Scrapping the beer duty escalator - benefits
to consumers, pubs and brewers
A report for the Campaign for Real Ale
February 2015
2
Disclaimer
Whilst every effort has been made to ensure the accuracy of the material in this document, neither Centre for Economics and
Business Research Ltd nor the report’s authors will be liable for any loss or damages incurred through the use of the report.
Authorship and acknowledgements
This report has been produced by Cebr, an independent economics and business research consultancy established in 1993,
providing forecasts and advice to City institutions, Government departments, local authorities and numerous blue chip
companies throughout Europe.
London, February 2015
© Centre for Economics and Business Research
3
Contents
Executive Summary
4
Introduction
5
Recent history of excise duties on alcohol
8
The decline of the beer industry
10
Impact on beer consumption and production
13
Impact on investment in brewing and pubs
18
Impact on employment
23
Conclusion
26
Appendix
28
© Centre for Economics and Business Research
4
Executive Summary
This report aims to quantify the impact of scrapping the beer duty escalator and the two
successive penny cuts in duty which were introduced in the Budgets of 2013 and 2014. The
changes introduced were widely welcomed as measures that would boost both the beer and
pub sectors as well as saving consumers money. The effects of these measures are considered
across this range of stakeholders, analysing the impact on, for example, consumer prices, the
number of pubs, investment and employment.
The report’s main findings are:
1

The consecutive cuts in beer duty saved consumers around 16p on a pint of beer - The
average pint of beer, which currently stands at £3.04, would have cost £3.20 if not for
1
these measures .

An additional 750 million pints of beer will be purchased in the UK this financial year as
a result of the budget changes - We estimate that, by the end of this financial year, sales
volumes would have fallen a further 2.8 million hectolitres from their level in 2012 if
beer remained on the duty escalator. This would equate to a fall of over 595 million pints.

In 2014 alone, we expect investment in the brewing industry stood £61 million higher
than it would have if the beer duty escalator had been maintained - Over 71% of
respondents of CAMRA’s survey of pubs and brewers reported increasing investment
expenditure this year. Almost four times as many businesses increased expenditure by
over 50% than those businesses that cut investment.

We estimate that an additional 1,047 pubs would have closed by the end of 2014 if the
Beer Duty Escalator had remained in place instead of beer duty being cut by 2p over
the last two years.

Compared with the level in 2012, the policy measures of the 2013 and 2014 Budgets
contributed to a total of 26,000 additional jobs in 2015 that would not have been
created if the alcohol duty escalator remained in place - around 24,000 jobs were
created in pubs and bars thanks to the boost to beer sales and a further 500 jobs were
created in the manufacture of beer.

An extra 33,000 jobs could be created by 2020 if the government opts to freeze beer
duty over the course of the next parliament - 89,000 jobs could be created if the
government froze beer duty until 2020. The current policy of up-rating alcohol duty by
RPI inflation would create a total of 56,000 additional jobs.
Source: HMRC, ONS, Cebr analysis
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Introduction
Cebr was commissioned by the Campaign for Real Ale (CAMRA) to quantify the economic
benefits of scrapping the beer duty escalator, a policy which up-rated the excise duty placed on
beer by 2 percentage points above inflation each financial year between 2008 and 2013. The
Budget of 2013 saw the planned 5.2% rise in beer duty scrapped and instead replaced by a 2%
cut, reducing the duty placed on a pint of beer by 1p. A further 2% cut was then introduced by
the Chancellor in the following year.
This report presents Cebr’s analysis of the impact of the beer duty changes introduced as part of
the 2013 and 2014 Budgets, namely the scrapping of the beer duty escalator and two successive
1p cuts in beer duty. The analysis has a particular focus on the benefits realised by UK
consumers, brewers and pubs across the country and quantifies the impact of beer duty
changes on a number of key areas over the next parliament. The key areas include:

Changes in consumer prices

The consumption of beer

The number of pubs in the UK

UK beer production

Employment

Investment in pubs and brewing
A variety of sources have been engaged as part of this research including an industry survey of
both brewers and pub-owning companies and a series of interviews with trade associations,
brewers and pub owning companies. Using data from HM Revenues and Customs (HMRC), the
Office for National Statistics (ONS), the British Beer and Pub Association (BBPA) and Cebr’s
forecasts for key macroeconomic indicators, we utilise econometric analysis of how alcohol
consumption across the various product categories changes in response to relative price
changes to the model the impact of a continuation of the current beer duty policy. This allowed
us to contrast these base results with counterfactual results that are reflective of the
continuation of the beer duty escalator through 2013-2020. The results of our analysis show
that these measures have clearly helped to slow the decline in sales of beer across the industry
but still suggest that more could be done to support this key and historic part of the UK
economy.
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Economic contribution of the beer industry to the UK economy:
The beer industry is a considerable contributor to both the UK economy and government tax
revenues. Beer and pubs contributed £22bn to the UK economy in 2014 and beer itself
2
generated £13bn in tax revenue from duty and VAT alone .
