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Scotch Whisky Industry

Volume 630: debated on Tuesday 31 October 2017

I beg to move,

That this House has considered the future of the Scotch whisky industry.

It is a pleasure, as ever, to serve under your chairmanship, Mr Bone. I am delighted that the Exchequer Secretary is almost in his place. I also acknowledge the presence of, and support from, hon. Members from other parties. I shall take some interventions if time permits but, if colleagues will permit, I shall ration myself, in view of the constraints of time.

The Scotch whisky industry, like just about every other one, has a sense of uncertainty about its future at the moment. Given the wider political context, that is hardly surprising; but there is much positive to be said about the industry, especially for the medium to long term, if we get the big decisions right now. For Scotland, and especially rural Scotland, the industry is enormously important. It is also an important part of the UK economy as a whole. It is a massive exporter and earns in the region of £4 billion a year for us—20% of our food and drink exports are from that one industry. The export performance is crucial, as it underpins a market providing about 40,000 jobs, including about 10,000 directly in the industry. Of those, 7,000 are in the rural economy. Beyond that direct employment there is the supply chain and, of course, the burgeoning question of whisky tourism.

On the supply chain, it is important to emphasise that the jobs are not just in Scotland. A company called Erben in Hadleigh in my constituency provides much of the bottling technology, and bottle caps, to some of the biggest brands in the whisky industry.

Indeed. The Scotch Whisky Association and the Wine and Spirit Trade Association would make that point: there is an industry and supply chain across the country. That includes the fact that the grain comes from farms throughout the country. The impact of the industry is particularly acute, however, in rural Scotland. The growth of whisky tourism, in particular, has been phenomenal in recent years, and has been transformative for the most economically fragile communities in Scotland.

There is an impact on the urban economy, as well as on the rural economy. Dewar’s whisky is produced on London Road in Glasgow. I do not know whether the right hon. Gentleman has had the pleasure of drinking it; I am more than happy to share it. His point about the wider supply chain is important. Having visited the bottling plant, I know the impact on Carntyne Transport, which provides many jobs in my constituency.

I anticipated that that might be your reaction, Mr Bone. I thank the hon. Member for Glasgow East (David Linden) for his intervention—he made a good point—and for his offer, but even by my standards it is a little early at the moment.

As I have said, many of the most economically fragile communities are sustained by the whisky industry and many are flourishing as a consequence of its recent growth. In recent weeks there has been welcome news from Diageo that it will reopen Port Ellen and Brora. That is part of a continuing pattern that has emerged over years. The Highland Park distillery in my constituency has been going from strength to strength for years. It also has a smaller cousin in Scapa, which has emerged not from mothballs—it does not like that term, for obvious reasons—but from a quiet period and grown such that production is now in the region of 1.1 million litres a year. There were three full-time jobs in production, and that number has now gone up to five. It has also expanded into a visitor centre and shop. That all brings money and employment into the community and allows it to stay there. That is a fairly modest but significant increase, and its replication in communities across the highlands and islands highlights the social importance of its economic impact.

Seven new distilleries opened in Scotland last year alone, and many others are still in production. In anticipation of today’s debate I had a brief conversation yesterday with Stewart Laing, of Hunter Laing, one of the people behind the construction, from the foundations up, of a new distillery on Islay, at Ardnahoe. He described it to me as a lifetime commitment, and the Treasury should understand that: those who are part of the industry are not in it just for a quick buck in the here and now. Long-term planning and stability are of exceptional importance. Another Islay distillery that provides a great example for others to follow is that at Kilchoman. It was set up 10 years ago by the Wills family and now employs 25 to 30 full-time employees. It has a turnover of £4.6 million and it is still a family business. Of course Diageo, Pernod Ricard, Chivas and so on—the big players in the industry—are very important, but a pattern is emerging of a much more diverse range of business models. For them in particular, the medium to long-term future of the industry and its stability are of absolute importance.

As the Minister may have anticipated, I want to concentrate for a few minutes on the shorter term. We all know the rules on Budgets, and we know that one is coming up on 22 November, so I have realistic expectations about what the Minister will say now, but I want to test him on a few of the issues arising from the March Budget. That, of course, affects spirits producers in general, not just Scotch whisky producers. For the second part of today’s parliamentary happy hour, the Minister will doubtless return to this Chamber for the afternoon debate on beer and pub taxation.

