'Time to act:' Alcohol directly contributes to inflation while tax hikes lead to Govt losses

Annual headline inflation over the year to November was 2.3%, 0.2 percentage points higher than the year to October, announced the Australian Bureau of Statistics in its monthly CPI indicator this morning.

Both Alcohol and tobacco and Food and non-alcoholic beverages were listed among the top three contributors to this increase, rising 6.7% and 2.9% respectively.

Published this morning, the ABS’ monthly CPI indicator follows shortly behind the Australian Government’s Mid-Year Economic and Fiscal Outlook 2024–25 (MYEFO), which revealed downgraded taxation revenue forecasts for spirits, beer, and wine as price hikes continue to reduce consumer demand.

“The rate of spirits excise has increased, yet revenue is down. This tells us everything we need to know about the appropriateness of this tax in the current economic climate,” said Greg Holland, CEO at Spirits and Cocktails Australia.

Both the CPI Indicator and MYEFO datasets follow on from established evidence that the automatic CPI indexation of the excise on spirits and beer is jeopardising the government’s efforts to curb inflation.

“Consumers aren't willing to absorb costs/aren't willing to bear price increases [and] it means that our producers are having to eat the increase,” Australian Distillers Association CEO Paul McLeay told Drinks Trade shortly after the most recent tax increase.

“The time to act is now, and we're saying the urgency is there… We certainly have support from our aligned people - certainly people within government - but when it comes to the Treasurer, it's just hitting deaf ears.”

According to the MYEFO, the forecast taxation revenue for Spirits for the current financial year is estimated at $3,310 million, 7.8% below what has been budgeted.

Similarly, income taxation revenue on Australian Beer is expected to be 1.5% below budget at $2,620 million, and the Wine equalisation tax (WET) is expected to generate $1,130 million, 1.7% less than budgeted.

The only liquor category that has a MYEFO taxation revenue forecast greater than what has been budgeted is Other alcoholic beverages, which is expected to generate $1,760 million, an additional 0.6% in tax revenue. Included in this category are all alcoholic beverages under 10% abv other than beer, brandy and wine.

Altogether, the MYEFO liquor tax revenue estimate for the current financial year is $330 million less than originally budgeted, with an additional $300 million deficit forecast for the 2025-26 financial year.

Paul McLeay says the current economic climate is further exacerbating the issue.

“While there is a cost of living crisis, it's very difficult to pass on any [cost] increases, it just means that our local producers have been absorbing this increase for the last two years and longer,” McLeay told Drinks Trade.

“That means that the margin per product is lower. It means their ability to employ staff has declined. And in fact, when you're eating your own profits, it means you do cut your cloth, and it does mean jobs. Given that half our distilleries are in regional areas, this means they're cutting jobs, particularly in the regions, at a time when the regions can afford it less. This is effectively a tax on jobs.”

Additionally, rising spirits excise has resulted in the formation of a counterfeit alcohol trade that the ATO estimates is resulting in $800 million in annual losses. Earlier in the year, Victoria Police successfully conducted a raid that uncovered crime syndicates mixing regular drinking spirits with denatured alcohol used to manufacture paint stripper, brake fluid and synthetic rubber. These concoctions were reportedly being sold statewide to over 80 licensed premises.

“Victorian Police busted a one billion dollar liquor substitution racket that blends dangerous industrial alcohol – like paint stripper and brake fluid – into whisky, vodka and other spirits products,” said Holly Klintworth, President of the Australian Distillers Association.

“Melbourne’s The Age newspaper reported that organised crime has moved onto bootlegged booze to avoid the high spirits excise, which is now $101.85 per pure litre of alcohol.”

Law enforcement estimates that 2.4 million bottles of illegal alcohol enter the market every year, with this number expected to rise should the biannual spirits excise remain unaltered.

Despite overall annual headline inflation rising more than expected, trimmed mean inflation - the Reserve Bank's preferred measure - fell by 0.3 percentage points.

“Annual trimmed mean inflation was 3.2 per cent in November, down from 3.5 per cent in October,” said Michelle Marquardt, ABS' Head of Prices Statistics.

”Annual trimmed mean inflation remains higher than CPI inflation as it removed large price falls for electricity and automotive fuel.”

In a joint media release, Treasurer Jim Chalmers added: “Our responsible approach has seen fiscal policy work alongside monetary policy to return inflation to the target band for the first time since 2021 and our fiscal settings continue to be consistent with sustainably returning inflation to target.

“We’re confident but not complacent about this progress we’re making… We know inflation doesn’t moderate in a straight line and we saw that again overnight, with inflation ticking up in the Euro area, and in the United States and United Kingdom in the most recent data.”