The beer industry is an important source of employment across the UK, both in the brewing of
beer and through supporting jobs in pubs and clubs. As Figure 1 shows, over 15,000 people
were employed in the production of beer and malt in 2013 – 87% more than were employed in
the production spirits and more than seven times the number of people with jobs in the cider
industry.
Figure 1: Employment in the production of the main alcohol product categories in Great Britain, 2013
16,000
14,000
12,000
10,000
8,000
6,000
4,000
2,000
0
Wine
Cider and other fruit
wines
Spirits
Beer and malt
Source: British Beer and Pub Association
3
This employment was spread over 1,400 breweries located across every region of the United
4
Kingdom and generated almost £500m in wages.
Pubs and bars provided over 400,000 jobs across Great Britain in 2014. However, employment
in this sector has fallen sharply since 2006, reflecting the impact of the economic downturn and
2
The Beer Story: Facts on Tap
3
Source: British Beer and Pub Association
4
Source: ONS, Cebr analysis
© Centre for Economics and Business Research
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the persistent squeeze on household spending power. A combination of higher rates of
unemployment and a fall in real wages put pressure on households’ disposable incomes in the
years following the financial crisis. As a result, consumers became increasingly unwilling or
unable to spend on luxuries such as a pint of beer in the local pub, particularly as the price of
each pint increased significantly more quickly than the general rate of price increases. As Figure
2 shows, employment in pubs and bars fell by 19.3% between 2006 and the three months to
March 2014.
Despite this, the 446,000 jobs in pubs and bars in 2014 supported a further 235,000 jobs
through indirect and induced spending. Thanks to the relative volume of beer sales in these
premises (seven in every 10 drinks sold in British pubs are beer) these jobs are all heavily reliant
on the health of the beer industry.
Figure 2: Employment in public houses and bars in Great Britain
580,000
560,000
540,000
520,000
500,000
480,000
460,000
440,000
420,000
400,000
2006
2007
2008
Source: British Beer and Pub Association
© Centre for Economics and Business Research
2009
2010
2011
2012
2013
2014
8
1
Recent history of excise duties on alcohol
Until the 2013 Budget, the Government’s alcohol policies have favoured the spirits markets over
those for beer. Duty on spirits over the decade to 2007 was frozen while, during the same
period, duty on beer increased broadly in line with the rate of inflation, as measured by RPI. This
allowed the price of spirits to fall relative to beer.
The introduction of the alcohol duty ‘escalator’ in the 2008 budget meant that the cost of all
categories of alcoholic beverage (beer, cider, spirits, wine) increased significantly faster than the
general rate of price increases across the economy. This was because duty increased by RPI
inflation plus 2 percentage points each year. The price of a pint of draught bitter in 2008 was on
average £2.41. This increased 16.2% in the four years the duty escalator was in place to £2.80 in
2012. This contrasts to prices in general (as measured by the RPI), which have increased by 13%
over the same period. If beer duty had continued to increase at the rate of inflation only, the
duty on a pint of beer would have been 8p lower in 2012 and 13p lower if the rate had
remained frozen at its 2007 level.
After a well-reasoned campaign from the beer industry, the government not only officially
scrapped the duty escalator on beer in the 2013 Budget but went further, announcing a cut of
1p in the duty placed on a pint of beer (a cut of 2%). The government appeared to recognise the
need to support the brewing and pub industries and moved further in that direction in the
Budget of 2014. In addition to removing the duty escalator for two more alcohol categories,
cider and spirits, the government announced an additional 1p cut in beer duty, helping to
reverse some of the relative increase the duty on beer has experienced since 1997 compared to
spirits and cider.
Figure 3: Percentage increases in United Kingdom alcohol excise duty since 1997
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Wine
Source: HM Revenue & Customs
© Centre for Economics and Business Research
Spirits
Beer
Cider
9
The impact on excise duty across the four main categories since 1997 can be seen in Figure 3.
Clearly, duty on all alcoholic drinks has increased markedly since 2007, but as the duty payable
on beer and wine rose to a greater extent than spirits and cider over the 1997-2013 period.
Even after two consecutive cuts of 2%, beer duty is still 73.2% higher now than it was in 1997.
The excise duty placed on spirits on the other hand increased by 48.6% over the same period.
Figure 4: Real changes in United Kingdom alcohol excise duty since 1997
40%
30%
20%
10%
0%
-10%
-20%
-30%
Wine
Spirits
Beer
Dec-14
Dec-13
Dec-12
Dec-11
Dec-10
Dec-09
Dec-08
Dec-07
Dec-06
Dec-05
Dec-04
Dec-03
Dec-02
Dec-01
Dec-00
Dec-99
Dec-98
-40%
Cider
Source: HM Revenue & Customs
Changes in government policy in the 2013 Budget have provided some relief on beer duties,
reducing the rate payable in both 2013 and 2014 and limiting the extent of future duty rises to
RPI inflation. However, as shown in Figure 4, beer duty remains around 6% higher in real terms
in December 2014 compared with 1997. Meanwhile duty on spirits has fallen by 18% in real
terms and cider duty is almost at the same level in real terms.
