Gordon Brown stuck to a long-standing tradition and announced that excise duties on tobacco will increase by 5 per cent above the rate of inflation, to help to pay for a pounds 3bn package of tax benefits for the elderly. The rise will add around 17.5p to a packet of cigarettes, pushing the cost of 20 Benson & Hedges to around pounds 3.80. A pack of five small cigars will cost 7.5p more, while a 25g pack of pipe tobacco will go up by 9.5p.
The rises will take place immediately.
Mr Brown decided to keep on hold the other section of the so-called "sin taxes" leaving duties on beer at 33p a pint, on spirits at pounds 7.82p per litre and at pounds 1.49 per litre for wine.
Cigarette-makers and retailers reacted angrily to the decision to hike taxes, noting that taxes now account for nearly 80 per cent of the retail price of cigarettes. John Carlisle of the Tobacco Manufacturers Association (TMA), which had called for a pounds 1 cut in taxes said: "We are very cross. This is an ostrich-policy and a head-in-the-sand Budget. The Chancellor has totally ignored the problem of smuggling, the loss of tax revenues and the threat to the livelihood of retailers."
The tobacco industry has attacked the Government's tax increases as a blueprint for smugglers. According to the TMA, the Exchequer loses pounds 1.5bn in revenue a year to smuggling.
The TMA claims that UK taxes are almost pounds 1.50 higher than the average of the rest of the European Union countries. The differential encourages smuggling and bootlegging. Over 15 per cent of all cigarettes and over 75 per cent of hand-rolling tobacco smoked in Britain comes from illegal imports, the TMA maintains.
Mr Brown acknowledged the problem of the black market in his speech to the House of Commons but added that smuggling "will not be permitted to undo a policy on cigarettes which successive British governments have adopted for good and urgent health reasons".
He added that the Government will strengthen its anti-bootlegging strategy with "new resources to detect, prevent and punish this costly form of organised crime".
Small retailers said the Government could do little to stop illegal importing of cigarettes. Paul Mason of the Tobacco Alliance, which represents 26,000 retailers, said: "Mr Brown may as well try to stop the tide at Dover as stop the flow of smuggled cigarettes.
"The Chancellor's misguided policy is just flushing billions down the drain. He says he is alarmed at the state of the tobacco smuggling problem, but he chooses to ignore the only sensible option to combat it, namely cutting the UK's ludicrously high tobacco tax."
Anti-smoking pressure groups welcomed the decision to put the cigarette duties. Clive Bates, director of Action on Smoking and Health (Ash), said: "We are satisfied. When cigarette prices rise, tobacco consumption falls as smokers cut down, give up or never start in response to prices."
Labour has taken a harder stance on cigarette duties than the Conservatives, which were committed to duty increases of at least 3 per cent above inflation.
Cigarette duties have been increased every year for the past nine years. The 1987 and 1989 budgets were the only two occasions in the last 12 years were not increased.
Beer and wine producers were delighted with the surprise decision to leave taxes unchanged. Mr Brown had increased duties on beer in line with inflation in the past two budgets and the industry was bracing itself for another hike. However, the Chancellor hinted that another increase would have spoilt the Millennium celebrations. "There will be no tax rises on alcohol this side of the Millennium," he said.
The only increase will apply to sparkling cider, where a 75cl bottle will go up by pounds 1.02p to bring it into line with sparkling wine.
The Brewers and Licensed Retailers Association said: "A freeze is very welcome as far as it goes and the Chancellor does seem to be acknowledging the problems caused by smuggling.".
Quentin Rappaport of the Wine and Spirits Association welcomed the freeze, which mirrored last year's decision on spirits duty but departs from the decision to add 3p to a bottle of wine. "We are particularly pleased that he mentioned that he did not want to spoil the Millennium party," he said.
The industry lobby groups claim that the high level of British duties is at odds with the rest of the EU, where duties are moving towards a target rate of 8p a pint. In wine, the gap is even more pronounced with the French duty on a litrepitched at just 0.2p.
They maintain that the tax differential encourages cross-Channel smuggling. According to the industry, every day more than 1.5 million pints of beer cross the Channel - the equivalent of beer sales of all the pubs in Dorset, Somerset, Devon and Cornwall. Over two-thirds of them are re-sold illegally without paying the UK duty, causing a tax revenue loss of around pounds 800m a year to the Exchequer.