Lower the taxes on tobacco and alcohol
Governments raise duty on tobacco and alcohol on the assumption that higher rates mean higher revenue. The evidence of the last five years suggests the opposite. Tobacco duty has risen seven times since 2020. Rolling tobacco duty is up 115%. And total tobacco duty revenue has fallen from £10.4 billion to £7.9 billion. The government has pushed the rate up the Laffer curve and watched the yield come down the other side.
The mechanism is straightforward. Legal cigarette sales volumes fell by 46% between 2021 and 2025, from 23.4 billion cigarettes to 12.6 billion. Survey evidence shows the number of cigarettes smoked per smoker has not changed over the same period. Those two facts cannot both be true unless a large share of consumption has simply moved outside the taxed market. Smokers have not quit at anything like the rate the duty rises implied. They have found cigarettes elsewhere.
HMRC's official tax gap estimates put the illicit share of the tobacco market at a comparatively modest 12% for cigarettes and 23% for rolling tobacco, figures presented as evidence that enforcement is winning. These estimates deserve some skepticism. They rely on survey data that HMRC itself had to abandon and then reconstruct after the ONS stopped asking people about their smoking habits during the pandemic. An estimate built on imputed data for three consecutive years, then patched back onto a resumed survey, is not a solid foundation for a claim that the black market is under control. The volume figures, which do not depend on survey recall, tell a plainer story: legal sales have halved while smoking has not.
None of this means duty causes crime in some simple sense. It means that duty sets the price gap that makes crime profitable. Every pound added to legal tobacco is a pound added to the margin available to the man selling it out of a suitcase or from under a shop counter. Organised crime groups do not need to undercut the legal price by much to make smuggling worthwhile when the legal price already contains ten billion pounds of tax. Raise the tax and you raise their margin along with the Treasury's theoretical one. The theoretical one is the one that shows up in the budget forecasts. The margin is the one that actually gets collected, by someone.
From October, £18.80 will buy you one packet of Marlboro Golds. It will buy you five packs of them duty free, or five packets of Manchester or one of the other illicit and untaxed brands.
A meaningful cut in tobacco duty would narrow the price gap between the legal and illicit market. Some of the volume currently supplied by smuggling and counterfeit production would shift back to compliant retailers, because legitimate shops offer convenience, certainty of product, and no risk of prosecution, advantages that only matter once the price difference is small enough to make them worth paying for.
The Treasury would collect less per packet. It would also collect on more packets. Whether the net effect is a gain or a loss depends on how large the illicit market actually is, which is precisely the figure in dispute. But the direction of travel over the last five years, in which duty has risen and revenue has fallen, is hard to explain except by an illicit market considerably larger than HMRC is willing to admit.
Alcohol duty operates on the same principle at smaller scale. The illicit and cross-border market in spirits is nowhere near the size of the illicit tobacco market, so the revenue case for a cut is less dramatic. But the competitive case is more immediate, and it runs through pubs rather than smuggling.
Pubs pay duty on every pint, but duty is a smaller part of their cost base than rent, business rates, and staff. A duty cut would not transform pub economics on its own. What it would do is narrow the price gap between a pint at the bar and a can from the supermarket, a gap that has widened for years and is a large part of why people now drink at home rather than in a pub.
Pubs compete with supermarkets on atmosphere, company, and convenience of location. They cannot compete on price while duty and business rates both weigh more heavily on the on-trade than the off-trade. A cut in duty is a small correction to that imbalance, not a solution to it, but it points in the right direction, alongside the draught relief the government has already conceded is necessary.
On the high street, the beneficiaries of a tobacco duty cut would be the newsagents and convenience stores currently losing legitimate trade to the illicit market and to shops that flout track-and-trace rules altogether. A narrower price gap means less incentive for anyone to buy or sell outside the legal system, and more footfall for the shops that follow the rules. This is a high street policy as much as a health or fiscal one. Every pound of margin handed to the black market by high duty is a pound taken from a legitimate trader on the local parade.
The public health case against this proposal is that cheaper tobacco and alcohol mean more consumption and more harm. This is not a frivolous objection. But it assumes the current duty regime is successfully suppressing consumption rather than successfully suppressing the taxed portion of consumption while leaving the underlying habit largely intact and supplied by criminals instead of retailers. If the volume figures are right, duty at its current level is not preventing smoking. It is deciding who profits from it, and the answer for a growing share of the market is organised crime rather than the Exchequer.
We should cut tobacco duty significantly, and reduce alcohol duty on draught beer and other products sold through licensed premises. Commit to monitoring legal sales volumes, not just survey-based tax gap estimates, as the primary measure of success. If legal volumes recover, as the pattern of the last five years suggests they would, the policy has worked on its own terms: more revenue, less crime, and a fairer market for the shops and pubs currently competing against sellers who pay no duty at all.
Madsen Pirie