© Centre for Economics and Business Research
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2
The decline of the beer industry
The UK beer industry has been in structural decline since the 1980s. Over the three decades to
2013, overall consumption of beer in the UK fell by nearly a third (32.3%). In particular, there
has been a significant contraction in the volume of beer consumed through the “on-trade” –
which includes restaurants, hotels and pubs. The amount of beer purchased through this
channel has plummeted by 60% over the three decades to 2014, mirroring the decline of
Britain’s industrial, manufacturing and primary industries since the 1970s. Having risen from
around 14% in 1983, the share of all beer sales made through shops and supermarkets
represented more than half of the market for the first time in 2014.
Figure 5: Beer quantity released for UK consumption, million barrels
40
35
30
25
20
15
10
5
On trade
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0
Off trade
Source: British Beer and Pub Association
However, it is encouraging to see that, following the two successive duty cuts, 2014 ended a
decade-long decline in UK beer sales, with overall sales rising by 1.3% as shown in Figure 6.
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Figure 6: UK Beer Sales (both on-trade and off-trade), thousands hectolitres
70000
65000
60000
55000
50000
45000
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
40000
Source: British Beer and Pub Association
In contrast to beer, sales of imported spirits, wine and cider were all higher in 2013/14 than in
the 1980s, as analysis of alcohol clearance data from HM Revenue & Customs in Figure 7
illustrates.
Figure 7: Pure alcohol clearances by type, million hectolitres of pure alcohol
3.0
2.5
2.0
1.5
1.0
0.5
1986/1987
1987/1988
1988/1989
1989/1990
1990/1991
1991/1992
1992/1993
1993/1994
1994/1995
1995/1996
1996/1997
1997/1998
1998/1999
1999/2000
2000/2001
2001/2002
2002/2003
2003/2004
2004/2005
2005/2006
2006/2007
2007/2008
2008/2009
2009/2010
2010/2011
2011/2012
2012/2013
2013/2014
0.0
Wine
Beer
Source: HM Revenue & Customs
© Centre for Economics and Business Research
Cider
Home produced whisky
Imported and other spirits
12
Pure alcohol clearances from beer fell by 29% between 1986/87 and 2013/14. By contrast, pure
alcohol clearances from spirits are now 13% higher than in 1986/87, while clearances from wine
and cider have both more than doubled, rising by 134% and 145% respectively. This is illustrated
in Figure 8 below.
Figure 8: Pure alcohol clearances by type, % change between 1986/87 and 2013/14
150%
145%
134%
100%
57%
50%
0%
-29%
-50%
-43%
-100%
Cider
Wine
Imported and other
spirits
Beer
Home produced
whisky
Source: HM Revenue & Customs
Notably, for spirits, there is a stark contrast in trends for domestically produced whisky
compared with imported and other spirits, such as vodka. Between 1986/87 and 2013/14, pure
alcohol clearances of home produced whisky fell by over 40%, while clearances of imported and
other spirits increased by 57%. This casts doubt on the notion that the Scotch whisky industry
was the main beneficiary of the differential treatment that spirits duty received in recent
decades.
Excise duty policies for much of the last two decades have reinforced the structural decline of
the beer industry, and are unlikely to have been the best way to raise tax revenues or protect
the significant number of jobs supported by the sector. Although the Government’s decision to
give more preferential treatment to beer in 2013 and 2014 is a step in the right direction, in this
respect, this report shows that more could be done to protect the beer industry, given the
substantial contribution it makes to the UK economy.
© Centre for Economics and Business Research
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3
Impact on beer consumption and production
The average selling price of a pub pint of bitter (3.9% abv) in 2007 was £2.28, a pub pint of lager
(4.1% abv) £2.48 and a four can pack of lager (4.1% abv) £2.83. In the same year, 49,900
hectolitres of beer were sold in the UK market, with 56.5% (28,200 hectolitres) of sales within
the on-trade.
Since the introduction of the beer duty escalator in the Budget of 2008 the price of these
products has increased considerably and sales of beer have declined sharply, particularly within
the on trade. However, the fall in sales can’t be attributed solely to the duty policies adopted
between 2008 and the present day. Other factors, such as the financial crisis and recession that
followed, have played an important role in the path that the sales of both beer and other
alcohol products have followed since the introduction of the duty escalator.
As part of the research, we conducted a survey of brewers and pub owning companies in order
to gauge the impact that recent policy decisions have had on trading conditions. The results
were generally positive with almost 40% of the companies surveyed suggesting that trading
conditions had improved in the last 12 months and over 82% suggesting that conditions had not
deteriorated. When questioned further as to the impact of the government’s decision to cut
beer duty in the 2013 and 2014 Budgets on domestic sales/profitability, over 56% of businesses
said that it had led to an increase in their company’s domestic sales/profitability. However, only
around 8% suggested that it had led to a significant increase in these performance indicators.
