The Impact of Increasing Excise Duties on the Economy

Excise duties have increased considerably over the past few years, raising concerns on the effect this may have on the economy. However, these increases are welcomed by those concerned about the costs of externalities associated with excessive alcohol consumption, including productivity loss, foetal alcohol syndrome, liver cirrhosis, traffic accidents, etc. This study contains results on the impact of a 10% increase in excise duties on the South African economy, using a static computable general equilibrium model. The impact on gross domestic product, trade and prices, as well as changes in the factor market and the welfare of households of the Northern and Western Cape (the two major wine producing provinces in the country) are analysed. The results indicate that the majority of households in South Africa will be worse off in terms of real consumption expenditure and all households in the Northern and Western Cape will lose out. In addition, lower income households will lose out most, as they spend a larger share of their budget on beverages and tobacco. However, these results do not capture the benefits from any reduction in negative externalities following the decline in demand due to a price increase in alcoholic beverages, and hence are likely to represent an upper bound of any welfare losses. Additional analyses indicate that the gain in productivity required to offset the negative impact of increasing excise duties is rather small.