Cheap beer under Blair?

Labour has pledged a Treasury sponsored review of duty on beer, in a bid to quell soaring duty-free imports from the Continent.

The move has yet to be officially confirmed, but the then Labour shadow secretary to the Treasury, Dawn Primarolo, has promised the industry an inquiry will be launched "sooner rather than later".

Stuart Neame, vice chairman of independent brewer Shepherd Neame, based in Kent, says his business is losing up to pounds 1m a year off its profits because of the impact on local pubs from cheap French bootlegged beer.

He says Ms Primarolo assured him in February that Labour would keep "an open mind" over the problems besetting the industry.

Beer duty is an essential part of Treasury revenues, and Customs has admitted it is losing pounds 750m a year in lost duty on alcohol and cigarettes from cheaper, untaxed imports flooding in from the Continent.

The Treasury has also been presented a paper, prepared by Oxford Economic Forecasting on behalf of the Brewers and Licensed Retailers Association (BLRA), urging a 20 per cent cut in duty on beer.

Surprisingly, the OEF research concludes that such a move would, paradoxically, lead to an increase in Treasury revenues.

The research was presented to a gathering of Treasury officials last November.

Using the Treasury's own model, the research concluded a 20 per cut in duty would lead to a 0.3 per cent increase in GDP in the first year, followed by gains of 0.1 per cent in the second and third years of such a regime.

Inflation would also benefit, falling by half a per cent in the first year. Jobs would be created, too, in pubs, both because of cheaper beer, and the trade won back from the bootleggers. The extra spending this would generate would create 13,000 new jobs in the first year, 23,000 in the second year, and 24,000 in the third year.

The figure that most surprised Treasury officials, however, was the impact on the public sector borrowing requirement - which is a key concern of the incoming Labour government.

In the first year, a loss in duty revenues would lead to a shortfall of pounds 717m. But in the second year, through the effect of new jobs, the initial negative PSBR effect would be cancelled out, with a pounds 932m saving, followed up by a further saving of pounds 628m in year three.

Because OEF used the official Treasury model as the basis for its forecasts, it is understood there was little dissent from Treasury mandarins to the conclusions reached by OEF.

The extent of the smuggling is apparent every day, in the courts, following Customs hauls. Last November, in a typical case, a gang of 40 people were arrested in a ring which Customs said had cost the Treasury pounds 65m in duty and VAT on smuggled cigarettes and alcohol.