The spring Budget delivered, somewhat out of the blue, an increase of 3.9% in the level of spirits duty. It is anticipated that the escalator will now produce a 3.4% increase at the end of this month, with a further 3% per annum thereafter. It is something of a supertax, which I suggest is ill conceived and misguided. It requires urgent consideration; otherwise the pattern that I have described of a growing, diverse whisky industry will be under threat.

Moray has 47 of Scotland’s 119 Scotch whisky distilleries, so I could not do as the hon. Member for Glasgow East (David Linden) did during his intervention. I could not possibly afford a bottle from each one.

On taxation, does the right hon. Gentleman agree that the Treasury should consider the benefits of reducing taxation? The Scotch Whisky Association, with the independent back-up of KPMG, has shown that reducing the duty on Scotch whisky would increase revenues to the Treasury.

The hon. Gentleman tees up my next point for me beautifully. I promise that is the last time there will be a reference to “tee” this morning. The work in question was done for the Scotch Whisky Association by KPMG, an organisation that is not just going to tell clients what they want to hear. The work is underpinned and supported by the Treasury’s own figures. The increase in March damaged confidence and led to a sharp decrease in sales—1 million fewer bottles were sold in the first two quarters of this year, compared with last year. That can be tested against the experience of 2015.

I was a Cabinet Minister in 2015 and was proud of the fact that that Government delivered a 2% cut in the level of whisky duty. I cannot remember exactly, but I recall that the expectation in the Government at the time was that a 2% cut would cost in the region of £600 million. That was what we thought we would lose in revenue. In fact, however, a significant increase in revenue was delivered as a result of lower taxation.

The right hon. Gentleman is a massive defender of the whisky industry and I am sure he likes a tipple himself. Will he comment on the way in which the Treasury is set up? Perhaps the problem is that the Red Book would have to determine a minus figure when the reality might be positive. The Treasury should look more imaginatively at how it taxes not only Scotch whisky but spirits in general.

I am keen to encourage creativity within the Treasury. I must say that that message is not always well received in that particular Department and change is often slow in coming, but I encourage the Minister to pursue that agenda, because—to return to the experience of 2015—having anticipated a £600 million decrease, there was an increase of £124 million in revenue to the Exchequer. Although I obviously have some concerns about the Chancellor, I do not believe that he put the rate of duty up in March believing that he would take in less money. The underlying problem is that the elasticities that underpin the modelling used by the Treasury are clearly out of date. They have not been updated since 2013 and they have been wrong at least twice. They were wrong in a good way in 2015, when the cut in duty delivered an increase in revenues, but they were also wrong in March, when the increase in duties delivered lower revenues.

My essential message to the Minister is that to embark on a progressive increase of the sort planned, with a year-on-year 3% increase on the basis of Treasury modelling that is at best flawed and in need of updating, is ill conceived and risks the emerging growth not just in whisky but in other spirits. It is difficult to go on any social media platform these days without seeing an advert for yet another craft gin. Gin is another emerging spirit and important part of our export portfolio. From the outside, as the industry sees it, it looks as if one of our most successful industries is being punished by the Treasury at a time when, frankly, we are going to need the contribution it makes to our economy.

I say to the Minister that it is now time to be bold. The Chancellor could use 22 November as an opportunity to cut duty, as was done in 2015. If he is not prepared to do so, there is a good business case for at least a freeze or for walking away from the escalator effect. If he continues with the escalator, he must come up with some justification for it, because all the indications go in the opposite direction.

Turning briefly to the question of the medium to long term, there is an opportunity to recalibrate the way in which the Treasury engages with the industry. During my time in Parliament, the successful PILOT partnership scheme between Government and the oil and gas industry has allowed the Government to better understand what is happening in the industry and allowed industry to engage, see the direction of travel and plan accordingly. The Scotch Whisky Association now talks about a sectoral deal, perhaps for the whisky industry but more likely for spirits or alcohol manufacturers as a whole. I encourage the Minister to take that suggestion seriously. We have seen tremendous success as a result of the city and regional deals, a model that has worked well. Taking that to a sector such as spirits production or the whisky industry would be a new iteration of the model. Given the opportunities that exist, the model is well worth considering. Those are the medium to long-term opportunities. In the medium to long term, the Government can do good to help the industry and, most importantly, the communities that depend on it. In the short term, on 22 November, the very least they can do is stop doing damage.

