The impact of excise duty changes on retail prices in the UK

<p>The annual exercise of revising excise duties has become part of Budget Day tradition. The need for such revision arises because, unlike VAT and the ad valorem tax on cigarettes, excise duties are set in nominal terms according to the physical quantity of the goods on which they are levied. Hence, regardless of any policy-based changes, if the real value of excise duties is to be maintained, the effect of inflation must be countered. However, there is perception in some quarters that producers respond to changes in excise duty rates by increasing prices beyond those implied by the tax alone. No doubt there is considerable potential for 'bar-room debate' over, for example, the contention that if the Chancellor puts 1p on the price of beer, the brewers will add another 1p for themselves. Underlying such a contention is the notion that there is some feature of the industries subjiect to excise duties which allows them to engage in such behaviour. It is noticeable that the principal industries on which excise duties are levied, namely alcohol, tobacco and petrol, have been the subject of major Monopolies and Mergers Commission investigations.</p>