Conceptual Room for Ontic Vagueness
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THE WHISKY INDUSTRY AND THE REGIONAL SCOTTISH ECONOMY : AN ECONOMIC ANALYSIS OF THE IMPACT OF IMMINENT INNOVATIONS IN PUBLIC POLICY Paul Haines A Thesis Submitted for the Degree of PhD at the University of St Andrews 1998 Full metadata for this item is available in St Andrews Research Repository at: http://research-repository.st-andrews.ac.uk/ Please use this identifier to cite or link to this item: http://hdl.handle.net/10023/10984 This item is protected by original copyright L University of St Andrews THE WHISKY INDUSTRY & THE REGIONAL SCOTTISH ECONOMY: AN ECONOMIC ANALYSIS OF THE IMPACT OF IMMINENT INNOVATIONS IN PUBLIC POLICY Paul Haines Department of Economics Ph.D 1998 UNIVERSITY OF ST ANDREWS i) I, t~.l.s l brJ. ~~ reby certify that this thesis, which is approximately \~P~ .... words in length, has been written by me, that it is the record of work carried out by me, and that it has not been submitted in any previous application for a higher degree. Date . ~t Signature of Candidate ii) I was admitted as a research stu ent in. ~ ~~ ... month, year] and as a candidate for the degree of. .J)•••••• in D. .... • ••.• [month, year]; the higher study for which this is a record was carried out in the University of St Andrews between . .0 . •~ .... [year] and .\~!\B ..... [year] . Date .1.5l\, f'.'f Signature of Candidate iii) I hereby certify that the candidate has fulfilled the conditions of the Resolutions & Regulations appropriate for the degree of .......... in the Uni versi ty of St Andrews, and that the candidate is qualified to submit this thesis in application for that degree. S· t f S . D a t e ..........Ie. lC/q ~ ~gna ure 0 upervlsor UNIVERSITY OF ST ANDREWS A Unrestricted In submitting this thesis to the University of St Andrews I understand that I am giving permission for it to be made available for use in accordance wi th the regulations of the Uni versi ty Library for the time being in force, subject to any copyright vested in the work not being affected thereby. I also understand that the title and abstract will be published, and that a copy of the work may be supplied to any bona fide library or research worker. Date ~ .~~ '-la Signature of Candidate. Scotland, my auld, respected mitherl Tho' whiles ye moistify your leather, Till, whare ye sit on craps 0' heather, Ye tine your dam; Freedom an' whisky gang thegitherl Tak aff your dram. Robert Burns The Author's Earnest Cry & Prayer Plate 1 The Highland Whisky Still by Sir Edward Landseer. United Distillers Pic. Although the reality was probably less chimerical than in Landseer's portrayal, the prevalence of illicit distilling throughout 18th century Scotland prompted the government to intervene, in so doing facilitating the development of one of the United Kingdom's most efficacious industries. It is contended herein that a similarly proactive stance on behalf of the industry may be required of the current government, if the success of Scotch whisky is to continue. ABSTRACT This dissertation analyses imminent innovations in public policy that will impact upon the whisky industry, and, through linkage adjustments, the regional Scottish economy. An analysis of the interconnectedness between the whisky industry and the wider Scottish economy reveals that such linkages are substantial. A holistic conspectus of the whisky industry in the first part of the dissertation reveals that the predominant form of structural change in the past has been merger & acquisition. Such consolidation has permi tted economies in marketing & distribution, but it is contended that in this arena at least there is scope for further performance improvement in the industry. Nevertheless, with taxation forming such a significant proportion of the final price of the product, realising a sustained increase in demand is deemed to be largely outwith the capability of the industry. It is advanced, therefore, that two tax-related developments in public policy in the next few years will impact not merely upon the whisky industry, but materially upon the regional Scottish economy as well. The first of these imminent innovations examined is the proposed abolition of the intra-EU duty free concession in 1999. Whilst it is concluded that such a move is inevitable (and economically logical), it is nonetheless determined that this will have a meaningful detrimental impact upon the whisky industry and Scottish economy. Secondly, the current proposals of the European Commission for the harmonisation of alcohol excises across the European Union are critically appraised, and are shown to be grounded on no logical economic principles, but instead, enshr1ne protection for European vinicultures. The rationale for alcohol taxation is considered de