In order to empirically analyse the impact of the beer duty escalator and assess the subsequent
benefits of the decision to scrap it in the 2013 Budget, we have developed a model of the
alcohol industry. The model takes into account a wide range of factors that influence the sales
volumes of different alcohol products such as household’s disposable incomes and price
changes; which includes both changes in the base price of each product and the impact of tax
changes. Using this we are able to model an alternative policy scenario in which the alcohol
products remain on the duty escalator through until 2015.
Gary Walters, Ludlow Brewing Company
The further penny off a pint in 2014 has helped the brewery to continue to limit price
increases to their customers. Owner Gary Walters reported that the brewery, by the end of
2014, was approximately 15% up on last year’s sales.
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Policy Scenarios:
Base Scenario: The base scenario reflects the actual changes in beer duty that have taken place
since 2008.
Scenario 1: Alcohol duty escalator remains in place through 2014/15.
The alternative scenario represents the policy plans initially set out when the alcohol duty
escalator was introduced in 2008. Following the VAT cut in the 2008 pre-budget report, duty on
all alcohol products was increased by 6% above the rate of inflation to compensate for lost
revenues in 2008. Following this, duty was then up-rated by RPI plus 2 percentage points each
year for the next four years (later extended to 5 years). As a result, between 2008–14 duty on all
alcohol products has increased by around 56%. Figure 9 shows the effect of the continuation of
the escalator on the duty rates of a pint of beer (5.0% abv) compared to the two consecutive
cuts in 2013 and 2014.
Figure 9- Duty rates on a pint of beer in the on-trade
£0.65
£0.60
£0.55
£0.50
£0.45
£0.40
2008
2009
2010
Beer (5.0% abv)
2011
2012
2013
2014
Continuation of Beer Duty Escalator
Source: HM Revenue & Customs, Cebr analysis
The continuation of the beer duty escalator through 2013 and 2014 would have raised the duty
payable on a pint of beer by a further 5p.In contrast, after two consecutive cuts introduced by
the Chancellor in those years, beer duty actually fell 2p. With VAT levied on the post duty price,
the continuation of the beer duty escalator would have further increased the tax due on the
© Centre for Economics and Business Research
15
average pint. VAT on a pint of beer would have been over 4p higher in 2014 if the beer duty
escalator had remained in place.
Thanks to a higher rate of pass through (i.e. the amount the final selling price changes in
response to changes in costs) in the on-trade; the selling price for a pint of beer has increased
by more than the changes in tax. The average pint of beer (5.0% abv), which currently stands at
£3.04, would have cost £3.20 if the beer duty escalator had not been scrapped and replaced by
two consecutive 1p cuts in 2013 and 2014.
Figure 10 shows estimates of beer volumes for the period under the base scenario and scenario
1. The divergence in sales volumes is testament to the positive impact that cutting beer duty
over the past two years has had versus the continuation of the beer duty escalator. In the year
following the introduction of the first 1p cut in beer duty, sales volumes increased by some 676
thousand hectolitres or over 142 million additional pints. We estimate that the additional cut of
1p this year should further support sales, which we project to grow slightly over 2014/15. This
compares with further declines in volumes if the beer duty escalator was retained. We estimate
that sales volumes would have fallen a further 2,816 thousand hectolitres, over 595 million pints,
by the end of the 2014/15 financial year.
Figure 10- Domestic beer clearances 2007/08 – 2014/15, thousands hectolitres
50,000
Thousand Hectolitres
45,000
40,000
35,000
2007/08
2008/09
2009/10
2010/11
Base
2011/12
2012/13
2013/14
2014/15
Scenario 1
Source: Cebr analysis
Despite the recovery of the UK economy over the past 24 months, household finances have
remained strained as stubbornly weak wage growth has persisted. A continuation of the alcohol
duty escalator on all products would have placed further pressure on household budgets and
sales volumes for most alcohol categories would have fallen between 2012-14 as consumers
© Centre for Economics and Business Research
16
were forced to cut back. Sales volumes of beer in the last two years have not just been
supported by the more moderate inflation on the price of beer itself. The fall in the relative
price of beer reverses the long-running trend which has seen alcohol duty on beer raised
proportionally by more than that for cider and spirits and appears to have encouraged some
substitution back towards the consumption of beer.
Lawrence Washington, Purple Moose Brewery
“Our sales increased by 27% in 2013 on the previous year, but clearly some of this will
be down to us installing extra capacity. Having said that, sales in 2014 are a further
12% up on 2013.
We are now looking to install further fermenting vessels and we have taken on a new
member of staff in production in the past year.”
