Labour officials have been warned that plans to boost government revenue by raising “sin taxes” could be judged harshly by the Office for Budget Responsibility (OBR) this year, with industry bosses calling on the Treasury to listen to “on-the-ground concerns” before making a final decision.
Reports have suggested the government could raise gambling levies later at the Autumn Budget to raise around £3bn while extra duties on junk food and other unhealthy products could also boost receipts.
But moves to hike “sin taxes” could lead to the OBR forecasting lower tax intake than hoped given the fiscal watchdog’s previous admission that projections for excise duties have been wide off the mark.
In a July report, OBR analysts said excise and fuel duties were “overestimated at each forecast” between 2022 and 2023.
The fiscal watchdog said it had been more successful in underestimated receipts for a number of other taxes including VAT and national insurance.
Errors in forecasting for sin taxes by the OBR could see it make more moderate projections at this year’s Autumn Budget, which would deal a blow to Rachel Reeves given expectations she will need to raise at least £20bn to rebuild her small headroom.
Separate analysis by the Scotch Whisky Association has shown that the Treasury collected £676m less tax than the OBR’s forecast in March 2023, which points to the significance which forecasting errors could have on the public purse.
Adam Hoffer, director of excise tax policy at the Washington DC-based think tank Tax Foundation, said government revenue forecasters often struggled to measure “behavioural changes” in response to changes on excise duties.
“This leads to often predictable overestimates of tax revenue from both new excise taxes and increased rates on existing excise taxes,” Hoffer said.
“Excise taxes can be a valuable tool, but they are a tool that requires careful design – a scalpel, not a hammer.
“Poorly designed excise taxes are likely to create problems, including a volatile revenue source that misses revenue projections.”
Reeves should fix ‘unequal system’
Scotch Whisky Association chief executive Mark Kent has meanwhile argued that the Treasury and OBR were not taking the “positive revenue impacts” of reducing duties, which they said could boost growth and in turn lead to higher tax receipts.
Kent said fresh tax data showing a ten per cent fall in revenue from spirits revenue over the last year suggested the government would be left with further problems in the coming years.
The group called on the government to fix its “unequal alcohol duty system” and listen to “on-the-ground concerns” of businesses who were calling for a multi-year freeze in duties, which currently rise in line with retail price index (RPI) inflation.