Gen Z's clean living means decline in 'sin tax' by £14 bn for UK

By Tom Rees

Generation Z’s reputation for monkish living — smoking and drinking far less than their predecessors — is turning into yet another problem for the UK Chancellor of the Exchequer Jeremy Hunt.
 

The decline of so-called “sin taxes” on tobacco and alcohol in recent decades have left a £14 billion ($17.1 billion) hole for the Treasury to fill as younger generations switch away from cigarettes to vapes and turn off the booze altogether.

The government would have taken in an additional £9.3 billion in revenue from tobacco duties and £4.7 billion for alcohol if the level of income from those levies had remained stable since 2002, according to a Bloomberg analysis of official estimates. 

That has forced Hunt and predecessors to boost other taxes when stabilizing the public finances with the Treasury’s overall tax take from the economy heading to the highest level in the post-war era.

The findings underscore the challenges facing Hunt from a fast changing society and tectonic generational shifts. He also faces the task of pivoting the Treasury away from fuel duties as the auto industry shifts from petrol and diesel vehicles toward ones powered by electricity. 

Revenue from tobacco now makes up just 1% of total public sector receipts, down from 1.9% two decades ago. Alcohol brings in 1.3% of receipts, shrinking from 1.7%. 

The result has added to the burden on those who pay income and corporation taxes, which are doing the heavy lifting in restoring the country’s fiscal health. The billions lost from the shift is enough to pay for both the child care benefits and business investment incentives that Hunt announced in his budget. 

Chris Etherington, partner and tax expert at RSM, said the shifting tastes of younger Britons means that more revenue from these sin taxes is likely to come under threat in the future.

“Younger people are probably moving more towards vaping as opposed to cigarettes and cigars, and likewise people are not drinking as much as they used to,” said Etherington. “If it’s helping the population to live a healthier lifestyle, then it hopefully has slightly wider benefits in terms of keeping people in better health.”

The Office for Budget Responsibility is now expecting revenue from tobacco duties to decline even in cash terms in the coming years as smoking rates continue to plunge. In its March forecasts, it slashed the amount it expects the Treasury to generate from tobacco in the next five years by an average of £800 million per year, a downgrade it partly pinned on the rise of alternatives to cigarettes.

Smoking rates have tumbled across the age spectrum in the last decade, but Gen Z are stubbing out the habit most. 

No group has seen a bigger decline than the youngest. Just 13% of 18 to 24-year-olds said they smoke cigarettes in 2021, compared to 26% a decade earlier, according to the Office for National Statistics. This group was also the most likely to be a daily or occasional user of e-cigarettes, prompting the government to reportedly consider a vaping tax.

Meanwhile, the OBR expects receipts from alcohol duties to increase by the end of its forecast in 2027-28 — but not as quickly as the overall tax take is projected to rise. In the near-term, revenue from alcohol will even decline with Hunt increasing relief on beer and cider draught products at the budget in a bid to help the country’s embattled pubs.

While the tax man is raking in less from Britain’s vices, the figures also suggest that these Pigouvian taxes are working to change behavior. Sin taxes both raise revenue for the country’s coffers and make unhealthy or environmentally damaging behavior more expensive.

In the longer run, this will likely save the Exchequer money if it means a lower burden on the NHS.

“If people smoke less and drink less, then the nation probably will be a healthier nation and it will save some money in the long run,” said Clive Gawthorpe, partner at UHY Hacker Young. “Certainly tobacco has definitely been a change of behavior with e-cigarettes.”

Indeed, dwindling receipts from cigarettes and alcohol has not deterred the UK government from other sin taxes in recent years, such as the sugar tax and the plastic bag charge. Both have been shown to influence behavior, persuading soft drink manufacturers to reduce sugar in their recipes and shoppers to slash their plastic bag usage.