Future Impact:
The analysis above makes it clear that the decision to scrap the beer duty escalator in favour of
the policies of the Budgets of 2013 and 2014 is already having a noticeable effect on the UK
beer industry, supporting sales growth as opposed to compounding the decline of the sector.
However, the change in policy direction could also have a much longer term impact on beer
consumption.
Considering a number of different policy paths over the course of the next parliament, we use
our economic model to compare the impact that different duty policies could have on beer
consumption through to the end of the next parliamentary term in 2020.
Future Policy Scenarios:
Base: Duty on all alcohol products up-rated by RPI inflation from 2015/16 – 2019/20.
Scenario 1: Alcohol duty escalator retained through 2013/14 – 2019/20.
Scenario 2: As with the base scenario but duty on beer frozen for next 5 years.
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Figure 10- Domestic beer clearances 2010/11 - 2019/20, thousands hectolitres
Thousands Hectolitres
45,000
40,000
35,000
30,000
2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
Base
Scenario 1
Scenario 2
Source: Cebr analysis
As Figure 10 shows, beer sales are projected to fall over the forecast horizon in each of the
policy scenarios modelled. However, there is a stark contrast between the performances of
sales volumes across the scenarios. The continuation of the beer duty escalator in Scenario 1
suggests that beer consumption could have fallen by nearly 2 billion pints per year between
2012/13 and 2019/20, an additional 1.2 billion pints compared with the current policy path
(Base Scenario). However, the analysis suggests that whilst the change in policy in recent years
has helped to support the performance of the UK beer industry, more may need to be done
over the course of the next parliament to truly reverse the decline of the sector. Compared with
a fall of 800 million pints per year, Scenario 2 suggests that beer consumption would fall by just
250 million pints per year by 2020 if beer duty was frozen at its current level during the course
of the next parliament.
© Centre for Economics and Business Research
18
4
Impact on investment in brewing and pubs
The ability to invest has been a substantial issue for both brewers and pubs in recent years.
Arguments have been made that under-investment has been a key part of the decline of these
industries for some time. Domestic brewers have lacked the confidence in the strength of the
market to invest in new products and, with beer volumes falling, have had little need to invest in
extra production capacity. Additionally, the weakness in the UK beer market has discouraged
global brewing companies from investing in their UK facilities as operations in other parts of the
world have presented more attractive investment opportunities. Analysis in section 3 has
already shown that the policy decisions made in the 2013 and 2014 Budgets have helped to
support domestic sales of beer, which will continue to remain around their current levels
through 2016. This upturn in demand and the signal of increased support for the industry that
the two duty cuts provided have boosted confidence in the British beer industry which should
have a positive impact on investment in brewing and pubs. If this proves to be the case, the duty
changes could have an even more substantial impact on the long-term health of the beer
industry.
Figure 11- Net capital investment by sector, £ millions
£400
£14,000
£350
£12,000
£300
£10,000
£250
£8,000
£200
£6,000
£150
£4,000
£100
£2,000
£50
£0
£0
2008
2009
2010
Manufacture of Beer (LH axis)
2011
2012
2013
Manufacturing Sector (RH axis)
Source: ONS Annual Business Survey
Figure 11 shows how capital investment in the brewing industry fell more sharply following the
financial crisis compared with investment in the manufacturing sector as a whole. Net capital
investment in the manufacture of beer fell from £336 million in 2008 to just £100 million in
2011, a fall of over 70%. In the manufacturing sector as a whole, net capital investment had
© Centre for Economics and Business Research
19
already begun to pick up after bottoming out in 2009. Despite the Budget measures introduced
in April 2013, investment in the brewing industry fell by over 8% from the 2012 level. However,
the fall was less sharp than the general decline in investment seen across the manufacturing
sector in 2013.
To assess the impact of the duty changes of 2013 and 2014 on investment we once again utilise
the model of the alcohol industry, relating the projections of total beer sales to the value of the
industry’s output and using this to forecast capital expenditure.
Policy Scenarios:
Base Scenario: The base scenario reflects the actual changes in beer duty that have taken place
since 2008 and duty on all alcohol products up-rated by RPI in the future.
Scenario 1: Alcohol duty escalator retained through 2013/14 – 2019/20.
Scenario 2: As with base scenario but duty on beer frozen for next 5 years.
Figure 12- Net capital investment in the brewing industry, £ millions
£400
£350
£300
£250
£200
£150
£100
£50
£0
2008
2009
2010
2011
2012
Base
2013
2014
Scenario 1
2015
2016
2017
2018
2019
2020
Scenario 2
Source: Cebr analysis
The results in Figure 12 show that the policies of recent years should provide a boost to the level
of investment brewers are currently making and this recovery should be sustained through the
rest of the decade. In 2014 alone, we expect investment stood £61 million higher than it would
have if the beer duty escalator had been maintained up to and including the budget of 2014. If
© Centre for Economics and Business Research
20
the duty escalator was maintained over the course of the next parliament, as opposed to uprating duty by RPI inflation only, investment in 2020 would likely be around £96 million lower.
