Scottish Whisky: Flourishing Amidst Uncertainty

Burns Night – 25th January – sees millions of people across Scotland eat a feast of haggis and raise a dram to celebrate the life and works of one of Scotland’s finest poets. It is fitting then, that on this day the Scottish Whisky Association published a report showing that sales of Scotland’s national drink have risen exponentially. But just how much does Scotch whisky add to the UK economy, and does its success in the year of the Brexit referendum show that worry over the UK’s exit from the EU is overblown?

The Scotch whisky industry is expanding at “historic levels”, with its contribution to the UK economy amounting to almost £5bn a year. According to the Scotch Whisky Association (SWA), exports of whisky amounted to roughly £4bn last year, with research showing that Britain’s trade deficit in goods could be 3% larger without the boost that Scotch’s provides. The SWA stated that these findings make Scotch whisky “…one of the UK’s most strategically important industries”, with exports of Scotch a key contributor to the UK economy as a whole.

Indeed, it is not only the exports of whisky that benefit the UK. Over 40,200 jobs are supported by the industry across Britain, with more than 10,500 people directly employed in Scotland.  In addition, just under £1.3bn is paid in salaries in Scotland alone. In fact, whisky is one of the most significant contributors to rural employment – thus helping to support the most fragile rural economies which often struggle to provide employment opportunities for local people. And with a further 40 new distilleries planned across Scotland, these figures are expected to grow rather than diminish or stagnate.

All of this is occurring at a time in which the UK’s decision to vote ‘leave’ in last year’s Brexit referendum, with the pound subsequently falling more than 15% against the dollar. The drop in the pound has, of course, benefited exports but imports have taken a direct hit – becoming more expensive for both businesses and consumers.

Indeed, distilleries in Scotland have seen this for themselves. For whisky to be sold as ‘Scotch’, the drink has to be aged in barrels in Scotland for at least three years. Most distilleries import the barrels and casks required to age whisky from different countries around the world. They also import some grains and yeast. The result of the drop in the worth of the pound is that these imports are more expensive. Also more expensive is the cost of making the whisky itself, and paying the wages of the employees of each distillery.

The fact that Scotch withstood the fluctuating market and rise in import costs to actually improve its profits is noteworthy. Some may even argue that it proves that the negative impact of Brexit has been overstated, but is this an anomaly or part of a wider trend?

To determine an answer, it is worth remembering that Britain has not left the single market yet. While Scotch’s gains are noteworthy, they were also carried out against a weak pound. The full effects of Brexit are yet to be felt and, as such, the success of Scotch exports might not be replicated once the UK extracts itself from the single market.

Additionally, the success of Scotch today does not stop the industry from worrying about the future. In fact, the Scotch Whisky Association are still worried about the implications that Theresa May’s ‘hard-Brexit’ will have on its members doing business abroad, in spite of their recent gains.

While confident that Scotch will survive in post–Brexit Britain, the SWA – like many other industries in and around Scotland – are seeking strong reassurances from the UK Government that measures will be put in place to mitigate the uncertainty that the UK’s exit from the EU brings.

Part of this reassurance, they say, should include addressing

“the high and unfair level of taxation distillers face in their home market.”

They argue that the current tax level, set at 77% on an average priced bottle of Scotch, is an unfair burden on consumers and the industry. As such, they are calling on the UK Government to cut excise by 2% in the next Budget. Such action, they say, will support

“a great Scottish and British industry at a time of uncertainty, giving us a stronger domestic platform from which to invest and grow to make a success of Brexit.”

And this echoes the message from businesses across the UK. Brexit is causing concerns for many UK companies and industries – whether it be through the removal of the UK from the single market and thus the ease of trade across the EU, or the fluctuation in British currency and its associated risks.

However, the removal of the UK from the single market appears now to be a political reality. Now businesses across the UK are beginning to accept that reality and look for ways to protect themselves. For many, it is important to remember that risks can be identified and mitigated against. As such, more clarity on what UK Businesses can expect from the UK Government’s Brexit plans and how the UK Government, Scottish Government and other devolved administrations will insulate businesses against any perceived dangers, will help to ensure that UK industry can find the opportunities within the risks and flourish amidst uncertainty.

This is, of course, politically challenging for the current Scottish Government, who are steadfast in their desire to keep Scotland in the single market and are unlikely to overtly take action which would be seen as accepting the new political reality. Nicola Sturgeon’s Government must therefore walk the line between pragmatically planning on how best to protect and support Scottish business in post-Brexit Britain, and remaining committed to Scotland’s vote to remain. As new tax powers come to Scotland as a result of the Smith Commission’s recommendations, businesses around Scotland will be looking closely to see how Ms. Sturgeon manages this challenging balancing act.

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