Whisky: ‘Whether or not it is Scotland’s oil, it is mostly not Scotland’s whisky’.

 

No account of the Highland county of Moray would be complete without a mention of whisky. There are 49 operating malt whisky distilleries in the Speyside region, the greatest concentration in Scotland. The clean air, the plentiful and pristine water of the Spey coming off the Cairngorm mountains to the south (plus natural springs) and proximity to the main barley growing areas of the country provide ideal conditions for making whisky.

But look beyond the warm inner glow that the idea of whisky provides and there are some uncomfortable aspects to what the Scots named uisge beatha (the water of life). Over dinner in the summer of 2017 my cousin Jan’s husband Sandy told us of a relative (an uncle perhaps?) who worked at one of the distilleries in the district. He would turn up to work in the morning and the custom was for everyone to have a dram before they started. Then at morning tea, another. Of course after lunch, one more. When the shift was over there was cheap Scotch to take home or perhaps it was off to the pub with his pals for a couple before dinner. It came as no surprise to hear that drink helped drive the man to an early grave. And I thought again of the old man and his lunchtime dram and chaser at the Laroch in Ballachulish.

Scotland has long suffered from a drink problem. A recent article in the Economist (11 May 2017) suggested the number of alcohol-related deaths had plunged since the early 2000s. A ‘dram-atic fall’, no less. A Scottish government program for reducing alcohol harm—in the form of training doctors to have short, structured non-confrontational conversations about people’s drinking habits—had proved to be an effective way of reducing consumption, the article said. Tightening the drink-driving limit has also had an impact—no longer is it ‘one for the road’, now it’s ‘none for the road’. Unfortunately, figures released by the National Records of Scotland in August 2017 pull the rug out from that feel-good story. The figures for 2016 show a 10 per cent increase (an additional 115 deaths) on those for 2015.

Tightening the drink-driving limit has also had an impact—no longer is it ‘one for the road’, now it’s ‘none for the road’.

A third proposed government initiative—the introduction of a 50p minimum price per unit of alcohol—is being strongly resisted by the Scotch Whisky Association. An appeal by the SWA was considered in a two day hearing at the UK Supreme Court in London in late July 2017. If the Scottish government’s legislation prevails, bottles of whisky could not be sold for less than £14, bottles of wine for less than £4.69 or four packs of beer for less than £4.

Former Scottish Justice Secretary Kenny MacAskill, who was one of the architects of the minimum pricing bill, told the BBC: ‘This (appeal) isn’t about protecting Scotch whisky, this about protecting cheap alcohol sales. What we have to remember is that members of the Scotch Whisky Association are also large alcohol producing companies and they are protecting their interests because somebody sells the cheap vodkas, somebody sells the cheap ciders and it’s the same people that own and manufacture Scotch whisky.’

Whisky stillsWhisky stills on Speyside

MacAskill makes a pertinent point. The great Scotch whisky brands are almost all foreign-owned. In fact, only 29 of Scotland’s 102 distilleries are in local hands. London-based Diageo is the biggest player with 28 distilleries, and its brands include single malts Lagavulin, Talisker and Oban and blends Johnny Walker, Bells, Black and White and Haig. The second largest whisky producer is French firm Pernod Ricard, which owns Chivas Brothers, operates 10 distilleries and sells the single malts Glenlivet and Aberlour. Other famous malt whisky brands now foreign owned include Bowmore (Japanese), Glenmorangie (French), Knockdhu (Thai), Isle of Jura (Indian) and Bunnahabhain (South African). The only major Scottish firms left in the game are Wm Grant & Sons (Glenfiddich) and the Edrington Group (the Macallan and Highland Park).

‘Big Whisky’ as represented by the SWA, is not backwards in trumpeting its contribution to the Scottish and British economies. Using a measure called gross value added (GVA), in January 2017 the SWA claimed whisky’s direct impact on the Scottish economy was £3.24 billion and when the closely related UK supply chain was taken into account, the figure rose to £4.9 billion.

All very impressive. However, in ‘Is Recent Economic History A Help?’ one of a collection of essays published in the lead up to the independence referendum (Mackay, Sir D 2011, Scotland’s Economic Future), Professor John Kay, argued that the figure that counts is not GVA, but gross national income (GNI). This would combine the incomes of those that work in the industry with Scotland’s pro-rata share of the UK corporations tax on whisky profits (unsurprisingly, most of the big companies avoid paying this), plus the dividends and other earnings accruing to residents of Scotland. No such figure has been produced by the whisky industry (no surprise there either).

‘Whether or not it is Scotland’s oil, it is mostly not Scotland’s whisky’.

Professor Kay, who served on the Scottish government’s Council of Economic Advisers, calculated wages and salaries and purchases of Scottish goods and services used in whisky production as only £400 million. To this should be added ‘the returns to beneficial Scottish ownership of whisky-related assets’, which is highly likely to be a modest amount given the industry’s overwhelming foreign ownership. With estimated worldwide retail sales worth around £25 billion, Kay made the arresting claim that only two per cent of the global sales value of Scotch whisky ended up in Scottish pockets. As Business Editor Colin Donald put it in Glasgow’s Sunday Herald, ‘Whether or not it is Scotland’s oil, it is mostly not Scotland’s whisky’.

Kay’s analysis led to some interesting responses—including one from trade unionist and Scottish National Party member Bill Ramsay for a whisky bottle tax. The Westminster government already taxes the hell out of UK sales of whisky, with excise duty and VAT (value added tax) comprising 79 per cent of the cost of a bottle bought in Britain. Despite this, Diageo the largest producer of Scotch whisky, declared an operating profit of £3 billion in 2015—a profit margin of 28 per cent.

Total export sales of whisky from all producers in 2015 were worth £3.85 billion, based on a selling price of £3.33 per bottle. But hold on—even allowing for a 50 per cent mark up, Ramsay asks when did you ever see a bottle of duty free Scotch on sale for £5? A more typical price would be £25—so where is the other £20 going?

Using Professor Kay’s estimate of true export value as £25 billion, and Diageo’s profit margin as a guide, Ramsay surmises real profits as close to £7 billion. He therefore concludes that a billion pounds could be levied on the whisky industry and it would still be extremely profitable. A pound a bottle would be likely to achieve that result.

The idea of a bottle tax would apply to every bottle that leaves a whisky bond, whether for the UK or for export. It would be the same for every bottle, whatever its value. It could be absorbed from the profits of distilling companies. But if it did so, they would make less profit, so they would pay less in corporation tax.

The idea of a bottle tax would apply to every bottle that leaves a whisky bond, whether for the UK or for export. It would be the same for every bottle, whatever its value.

Alternatively, it could be passed on to consumers in higher prices. That could be expected to reduce demand, which is difficult to assess.

In ‘Scotched Earth’, a special investigation screened on BBC TV in 2013, Sir George Mathewson, who was chairman of Scotland’s Council of Economic Advisers said the idea was certainly worth investigating.

The Scottish government cannot tax the alcohol, as that power is reserved to Westminster. However Matthewson (a former chairman of the Royal Bank of Scotland) told reporter Douglas Fraser that Holyrood could put a levy on the water used in the distilling process. Powers over charging for water are already devolved to Scotland so it can be argued they would not require additional constitutional changes.

‘If it was left to me I would do what Peter the Great did with vodka and make Scotch a state monopoly,’ Bill Ramsay wrote on commonspace.scot, ‘ but I am not Scotland’s finance minister’.

Aye, more’s the pity.

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