How Rachel Reeves can close £22bn black hole by cutting taxes on Scotch whisky

“A week is a long time in politics.” A phrase, attributed to former Labour Prime Minister Harold Wilson, that perfectly captures the fast-paced nature of politics, and how quickly things can change.

In the past week, the new Chancellor, Rachel Reeves, could be forgiven for having thought this, as she announced a £22bn shortfall in public finances. How quickly things can change, from the poetry of campaigning to the prose of governing.

The newly elected Labour government are searching for growth to get the economy moving, and tax revenue flowing. It is self-evident that achieving this goal is vital to invest in the public services we all rely on.

While a week can be a long time in politics, some government decisions can take longer to play out. A year has now passed since the previous government imposed the largest tax increase on Scotch whisky and other spirits for 40 years.

And what judgement can be made on this tax hike with the benefit of a year’s data? It has, simply put, been a disaster, contributing to the shortfall in public finances the Chancellor is now looking to address.

Inflation and reduced revenue

New analysis commissioned by the Scotch Whisky Association shows the decision to increase duty on Scotch whisky and other spirits by 10.1 per cent in August 2023 cost the public almost £2.5bn in lost revenue.

The duty rise, which the Office for National Statistics concluded made the largest contribution to inflation by alcohol on record, added 0.35 percentage points to inflation between August 2023 and June this year. This resulted in £2.3bn in additional interest payments on government borrowing – money that could have been used to bolster public services. In addition, the duty increase reduced revenue from spirits – down by £132m between August and June, compared with the same period the previous year.

Over 10 per cent of the shortfall in public finances identified by the Chancellor was caused by last August’s decision to raise duty on Scotch whisky and other spirits. It is hard to think of a more self-defeating policy than one which increases inflation, reduces revenue, jeopardises investment and hurts businesses and households all at the same time.

Discriminating against spirits

The good news is that there is an opportunity to change course, boost growth and get revenue flowing again at the Budget on 30 October. The Chancellor can begin to reverse the damage done by the duty rise. By reducing the tax burden on Scotch whisky, Rachel Reeves can incentivise investment, create more jobs, and generate more revenue to support public services.

She can also signal that the policy of the previous government, to tax Scotch whisky and other spirits up to four times more per unit of alcohol than other products, is at an end. The duty system clearly discriminates against spirits, and with 70 per cent of UK spirits produced north of the Border, it has a disproportionate impact on Scotland.

Labour Prime Minister Keir Starmer promised to “back Scotch producers to the hilt”. The budget is an opportunity to back up that commitment with action and, with the right support, the Scotch whisky industry stands ready to be a partner for growth, this week and in all the weeks to come. 

Mark Kent is chief executive of the Scotch Whisky Association