I am advised by Revenue that the Ready Reckoner is designed as a short-term fiscal costing tool which shows the projected Exchequer costs and yields of possible changes to rates for a range of taxes. Its purpose is to provide a reasonable estimate of the immediate Exchequer impact of a tax-rate change, it is not, and is not intended to be, a medium to long-term behavioural forecasting model.
Revenue has considered whether explicitly incorporating behavioural parameters, such as substitution to illicit products, cross-border purchasing, or switching between product categories would improve the accuracy of its estimates. Revenue's assessment is that doing so would not necessarily produce a more reliable forecast over the short term. Such parameters are, by their nature, subject to considerable uncertainty and depend on assumptions that are difficult to validate in advance. Incorporating these into a deterministic costing model risks introducing a false degree of precision into estimates that would remain inherently uncertain over the long term.
It is important to note, however, certain behavioural responses are accounted for by the Ready Reckoner. For example, the model includes a price elasticity of demand coefficient that estimates the expected reduction in consumption associated with a given price increase, directly capturing anticipated behavioural responses to a price increase. In addition, the baseline from which the Ready Reckoner projects forward is adjusted to reflect the most recently available data on actual tobacco products volumes released for consumption, while controlling for seasonal patterns. Because this baseline already incorporates the ongoing structural decline in tobacco consumption, the projected yield from a rate increase must be understood in that context. Where consumption volumes are falling, a rate increase may in practice serve to maintain Exchequer receipts at or near existing levels rather than generating additional net revenue above the prior year's outturn. In this way, prior behavioural responses, including substitution effects, reduced consumption, and shifts in purchasing patterns arising from previous excise increases, are embedded in the baseline before the short-term projection is applied. Revenue also conducts periodic surveys of the illegal tobacco market, the results of which inform its understanding of the broader consumption landscape. Behavioural responses are therefore captured through both the model's elasticity parameter and through evidence-based adjustments to the consumption baseline, rather than through additional deterministic assumptions that may prove unreliable.
The current methodology which applies a conservative short-term price elasticity of demand to observed consumption volumes represents an appropriate approach to estimating the fiscal impact of TPT changes for short term change. Revenue keeps its methodologies under ongoing review and will continue to refine its approach as further evidence becomes available.