novo, concluding that wi thin the Uni ted Kingdom & across the European Union, at a minimum all alcoholic beverages should be taxed on an equal basis according to alcoholic content, at a level sufficient to cover an estimate of the negative externalities associated with alcohol consumption. Mindful of the importance of the whisky industry to the Scottish economy, it is revealed that in times past, the public authorities have been proactive in intervening to secure the continuing prosperity of the whisky industry, and it is contended that such a stance may be required of the present government. The dissertation concludes by advocating a set of reforms to the structure of alcohol excises in the United Kingdom. An approximate halving of the excise applied to spirits, such that all alcoholic beverages are taxed equally according to alcoholic content, would ensure that the whisky industry & government could lobby with credibility for comparable structures to be adopted overseas, particularly in any revised proposals for European excise harmonisation. In addition, it is suggested that the fillip such a reform would give to domestic sales of whisky would mitigate the negative effects upon the whisky industry & regional Scottish economy of losing the intra-EU duty free concession in 1999. ACKNOWLEDGEMENTS Many people have been of assistance in my compilation of this thesis, but in particular I would like to extend my appreciation to Peter Morgan for his extensive help with the graphics & illustrations, to Pieda PIc, The Scotch Whisky Association, Alan Gray (of Sutherlands Ltd), and William Grant & Sons for the information they kindly supplied, and to Jim Love & Peter McKiernan for their candid advice. Finally, I must convey especial thanks to my supervisor, Gavin Reid, and to Vincent Fusaro of Faval (Cupar) Ltd, whose extensive experience of the off licence trade in Scotland proved invaluable in writing this thesis. The usual disclaimer applies. CONTENTS Page Abstract Acknowledgements List of Tables List of Figures List of Plates Chapter 1: Introduction 1.1 The Scotch Whisky Industry & The Scottish Economy 1 1.2 Survey of the Literature 9 1.3 Importance of the Present Research 14 1.4 Structure of the Dissertation 18 Chapter 2: The Scotch Whisky Industry 2.1 Introduction 23 2.2 The History of Distilling in Scotland 25 2.3 The Production of Whisky 34 2.4 The Present Industrial Structure 52 2.5 Recent Trends in Consumption, Production & Marketing 97 2.6 Bulk Exports, Distribution & Overseas Investment 120 2.7 Conclusions 140 Chapter 3: The Whisky Industry & The Regional Scottish Economy 3.1 Introduction 156 3.2 Direct Employment by The Whisky Industry 157 3.3 Indirect Employment: The Scottish Regional Input-Output Model 162 3.4 The Multiplier Process 166 3.5 Conclusions 177 Chapter 4: Public Policy Issues I: Duty Free 4.1 Introduction 181 4.2 The Intra-EU Duty Free Market 182 4.3 Impact Upon The Whisky Industry of Ending Duty Free 188 4.4 Impact Upon Wider Scottish Economy of Ending Duty Free 196 4.5 Justifications For Retaining Duty Free 198 4.6 Conclusions 212 Chapter 5: Public Policy Issues II: Alcohol Taxation 5.1 Introduction 217 5.2 The History of Excise Taxes 218 5.3 The Present Duty Structure in The United Kingdom 222 5.4 The Rationale For Alcohol Taxation: Taxation & Welfare Considerations 226 5.5 The Rationale For Alcohol Taxation: Externalities 252 5.6 Conclusions 268 Chapter 6: Public Policy Issues III: Harmonisation of Alcohol Excises in the European Union 6.1 Introduction 272 6.2 Production & Consumption of Alcohol in the EU 274 6.3 The Existing Structures of Alcohol Excises in the EU 278 6.4 Competition Between Alcoholic Beverages 281 6.5 Indirect Tax Harmonisation in Europe 289 6.6 Problems with European Proposals for Excise Harmonisation 295 6.7 Alternatives to European Excise Harmonisation 308 6.8 Conclusions 315 Chapter 7: Public Policy Issues IV: Some Alternative Proposals 7.1 Introduction 323 7.2 Problems with the Present Structure of Duties in the United Kingdom 325 7.3 Possible Reforms of the Duty Structure in the United Kingdom 337 7.4 Preferred Options 350 7.5 Estimates of Own-Price Elasticities 355 7.6 Implications for Whisky Industry of Reform 362 7.7 Effects on Regional Scottish Economy 364 7.8 Impact of Proposed Reforms on Government Revenue 368 7.9 Conclusions 371 Chapter 8: Conclusions 379 Bibliography LIST OF TABLES Page Table 1.1 Gross Value Added in Scottish Manufacturing Industries 1994 3 Table 1.2 Scottish Manufactured Exports in 1995 5 Table 2.1 Geographical Distribution of Whisky Distilleries 38 Table 2.2 Capacity Utilisation 1980-1995, Malt & Grain Distilleries (millions of litres of pure alcohol) 42 Table 2.3 Yields (litres of alcohol) Per Metric Tonne of Cereal Malt & Grain Whisky 46 Table 2~4a Cost Structure (pence per litre of pure