service.''

Those are serious allegations being made against the Government. I hope that the Financial Secretary has an answer to them, because another point that the FPS makes is that the simple way to eliminate fraud is to lower duty on road fuels. It also says that the present scheme will be unworkable and unfair to distributors, and that it does not address the problems in Northern Ireland. We know from the National Audit Office report and other information that the problem of fraud and duty avoidance in Ireland, and particularly Northern Ireland, is by far the largest proportion of the overall problem.

Paul Boateng (Labour, Brent South)

I certainly was intending to speak to the clause, and I am delighted to have caught your eye, Mr. Benton. I prefaced my intention to speak to it in my earlier reference to concerns about red diesel. The matter is something that would give any responsible person charged with consideration of the issues a great deal to think about, and certainly something to say.

I am bound to say that, having heard the hon. Member for Christchurch, I had rather hoped to have a more constructive and supportive response in tackling what is a very real problem: serious and increasing fraud involving the misuse of rebated fuel oils. All parties must take that issue seriously. I know that many right hon. and hon. Members sitting on

Select Committees that have an interest in the matter certainly take it seriously, and we do as a Government.

In the calendar year 2000, mainland diesel fraud accounted for 4 per cent. of the market and cost at least £450 million. We estimate that, with no action, that fraud will have doubled by 2005–06. At present, there is little or no control over the distribution network for red diesel and kerosene after they pass the duty point. That enables fraudsters to purchase those fuels as if they were to be used for approved purposes and then misuse them as road fuel with relatively little fear of detection. Customs has increased its volume of intelligence-based investigations into oils fraud, and we have seen a tenfold improvement in detection rates as a result. I commend Customs and Excise for its vigour, but the fact of the matter is that we lack the basic information on the distribution of rebated fuels that would help us to target our resources in Customs and Excise investigations more effectively.

Unless we significantly tighten the control regime for rebated fuels, diesel fraud will continue to grow rapidly, with serious implications for revenues, the competitiveness of legitimate retailers and hauliers and for the environment. All parties have urged us to tackle that problem. That is why the comprehensive strategy announced in the Budget is designed to reverse the growth in oils fraud, reduce the illicit market share to 2 per cent. and secure £550 million against the pre-Budget revenue baseline by 2004–05. Instead of filling the fraudsters' pockets, that money will assist in implementing our public policy proposals.

Michael Jack (Conservative, Fylde)

On Second Reading, I raised with the Financial Secretary the line of figures in table A.1 on page 155 of the Red Book. I wonder whether he could share with the Committee some more detail as to how the calculations were done to increase the oil fraud strategy revenues to which he refers. This year, the figure is £100 million. It goes up to £290 million, and then a colossal £550 million. Could he explain how the build-up is accounted for?

Paul Boateng (Labour, Brent South)

I shall happily do that, but first I shall address the points made by the hon. Member for Christchurch. I am grateful to the right hon. Member for Fylde for raising that issue again. He did raise it on the Floor of the House and I will deal with it in detail in a moment.

The Government are determined to introduce to distributors of rebated fuels a system of approval that I do not believe is disproportionately burdensome on the industry. The system will require distributors to tell us about the supplies that they make and to take reasonable steps to check that their supplies of rebated fuels are made only to customers who intend to put them to an approved use. Only those trading in these fuels will need to be approved, and end users of the oils will not be affected. The scheme will, therefore, radically improve our control over the distribution of rebated fuels and will provide a regular flow of information about their distribution and use, which will help Customs to improve its intelligence, its ability

to identify potential misuse and its ability to target the use of anti-fraud resources effectively.

We consulted the industry closely on the introduction of the scheme. The hon. Member for Christchurch said ''You can target it, but you don't accept everything that it says.'' No, we do not accept everything that it says. We consulted it, and we met it some of the way. Some of what it had to say had force and we accepted the arguments; other arguments we could not accept. I have placed in the House copies of the regulatory impact assessment and a summary of the responses received to the consultation. I do not believe that, if the hon. Gentleman reflects on those, he will find our response wanting.

Is the estimated revenue yield from the strategy realistic? The answer is yes but I would say that, wouldn't I? The reason why I say that the estimate is based on sound analysis and cautious assumptions is that, in 2000, mainland diesel fraud accounted for 4 per cent. of the market and cost at least £450 million. We estimated that, with no action on our part, the fraud would double by 2005–06. That was the basis of the revenue projections in the pre-Budget report. The strategy announced in the Budget will radically enhance our capacity to control the oils distribution network, making it far harder for fraudsters to get hold of rebated fuels and misuse them. We estimate that this strategy will reduce the market share of illicit fuel to 2 per cent. by 2005–06. It is the impact of this estimate against the previous revenue base line that has been scored in the Budget projections. Hence the saving of £550 million by 2005.

Howard Flight (Conservative, Arundel and South Downs)

Given the extent of red diesel fraud, is it mainly of a local nature or is there evidence of large-scale, organised crime behind it?

Paul Boateng (Labour, Brent South)

There is large-scale, organised crime behind it in Northern Ireland. The links with terrorism are real, and we should not ignore them for one moment. There are also some indications that it is spreading to the mainland, so we must take the matter seriously.

There is a clear and pressing need to improve customs controls over the distribution of the network and to persuade distributors to exercise more control over who they supply the fuels to. As I say, we have consulted industry on the matter and we shall issue a discussion document on the details of the scheme, because it is in nobody's interests that it should not work effectively or should be so burdensome that the various stakeholders do not feel they have ownership of it. Customs will hold further meetings with representatives from the industry as we introduce the draft regulations. That will provide an opportunity to clarify the trade's requirements and the cost involved.

I hope that, with that assurance, right hon. and hon. Members on both sides of the Committee will feel that they can give the clause a fair wind.

Christopher Chope (Conservative, Christchurch)

I am grateful to the Financial Secretary for what he has said, but can he assure us that the proposals to penalise the distributors, which many people find particularly offensive because the distributors have no control over the use to which the fuel is put once it has been sold, and the penalty

regime will also be the subject of a consultation document? Will the attitude of the Financial Secretary's Department be to deal with the matter with a light touch, rather than to make enemies of responsible small businesses?

Paul Boateng (Labour, Brent South)

The Department's attitude is to deal with the matter effectively. The penalties will be proportionate to the extent of the negligence.

Question put and agreed to.

Clause 6 ordered to stand part of the Bill.

Further consideration adjourned.—[Mr. Sutcliffe.]

Adjourned accordingly at fifteen minutes past Six o'clock till Thursday 16 May at half-past Nine o'clock.