Ant Stevens, Ledbury Real Ales
“The removal of the beer duty escalator and the reduction in the rate of beer duty by
two 1p reductions has given our business the confidence to invest in the future.
Over the past two years we have invested in new equipment (made in the UK), made a
significant investment in new casks (made locally in Hereford) and invested in the
infrastructure of our brewery itself with a new cool room and dry store.”
The survey of brewers and pub owning companies undertaken as part of this research was also
used to ascertain how investment had changed over the last 12 months and asked respondents
to project changes in expenditure levels over the coming year. The results suggested there had
been a strong pick up in investment over the last 12 months. Over 71% of respondents reported
increasing expenditure on, for example, purchasing new equipment, new premises, R&D and
marketing this year. In addition, almost four times as many businesses increased expenditure by
over 50% as those businesses that cut investment. Projections for the next 12 months are even
stronger with over 83% of companies projecting increases in this form of spending and only 3%
looking to reduce investment expenditure. When asked about the main reasons for increasing
investment, one of the most popular answers given were the Chancellor’s decision to scrap the
alcohol duty escalators combined with cuts in beer duty in 2013 and 2014. The other most
popular answer was an increase in domestic sales, which the Budget decisions have played an
important role in as shown in section 3.
The decline in beer sales in the on trade shown in section 2 has had a knock on effect on the
health of the pub industry. The number of pubs in the UK has fallen for over three decades, as
shown in Figure 13. The number of public houses in 1980 stood at 69,000 but has declined over
30% over the last 33 years to just over 48,000 in 2013.
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21
Figure 13- Number of Public Houses in the UK
70,000
65,000
60,000
55,000
50,000
45,000
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010
2013
Source: British Beer and Pub Association
Clearly the decline in the British pub industry supersedes the introduction of the alcohol duty
escalator which suggests that there are a number of other factors that have weighed on the
prospects of the sector. However, the rate of decline has accelerated since 2007. For example
5
more than 29 pubs a week closed in the six months to December 2014 compared with just
6
under 8 a week just a decade earlier .Whilst the recession is likely to have played a key role in
this, the introduction of the alcohol duty escalator is likely to have accelerated the decline.
Utilising the historical relationship between on-trade beer sales and the number of public
houses, we use our model to estimate the number of pubs in each year under the different
policy scenarios highlighted earlier in this section.
Dave Sweeney, Bank Top Brewery
"The back to back cuts in beer duty and the welcomed scrapping of the escalator system
have enabled Bank Top Brewery to increase our staffing by three people. In addition Bank
Top Brewery Estates is flourishing with two public houses having been purchased within
the last 5 years, both have been fully refurbished to a high standard and with a third
public house purchase on the horizon we can only be moving from strength to strength.”
5
CGA-CAMRA Pub Tracker, June- December 2014
6
Source British Beer and Pub Association 2004-05
© Centre for Economics and Business Research
22
Figure 14- Forecasts for the number of Public Houses in the UK
58,000
56,000
54,000
52,000
50,000
48,000
46,000
44,000
42,000
2006
2007
2008
2009
2010
Base
2011
2012 2013
Scenario 1
2014 2015 2016
Scenario 2
2017
2018
2019
Source: Cebr analysis
As Figure 14 shows the Budget changes have not stopped the number of registered public
houses continuing on the downward trend of the last three decades but they have helped stem
the flow slightly. By the end of 2014, we estimate that an additional 1,047 pubs would have
closed if beer duty had continued to be up-rated by RPI+2% in 2013 and 2014. If the beer duty
escalator continued through the next parliament there would be over 2,100 fewer pubs in the
UK compared with a continuation of the current plans set out for 2015/16.
© Centre for Economics and Business Research
23
5
Impact on employment
The beer and pub industry is an important source of employment across the UK. However,
falling beer consumption in recent times has led to a decline in the level of employment that
these industries have supported, both directly and indirectly. For instance, direct employment in
brewing has fallen by 40% since the beginning of the Millennium and employment in pubs and
bars declined by around 18% over the same period.
Section 4 showed how the scrapping of the beer duty escalator and two consecutive 1p cuts
have helped to support a significant increase in beer consumption when compared with the
level that may have been experienced if the beer duty escalator was still in place. This in turn
should support jobs directly, in the manufacture of beer and industries such as pubs and clubs,
and indirectly through its positive impact on the supply chains associated with these industries.
Based on the historic relationships between beer sales, domestic beer production and
employment, we can utilise our economic model to assess the impact of the Budget decisions of
2013 and 2014. The scenarios used are retained from the previous section.
Figure 15- Forecasts of the number of people directly employed in the manufacture of beer
16
Thousands
15
14
13
12
11
2012
2013
2014
Base
Source: Cebr analysis
© Centre for Economics and Business Research
2015
2016
Scenario 1
2017
2018
Scenario 2
2019
2020
24
Despite a rise in the number of breweries in the UK, which is primarily attributable to a sizeable
influx of smaller breweries, employment in brewing has been in decline for more than a decade.