It is always a pleasure to serve under your chairmanship, Mr Bone. I congratulate the right hon. Member for Orkney and Shetland (Mr Carmichael) on securing this debate. I understand his passion for the subject, given his constituency’s long-standing tradition of producing fine whiskies. He mentioned the Highland Park and Scarpa distilleries; I have been fortunate enough to visit his constituency and those places on my holidays and I entirely agree with his basic point. I also agree with his underlying point that producing whisky is a lifetime commitment. People cannot enter into it for the short term. It takes a long time to produce the product, particularly in the premium sector. It is a proper, significant long-term commitment. We are seeing huge innovation and people entering the marketplace—both signs of a good, strong sector.

I will try to answer as many of the issues raised as I can, but in particular I must comment on the duty rates—a key element of the right hon. Gentleman’s speech. However, as one might expect, I am unable in discussing that to pre-empt what my right hon. Friend the Chancellor may or may not do in the forthcoming Budget. That is only three weeks tomorrow, so there is not long to wait. Before I discuss the duties, I reassure the House that the Government recognise the important contribution that the Scotch whisky industry makes to both the UK economy and local communities.

I met with the Scotch Whisky Association and with large and small distillers in the run-up to and preparation of the Budget. The Scotch Whisky Association estimates that the industry adds over £5 billion to the UK economy and supports over 40,000 jobs, 7,000 of which are in the rural economy. Its footprint extends beyond those fortunate enough to have a distillery in their immediate constituency. As my hon. Friend the Member for South Suffolk (James Cartlidge) says, the industry creates jobs throughout the UK, whether in the agricultural sector in East Anglia or, in this case, the bottling technology, but primarily it is a great Scottish industry. Distilleries are also increasingly significant tourist attractions in their own right. Some 1.6 million tourists visited distilleries in 2015, an increase of more than 20% in visitor numbers since 2010.

The Government also recognise that Scotch whisky is a UK export success story. Exports account for about 93% of total production. More Scotch whisky is sold in France in one month than cognac in an entire year—an enjoyable stat to consider. In 2015, we exported 1.2 billion bottles of whisky worldwide. The industry estimates that whisky exports were worth nearly £4 billion last year. That is over £7,500 of Scotch whisky sold every minute, accounting for around a quarter of all UK food and drink exports. It is a fantastic success story for the UK to be proud of.

The reach is equally impressive. In 2016, whisky was exported to 184 countries—that means that over 90% of countries have a taste for whisky. South-east Asia in particular has grown as an export market, with Singapore alone importing £224 million of Scotch whisky last year.

We are seeing an increasing premiumisation of some exports, which reflects a broader food and drink trend within the UK, and Scotch whisky is poised to take advantage of the appetite for premium British products in this area.

I agree with everything the Minister is saying, but two things are worth consideration. First, although we are seeing that growth in premiumisation, it is on the basis of a shrinking market share globally in a very competitive market. Secondly, when opening up new market opportunities, Governments in other countries look here to how we treat our own industry. That is why the domestic market and taxation of it cannot be divorced completely from the export market.

The right hon. Gentleman makes points that I broadly agree with. The signal that the UK supports the industry and recognises its impact on our economy and our exports particularly is entirely understood. In recognition of the quality of the product, Scotch whisky was one of the first food and drink products to feature in the Government’s GREAT campaign, which gave it high international visibility in key markets. I assure Members that we will continue to support the Scotch whisky industry, so that it continues to thrive and prosper.

I welcome all the export trends the Minister has outlined, but we have the fourth highest excise duty rate in the EU. Other EU countries support their home industries and we need to follow suit—even more so, now. Does he agree?

That tempts me towards Budget comments, which I cannot make at this moment. I need to rewind a little bit from that question and make a quick point before coming on to duty rates.

