https://consciousnessofsheep.co.uk/2024/10/25/an-example-of-the-problem/

As the incoming UK Labour government’s first budget draws closer, concerns are growing about how the government intends to increase its tax income. Given that the UK already has its highest ever tax burden, the broad – and entirely reasonable – concern is that further tax increases will be counterproductive, plunging the UK into recession rather than helping to produce the “growth” which the government claims to wish to generate.

To understand why this is a problem, we need to understand the extreme distortions behind the headline economic figures in the UK. For example, earlier this month we got a surprisingly low rate of inflation – the CPI rate falling to 1.7 percent (although the CPIH – which includes housing costs – remained above the arbitrary 2.0 percent Bank of England target, at 2.6 percent). This is still disinflation not deflation – prices are still rising, just not as fast as they were a couple of years ago… or perhaps, to be more precise, some prices are not rising as fast as they used to be. Because within the data, we discover that the price of essentials such as food and housing costs continue to rise faster than the headline rate. So that what we are actually observing – and the same appears to be happening across the western economies – is the early stages of deflation in discretionary goods (particularly those imported from the Far East) even as the cost of essentials continues to rise.

The reason for this – mostly due to factors outside the UK, but which are also true here – is that as discretionary incomes have been squeezed – by the supply shock, higher prices of essentials, lower real wages, higher borrowing costs, and higher taxes – sales have plummeted, import volumes have shrunk, and manufacturing states have been forced to cut prices. The result, in inflation figures based upon an average “basket of goods and services” which hasn’t been adjusted to take account of the new balance between essential and discretionary purchases, is that the economy appears to be in a better shape than it really is. And so, corporations assume they can continue to raise prices and governments assume they can raise more taxes.

This, of course, spells catastrophe for the discretionary sectors of the economy… which is a particular problem in an import-dependent UK economy which (except for a handful of foreign owned factories) de-industrialised into retail and hospitality half a century ago. And nowhere is the current predicament facing the UK economy more apparent than in Britain’s once-thriving public houses.

Pubs had been closing in droves even before the imposition of lockdowns pulled the rug out from under them. But even with a series of post-pandemic tax exemptions designed to help the sector recover, some 50-60 pubs have been closing every month. As the British Beer and Pub Association report, pubs earn just twelve pence on a pint of beer costing on average £4.79 (compared to the £1.52 per pint taken in taxes).

There is a degree of historical inertia in this heavy tax burden. Duties were levied on imported wine from 1303, and a wider alcohol duty was imposed during the English Civil War. And as tends to be the way with taxes, it remained on the books long after the war had concluded… also paving the way for widespread smuggling in the eighteenth century. By the second half of the twentieth century, alcohol – which had become consumerist Britain’s recreational drug of choice – was a regular target for government budgets (the only question being the amount by which the duty would go up). But when historical hangovers of this kind outlive conditions in the evolving real economy, the scope for unintended harm can reach crisis levels.

The consumption of alcoholic beverages – particularly consumption outside the home – is entirely discretionary, with only social pressure (the desire to spend time with friends) adding weight to consumption. But like so many (e.g., motoring) over-taxed activities enjoyed by the baby boomer generation, consuming alcohol has been going out of fashion among Gen-Z. And among the most cited reason for this newfound abstinence is the cost:

“Young people commonly referred to cost when discussing the decline in youth alcohol consumption. However, this played out quite differently among young people from different contexts. Young people in the affluent schools emphasised the relative cost of alcohol within a broader landscape of purchasing decisions. Although they had access to money to spend, they preferred to use this to purchase food, clothes, books or public transport rather than to buy alcohol…

“A few of the C2, affluent young people also reported saving their money for significant projects: university or to take holidays with friends. In contrast, young people from the deprived and rural schools, and from the FE colleges, indicated that they lacked adequate access to financial resources and the cost of alcohol was seen to be a deterrent to drinking, particularly when purchased in city centre locations…”

Nor is it just pubs which are feeling the decline in young people’s spending power. Nightclubs – which are even more focused on the young – are in serious trouble too. As Katie Spencer from Sky News reports:

“New research by the [Nighttime Industries Association] shows that in the past four years the UK has lost 37% of its clubs, which works out at about 10 clubs closing each month.

“Not only has the cost of living meant more of us are going out less, the nighttime industries have had to grapple with rising operational costs, with one recent NTIA flash poll of 500 businesses finding that seven out of 10 are either barely breaking even or operating at a loss.”

While Millennials (who are now in middle age) earn and spend more, much of their spending is on bringing up children and maintaining a home. So that, while earning less, the young – particularly those still living in the family home – are generally the ones with disposable income to spend in pubs and nightclubs. And the problem is not just that Gen-Z have less to spend, but also that there are several million fewer of them than the Millennials (a demographic problem which is also taking its toll on British universities).

Fewer people with less money to spend does not bode well for the hospitality sector. But it is likely an unforeseen problem for government too, since the alcohol duty, property-based business rates, and VAT levied on pubs and clubs have been core government income streams for decades. If government continues to raise these, they will hasten the demise of the sector and probably end up with no more income than they currently get.

Meanwhile, hospitality sector trade bodies are calling for nothing short of root and branch reform of the taxes and costs levied on them. In particular, the outdated business rates system – which taxes businesses on the basis of the estimated value of the buildings they trade from – from which pubs have been sheltered since the pandemic, could leave pubs facing a 400 percent increase from next year. There are also calls to reduce both alcohol duty and the rate of VAT. Other proposals from the sector though, would be counterproductive. Holding down the minimum wage, for example, would mean younger people have even less discretionary income to spend on discretionary items… like a night down the pub with their mates.

For the moment, the hospitality sector is just one part of the discretionary economy – albeit a visible one – which is facing pressures of this kind:

Rising input costs,
Increased taxation, and
Decreasing income (demand).

Government – which is increasingly drawn from an insulated professional-managerial class – on the other hand, continues to behave as if the whole of the UK, rather than just the City of London and a handful of top-tier university districts, is still prospering. That being the case, the attempt to impose additional taxes on discretionary goods and services will result in the worst of all worlds – businesses will go bust, workers will be fired, tax income will fall, and government spending on health and welfare will be forced up… but then, nobody within government – or, indeed, the opposition parties – is prepared to contemplate the alternative.