Drinks industry left with Budget hangover

Britain's drinks industry got the bad news it was dreading from the Budget.

The chancellor delivered a 5% increase in duty, despite dozens of company bosses calling on the government for a tax freeze.

The unheralded cider industry took the biggest hit. Darling said the sector had been 'under-taxed' in the past and would be hit with a duty rise 10% above inflation adding 5p to a litre of still cider and 9p to a 75cl bottle of sparkling cider from Sunday.

Before he had even sat down, a Facebook campaign called 'Leave our Cider Alone' had been set up and attracted nearly 300 followers. Cider companies can expect no respite as further changes in September will redefine cider to ensure that stronger ciders are 'taxed more appropriately'.

For the rest of the sector, the chancellor went ahead with the tax escalator which automatically increases tax on alcohol by 2% above inflation. The escalator was introduced in the 2008 Budget and has been heavily criticised by drinks companies and trade bodies. A spokesman for the Scotch Whisky Association said "It is depressing the market and it's not good for a product which is one of the country's leading exports".

With inflation running at 3%, the 2% escalator - designed to appease the health lobby and show that ministers are serious about tackling the problems caused by binge drinking - will now see tax on drinks rise by 5%. The rise will add 10p to a 75cl bottle of wine and 12 to a 75cl bottle of sparkling wine, 36p to a 70cl bottle of spirits and 2p on a pint of beer, from Sunday.

Tax receipts from alcohol rose to £14.7 billion last year, from about £10.4 billion in the tax year ended in 1998, after Labour returned to office. But pubs are also closing at a record pace as publicans struggle to cope with lower consumer spending and the discounts offered on wine and beer by supermarkets.

This is also having a knock-on effect for the Treasury. Last year saw the revenue the government received from spirits drop by £30 million, official figures show. The duty and VAT paid on beer fell by £31 million last year, as the number of pints of lager sold each day fell to 12.4 million from 13.2 million.

Representatives from the drinks industry have called for the tax escalator to be postponed and are understood to have held meetings with shadow ministers in recent weeks, in the hope that a Conservative government would be more sympathetic.

Two of the world's biggest wine producers, Constellation Brands and Fosters, which owns the Hardys and Lindemans brands, are cutting jobs in the UK and moving investment to other parts of Europe. They have accused the government of "decimating" the wine trade with tax rises.

The head of Diageo's (DGE) UK business, Simon Litherland, said the present tax level had cost the drinks industry 30,000 jobs. He also said the company's investment in the Scotch industry would be under threat if Government action further hurts drinks sales. Among the retailers that have collapsed are Threshers and Wine Rack.

In a letter to The Times, published ahead of the Budget, forty leading bosses in the brewing and pub industry including the heads of companies including Anheuser-Busch InBev UK, Heineken UK and Enterprise Inns claim that the industry's ability to participate in the economic recovery is being jeopardised by "the blunt instrument of tax". The bosses - who also include the chief executives of Mitchells & Butlers (MAB), Marston's (MARS) and Punch Taverns (PUB) - claim that ditching the duty rise would save 7,500 jobs in the next 12 months.

The British Beer and Pub Association says 4,000 pubs have closed in the last two years while UK brewers were making a profit of just 1p a pint, contributing to 41 major brewery closures since 1997. Continued increases have seen beer duty soar by an unprecedented 25% in the last two years.

"With nearly six pubs a day still closing, what community pubs and pub goers needed today was a lifeline, not a death knell, " said Mike Benner, Chief Executive of the Campaign for Real Ale. It is also a snub to voters, who by a majority of two to one wanted the chancellor to scrap the beer tax escalator.

The 130 million-gallon-a-year UK cider industry was not impressed. Henry Chevallier, chair of the National Association of Cider Makers, said: "We are at saturation point on the duty on alcohol - even for a success story like cider. This dramatic increase could well reverse the growth we have generated in recent years.

"What makes this so serious is that cider makers have invested millions to plant thousands of acres of new orchards in the last decade. Orchards take years to yield a return and the loss to the rural economy and the environment will be enormous if sales decline sufficiently and the demand for English apples falls. It is the major brands that use the vast majority of the UK fruit the industry buys every year."

However, the chancellor has also been under pressure to hammer the drinks industry much harder after a series of recommendations by MPs on the health select committee last year. Their report demanded that "unlike in recent years, duty increases should predominantly be on stronger alcoholic drinks, notably on spirits".

MPs called for a return to the level in 1983 when the duty on a litre of pure alcohol was 11% of the average male weekly manual wage, compared with 5% in 2002. Such a move would send Britain to the top of the European league table for spirits tax.

Hundreds of publicans the length and breadth of Britain have permanently barred mineral-water-sipping Chancellor Darling from their establishments since he blitzed them in his 2008 Budget. And after crushing the cider industry today, he'd better not attempt to order a pint of Woodpecker any time soon.