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The only way is cannabis: UK government tax black hole raises burning question

Cannabis is now legal in several states of America, including California and Colorado

The drug could be a big revenue earner

The eminent writer Max Hastings wrote in a devastating critique of the British government this week that it’s culturally right wing but economically left wing.

Who could argue with that, when ancient shibboleths are being upheld or reinstated at august institutions like the National Trust and the Greenwich Maritime Museum at the same time as huge deficits are being run up to pay people to stay safe and not to work?

While the cultural reaction is hard to measure other than by number of headlines or tweetstorms, the financial impact is at least readily quantifiable by our very own, and still largely culturally and politically neutral National Statistics Office.

The numbers involved are staggeringly vast.

The furlough scheme cost £58bn. The self-employment grant cost £19.7bn, and Eat Out to Help £800mln.

At the same time, ordering people not to go out had a predictable impact on the tax take. HMRC took in £584.3bn in the 2020-2021 tax year, a drop of 7.8% or £49bn on the previous year.

The VAT take dropped 22%, fuel duty fell 24% to £20.9bn.

To be sure, now that the economy is recovering receipts are likely to start rising again. But that doesn’t fix the salient issue: how is the government going to claw back the money it borrowed in order to fund this huge exercise in socialist finance?

One figure from HMRC stands out in a different way.

During the pandemic alcohol duty increased to £12.1bn, as the wine and spirits drunk at home more than offset the loss in tax from the beer and cider usually drunk in pubs.

If this type of revenue collection was extended to cover a newly-legalised cannabis industry, it might rake in considerable sums for the government, without any need to provide comparable figures for previous years. In other words, the legalisation of cannabis and the introduction of a cannabis tax could provide a one-off exceptional gain for the government whose cupboard looks otherwise bare.

Will the current administration make such a move?

The talk at the moment is of adjustments to capital gains tax rates and adjustments to pension relief, neither of which will be particularly popular. It’s arguable, though, that for broad swathes of the country, and in particular the crucial younger demographic, a legalisation and subsequent taxation of cannabis actually would be popular.

For pragmatic chancellors, ignoring the possibility of a popular tax is like looking a gift horse in the mouth. But what does the famous Red Wall think? That may well be the crucial question, because as we’ve noted, while this government is socialist in economic terms, it’s conservative culturally.

The near-term future of cannabis legalisation may therefore depend on which particular lens its viewed through in the corridors of power: a culturally conservative one or an economically socialist one.

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