As shown in Figure 15, a decision to maintain the beer duty escalator through 2013-2014 and
over the course of the next parliament would have caused employment in the manufacture of
beer to continue to decline at a considerable pace, with a further 1,000 job losses in the sector
between 2012 and 2014. By 2020 the UK brewing industry would have lost around 3,300 jobs
compared with the level of employment observed prior to the 2013 Budget.
In contrast, we estimate that, thanks to the cuts in beer duty in 2013 and 2014, employment in
brewing has risen by nearly 500 jobs, since 2012. Whilst we forecast that employment will
continue to fall slightly over the course of the next parliament if the planned duty path of RPI
up-rating continues, we forecast that employment in 2020 will stand at a similar level to 2012 if
beer duty is frozen at its current level.
Figure 16 – Forecasts for employment in public houses and bars in Great Britain
520
510
500
Thousands
490
480
470
460
450
440
430
420
2010
2011
2012
2013
Base
2014
2015
Scenario 1
2016
2017
2018
2019
2020
Scenario 2
Source: Cebr analysis
While the number of pubs continues to decline, employment in pubs and bars picked up in 2013.
The number slipped slightly in 2014, but our analysis in Figure 16 shows that the duty changes
of 2013 and 2014 are having a positive impact on employment, which we forecast will stand
around 12,000 higher in the first three months of 2015 compared to the level in Scenario 1,
where the escalator is retained. By the start of 2020 employment will stand around 33,000
people higher if duty continues to be up-rated by RPI compared with a situation where the
alcohol duty escalator remained in place between 2013-2020.
© Centre for Economics and Business Research
25
Table 1 shows the wider impact on employment that the policies of 2013 and 2014 had. The
policies not only have a direct impact on employment, as already reviewed, but also have an
influence on employment through the impact on supply chains (indirect employment).
Furthermore the expenditure of these additional employees helps to induce an even greater
increase in employment across the economy (induced employment). Compared with the level in
2012, we forecast the policy measures of the 2013 and 2014 Budgets contributed to a total of
26,000 additional jobs in 2015 that would not have been created if the alcohol duty escalator
remained in place.
Table 1- Total change in employment between 2012 and year given, thousands
Base
Direct
Scenario 1
Scenario 2
Indirect
Induced
Total
Direct
Indirect
Induced
Total
Direct
Indirect
Induced
Total
2015 +24
+8
+6
+38
+10
+1
+1
+12
+24
+8
+6
+38
2020 +39
+8
+8
+56
+3
-6
-3
-6
+58
+16
+15
+89
The current policy of up-rating alcohol duty by RPI inflation would create a further 18,000 jobs
by the end of the next parliament, a total of 56,000 additional jobs. However, there is the
potential for the government to create an extra 33,000 jobs on top of this by freezing beer duty
over the course of the next parliament.
Gary Walters, Ludlow Brewing Company
“The cut in beer duty has given us the confidence to put a young brewer through an
apprenticeship. The business is looking to employ two more full time staff within the
coming months and is soon to invest in another 3000 litre fermentation vessel”.
© Centre for Economics and Business Research
26
Conclusion
The beer and pub industries are both historic parts of the UK economy and key components of
local economies and communities. However, the two have been under considerable pressure
for some time with beer sales falling, pubs closing and jobs being lost.
Fortunately, the government has begun to recognise the importance of the excise duty system
and the role it can play in supporting these industries. The duty escalator that up-rated beer
duty by RPI+2% was scrapped in the 2013 Budget and duty was instead cut by 2% for two
consecutive years. Our analysis suggests that this reversal in the direction of duty policy is
already having a positive and sizeable impact on the health of the UK beer industry and the
public houses that the sale of beer supports. Domestic beer sales are considerably higher than
they would likely have been if duty had remained on the escalator, helping to boost investment
in the brewing industry and stem the decline in the level of employment associated with the
manufacture of beer. There are also signs that the improvement in beer clearances isn’t solely
driven by an increase in sales in supermarkets and other off-licence premises as declining sales
in the on trade, which includes pubs and bars, are beginning to steady. This has helped to slow
the rate of pub closures, particularly when compared with the scenario where the beer duty
escalator remained in place in the last two years.