The protected food name scheme remains in place while we are still a member of the EU. The European Union (Withdrawal) Bill, which is currently passing through this place, will ensure that all EU law passes into UK law when we leave the EU. That will include the legal definition of whisky, which is a significant point for the protection of the sector in the long term.

I am grateful to the Minister for giving way; I know he has limited time. I wonder whether the Treasury and the Department for International Trade would talk to the industry in Scotland, which is such a successful exporter. In the post-Brexit world, the Government could learn a lot from the industry and how it has been able to export so successfully. That could happen to other sectors when we leave the EU.

The hon. Gentleman makes an important point. I have to say, though, that I have been talking to the industry and will continue to do so. One thing I have learned in the preparation of Budgets is that a significant number of representations are made either for Government spending or relating to duty. My door is open. I want to hear from the industry and ensure it understands that it can access the Treasury, which will be entirely supportive of British companies developing, investing and exporting. I particularly include the Scotch whisky industry. I have been trying to get across my support for it, and my door will be open for future meetings.

Let us get to the issue of duty rates. The actions taken by this Government are estimated to have reduced all alcohol duty receipts by around £2 billion since 2013. That is a significant duty cut. The actions taken to freeze or cut spirits duty at Budgets in 2014, 2015 and 2016 mean that the tax on a bottle of Scotch is now 90p lower than it would otherwise have been. I understand the point made by the right hon. Member for Orkney and Shetland about price elasticity within the marketplace. The £4 billion of exports per year are unaffected by duty changes as no duty is paid on exported spirits. No UK duty is paid therefore on around 93% of all Scotch whisky produced.

As we approach the Budget, the Government face some pretty tough choices. As I said, I cannot pre-empt what my right hon. Friend the Chancellor of the Exchequer may announce. However, it is the Government’s policy for our public finances to assume that alcohol duties will rise by retail prices index inflation each year.

We had a success in reducing corporation tax, which increased the tax take, and we are minded to further reduce corporation tax to achieve the same goal. Does the Minister think that that would also apply to a reduction in the duty on spirits? Would that generate an increased tax take, as per the corporation tax?

That is a very interesting question, and it slightly tempts me into a Budget thought, which I am sure was entirely my hon. Friend’s intention. While not commenting on the Budget, I assure him that I am instinctively a low-tax Conservative. That is my principle when dealing with the industry, and I think that can be said of my predecessors in the Treasury, otherwise we would not have had the £2 billion reduction in duty rates over the past few years.

I know the Minister does not want to be dragged into questions about future Budgets, but does he accept the scenarios that have been painted since previous Budgets? As the right hon. Member for Orkney and Shetland (Mr Carmichael) said, a 2% reduction increased revenue by £124 million, yet the increase of 3.9% on spirits in March this year reduced the revenues going to the Treasury in the first quarter by 7%. That is looking not at the future but at the impact these decisions have had in the past.

That is an important question, and it has certainly been considered within the Treasury. There is a general view that if we cut duties, we can increase growth and therefore revenue, as the evidence suggested in 2015. However, sales of some drinks have increased after duty cuts, and sales of some drinks have increased after duty increases. It is very hard to evidence that the sales growth my hon. Friend talks about is directly caused by that duty cut.

The principle of supporting a sector in a competitive way through a fiscal and regulatory regime, with support for infrastructure and skills, is exactly what the Government are about: creating the most benign environment in which to do business. I reinforce to the House that our public finances are under some significant pressures. The Government estimates of costs to the Exchequer are scrutinised by the Office for Budget Responsibility before they are certified, so they have independent scrutiny.

I would like to emphasise in the last moments that we will carefully consider all Members’ representations this morning as part of the representations for the forthcoming Budget. I want nobody to leave the debate without a clear understanding that this Government support the Scotch whisky industry. We recognise its importance and are utterly committed to ensuring that this great British success story maintains its global pre-eminence and global growth. The passion for the sector is clearly shared by colleagues here today. When we look at recent trends within the industry and the new entrants into the marketplace, new products becoming available, innovation and export growth, I think we can all say that the future for the Scotch whisky industry is bright.

Question put and agreed to.

Sitting suspended.