Booze Booms in the Shadow Economy

Putting estimates on the harm done by the illicit alcohol industry

We frequently learn of the dangers of over-indulging on evenings out, particularly of the dangers of binge drinking and the accompanying damage for the economy and the individual. A topic that receives fewer headlines is that of the implications of the illegal alcohol trade in Britain and the damaging effect on British businesses, the tax losses for the HMRC and a practice that is damaging our economy in general. This article will investigate the increasing prevalence of illegal or counterfeit alcohol and the ensuing economic effects thereof.

Students are familiar with many different alcoholic beverages and many methods of obtaining these – pubs, clubs, bars, shops, wholesalers and dial-a-booze businesses help to keep the thirsty in constant supply. In addition, students are becoming increasingly resourceful as their budgets decline. One popular method of obtaining cheap booze includes the home concoction technique. According to the law, the only legal mode of producing your own alcoholic beverages is through dedicated home brew kits; all other methods of brewing and distillation are not permitted in the UK. Whilst, students may partake in the activity in order to save a few pennies before heading into town, the proliferation of illegally produced alcohol in British shops is a significant cause for concern, prompting a widely-circulated British tabloid to run the sensationalist headline ‘Bottles of Poison’. A highly profitable practice, illicit alcohol production is being undertaken by criminal gangs and is a significant source of employment for visa-less migrants in areas such as North Lincolnshire. Negative health consequences persist but one illegal distillery near Boston highlighted another danger of counterfeit production when the facility exploded, killing five of the workers therein.

Unlicensed distilleries and filtration plants may be dangerous but the produce they are peddling is equally hazardous, with side effects of the ethanol substitutes including blindness and severe internal organ failure. Toxic contents are known to include chemicals found in nail polish remover and anti-freeze and can be recognised by its strong acetone smell. Other cognisant elements of counterfeit produce include poor labelling and heavily discounted prices. The lower retail cost reflects the cheap manufacturing process and represents a much greater profit margin for producers, who have circumvented the duty on alcohol.

Other than the NHS costs incurred by an increasing number of severely ill imbibers of counterfeit booze, an obvious economic detriment of the trade are the missing numbers on HMRC’s income statement. Estimates suggest that organised criminal trading in alcohol causes customs losses of up to £1billion per year. In any era, such a figure would be hugely troubling but, in an era of across-the-board budget cuts, an extra billion on the balance sheet would greatly ease pressure on the under-fire government. Between 2005 and 2011, 15 million litres were seized, according to the Institute of Alcohol Studies, whose research found the presence of counterfeit goods extant in markets from Newcastle to St. Albans. A 600% increase in incidence of seizure in the years between 2008 and 2011 reflects a boom in black market activity and an escalating nuisance with which the industry must contend. Furthermore, legitimate retailers are losing business to counterfeiters. The Institute of Economic Affairs states that illegal alcohol consumption is more abundant in lower income countries, which is also a worrying paradigm facing a recession-weary UK. Notwithstanding, the UK’s status as a low-income nation is refuted by its classification as a high-income economy from the World Bank.

Total alcohol duty has been rising for the past twenty years and exceeded £8 billion for the first time in 2008; the Institute of Alcohol Studies’ 2001-2008 data shows an average year on year percentage increase of 3.0% and, from this, a 2013 figure of circa £9624.3 can be extrapolated. Therefore, in the tax year 2012-2013, 9.4% of potential excise duty revenues are being misdirected by the illegal alcohol trade.

Though a lost £1 billion may seem a lot to the average individual, the UK’s projected tax bill for 2012-2013 is estimated at £591.7 billion by the Institute for Fiscal Studies, so the predicted loss of £1 billion would account for just 0.169% of total tax revenues.

What is clear is that HMRC’s estimated loss in revenues attributed to the illegal alcohol trade is sizeable, especially relative to the industry, yet not considerable enough to affect public spending policy decisions. It is as yet unclear how much the increased incidence of illegal alcohol-related hospitalisations and other medical expenses are burdening the NHS but it can already be inferred that this activity in the ‘shadow economy’ carries more than mere individual health costs. When data becomes available to exhibit these costs, and the costs for legitimate businesses in the alcohol trade, it will be possible to conduct a more complete analysis of the full implications but, for now, the true extent of the damage remains under the surface.