Bring on the black market

At the beginning of December, it was reported that the number of cash transactions in Britain, which had been in decline for decades, had risen for the second year in a row. The British Retail Consortium suggests that this is because people are using cash to ‘budget more effectively’, but it seems more likely to be the result of a growing shadow economy of dodgy pop-up shops, Turkish barbers, illegal labour, money laundering, casual tax evasion and black-market sales.

Economists have long understood that the shadow economy is linked to ‘tax morale’. When people feel that taxes are too high or unfair, and that the state is not giving them enough for their money, they feel less guilty about avoiding and evading them. With the tax take at a 70-year high, the roads full of potholes and the NHS supposedly on the brink of collapse because a thousand people – in a country of 70million – are in hospital with the flu, it would not be surprising if Britain is suffering from poor tax morale.

No one has greater cause to feel hard done by than Britain’s six million smokers, who are now required to pay between £12 and £18 for a pack of cigarettes if they want to stay on the right side of the law. Since it is UK government policy to make tobacco unaffordable, a large and growing number of them have decided to starve the beast and buy packs of cigarettes for £5 on the black market instead. Illicit tobacco used to be sold furtively in pubs and ‘tab houses’. It is now sold more or less openly in shops and at car-boot sales.

This is having a material effect on the public finances. In the third quarter of this year, tobacco-duty receipts were 13 per cent lower than in 2023. Between 2021/22 and 2023/24, the amount of tobacco sold legally in Britain fell by 30 per cent and, despite some of the biggest tobacco duty hikes in history, annual tobacco tax revenue fell from £10.3 billion to £8.8 billion.

HMRC no longer makes any serious attempt to estimate the size of the black market. Its most recent guess suggests that a mere 6.9 per cent of cigarette sales are ‘non-duty paid’. Anyone who smokes or has seen cigarette packs in public places knows that this is a fantasy. When researchers at KPMG went through people’s bins looking for discarded fag packets, they found that the real figure was 36 per cent and growing year on year.

And you know what? Bring it on. Successive governments have been warned time and time again and they simply do not care. Britain being a ‘world leader’ in tobacco control means more to them than maintaining law and order or tax revenues. Complaints about regressive and discriminatory taxation have fallen on deaf ears. Politicians have doubled down with the Tobacco and Vapes Bill, which will introduce literal prohibition not just for cigarettes but also for cigars, shisha, heated tobacco and cigarette papers, alongside a new vape tax and a ban on disposable vapes. For sanity to be restored, the political class will have to have its nose rubbed in the consequences of its actions.

What’s so bad about the black market anyway? It has served users of recreational drugs pretty well for more than a century. It operates 24 hours a day, it is not encumbered by petty regulation and it seems to be inflation-proof. Thirty years ago, a pint of lager cost £2 and a gram of cocaine cost £50. Today, a pint of lager costs £6 and a gram of cocaine is still £50. Moreover, while the brewers have been watering down their product, cocaine has been getting purer. If we can’t have a free market, the black market may be the next best thing.

It’s not all fun and games, of course. The lack of petty regulation is a boon, but the lack of any regulation contributes to thousands of deaths every year. The inability to enforce contract law means that disputes tend to be settled with violence. And, by and large, it is better to have a society in which the law is respected than to have one in which people learn from an early age to disregard authority and evade taxes.

But the biggest problem with the ‘let it rip’ approach is that there is no guarantee that the government will admit it has made a mistake and reverse its policies. As I write this, there have been 198 arson attacks on Australian tobacconists and vape retailers since its ‘tobacco turf wars’ began last year. By the time this article is published, there will probably have been 200. The root causes are so obvious that even the ABC, Australia’s left-wing state broadcaster, no longer denies them: Australia has the highest tobacco taxes in the world and has banned e-cigarettes in every form. The consequences have been worse than any opponent of the nanny state could have predicted: criminal gangs are firebombing retailers on an almost daily basis and people have been murdered in broad daylight.

This could all be stopped by legalising vapes and making cigarettes affordable for any adult who wants to buy them. The sky is hardly going to fall in if Australia starts taxing and regulating these products like a normal country. Yet there are almost no mainstream politicians in Australia making that case. Meanwhile, the British health secretary, Wes Streeting, has seen what’s going on Down Under and has decided that he would like a slice of it. Last year, Conservative MP Neil O’Brien, who was then the public-health minister, proudly announced that his government had not run an impact assessment to look at the effect of generational prohibition on the black market because he didn’t think it would be a problem.

So the ‘let it rip’ approach falls down because it assumes that politicians are rational actors when they are not. It is possible that things will have to get worse before they get better, but it is equally likely that things will get worse and stay worse. In any case, it is out of our hands. The Tobacco and Vapes Bill passed its second reading by 415 votes to 47 in November, a thumping victory for the prohibitionists. The political class has decided to let the black market rip. The rest of us will just have to adapt.

Christopher Snowdon is director of lifestyle economics at the Institute of Economic Affairs. He is also the co-host of Last Orders, spiked’s nanny-state podcast.