However, our analysis also reveals that whilst the Budget decisions have provided a welcome
boost to the beer and pub industries, it far from solves the pressures that these industries will
face going forward. Our scenarios show that a freeze on beer duty over the course of the next
parliament would further support consumers, brewers and pubs compared with the current
plans. The current system would see duty on all alcohol products up-rated by RPI inflation and
the return of undifferentiated duty policy despite the relative importance of the beer industry,
which in manufacturing alone employs 87% more than the spirits industry and more than seven
times that of the cider industry. When asked to rate future policy announcements in terms of
the extent to which they would support brewers and pub companies, companies rated three
policy announcements above 4.0 (where 5 represented an announcement that would have a
very important impact on their business). Of these three, two of the answers referred
specifically to excise duty policy; a further cut in duty and an announcement that duty would be
frozen over the course of the next parliament. This highlights the importance of this section of
Ant Stevens, Ledbury Real Ales
“We have seen recent increases in our raw material costs with hops seeing double digit
percentage increases. The reduction in fuel prices will help our business a lot as that is a
big day to day expense for us, but I still expect my overall margin to be put under
pressure due to supplier price increases in 2015. We have a growth plan to meet in 2015
and this will include a further investment in equipment, any duty cut or reduction in our
overall expenses will assist in allowing us to part fund this investment in UK made
equipment.”
© Centre for Economics and Business Research
27
the tax system to the confidence and health of businesses in the beer and pub industries.
The government cannot rely on the economic recovery to truly reverse the fortunes of the beer
and pub industries and the measures of 2013 and 2014 appear to recognise the need to support
these sectors. Yet there is still more that can be done in terms of the level of duty on beer
compared to other alcohol products. The government has yet to fully reverse the impact of the
1997-2007 period when beer duty was raised but duty on spirits and cider remained broadly flat.
This is something that a duty policy that truly differentiates beer in the coming years can work
towards and, as shown in our analysis, such a policy would, at the same time, boost beer sales,
help to stem the decline in the number of pubs in the UK and increase employment.
Dave Sweeney, Bank Top Brewery
I look forward and welcome any further reductions in beer duty and/or any further
assistance the Government may choose to offer the industry. Part of the history behind
Public Houses is that they are a great tourist attraction, welcoming guests from far and
wide to meet and chat, this environment simply cannot be recreated within the confines
of a living room with supermarket purchased beverages. In my view cask ale is the
National drink!"
© Centre for Economics and Business Research
28
Appendix
Survey Note
Survey results are based off of a survey of breweries and pub owning companies commissioned
by CAMRA and conducted by the Centre for Economics and Business Research. The survey was
conducted between 27th August 2014 and 22nd October 2014. The results are based on a survey
of 13 questions and a sample of 68 breweries and pub owning companies.
Modelling assumptions
For the purposes of modelling the impact of these scenarios, we assumed that alcohol excise
duty increases are passed on to consumers to differing degrees, with off-trade beer duty
increases seeing relatively little pass-through to consumers, and on-trade beer duty increases
being passed through by more than 100%.
For on-trade and off-trade beer pass-through rates, we adopted estimates broadly in line with
those made by Oxford Economics and PricewaterhouseCoopers . Econometric analysis by these
companies suggests a higher pass-through rate for on-trade beer than off-trade beer, and we
have incorporated this into our central projections.
7
We have assumed pass-through rates of 100% for spirits, wine and cider. While there will be
deviations, both up and down, amongst sellers of these products in practice, we have no
evidence to suggest that, in the aggregate, pass-through rates for these other beverages are
likely to deviate significantly from this norm. The full set of pass-through rates are detailed in
Table 1 below.
Table 1: Pass-through rates for duty and VAT rises, by type of alcoholic beverage
Type of alcoholic beverage Assumed pass-through rate
7
Beer (on)
170%
Beer (off)
100%
Spirits
100%
Wine
100%
Cider
100%
See Oxford Economic Forecasting (2004), “Modelling the Beer Market” and PwC (October 2009), “Analysis of the impact of excise taxation on
the brewing sector”.
© Centre for Economics and Business Research
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Modelling the above scenarios also required assumptions about elasticities of demand for
alcohol products. In the analysis which follows, we use recent HM Revenue & Customs (HMRC)
estimates for alcoholic beverage elasticities of demand.8 Table 2 below provides an overview of
the own-price and cross-price elasticities estimated by HMRC.
Table 2: HMRC elasticities of demand
Source: HM Revenue and Customs
Assumptions about inflation and household income growth also need to be made, as these feed
through into duty escalator calculations and also have implications for alcoholic beverage
demand going forward. Cebr’s November 2014 inflation and income forecasts are used in the
analysis which follows and the forecasts are outlined in Table 3 below. Office for Budget
Responsibility (OBR) December 2014 forecasts are also shown in Table 3, for reference.
8
Source: HM Revenue and Customs (December 2010), “Econometric Analysis of Alcohol Consumption in the UK”, London.
© Centre for Economics and Business Research
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Table 3: Inflation and earnings forecasts, Cebr and OBR
Cebr
OBR
Annual % change
Household nominal
disposable incomes
RPI (September)
Household nominal
disposable incomes
RPI
(September)
2015
4.3%
1.7%
3.3%
2.1%
2016
3.9%
3.6%
3.7%
2.9%
2017
4.0%
3.4%
4.0%
3.4%
2018
3.8%
3.1%
4.4%
3.6%
2019
3.8%
3.1%
4.4%
3.6%
Source: Cebr, Office for Budget Responsibility
© Centre for Economics and Business Research