Figuring out the financial benefits of legalising currently illegal substances is a rather fraught little exercise. There are many variables - how one chooses to estimate the number of illegal drug users in the country, which tax income to compare it too, whether legalisation will have an impact on consumption rates, what drugs you will legalise - which can impact on the final number generated. This blog post is only a rough attempt to sketch this out - the total is likely to vary when estimated by more scholarly minds than mine.

I am going to set aside debates over whether to legalise, decriminalise or not - I think they are best covered separately and I am aware this is a complex topic. This blog is an attempt to briefly summarise the potential income impact for government of legalising all drugs. There are a number of ways of breaking this issue down to ask other questions, but these are to be left aside for now. I also want to make it clear I am not going to address any change in the government’s outlays as a result - any savings from ending prosecution/imprisonment of drug users or policing the restrictions.

I’m going to begin with reference to tobacco. According to ASH, there are around 10 million adult smokers in the United Kingdom; the Tobacco Manufacturers Association (TMA) estimates that the total tax revenue generated from the sale of tobacco in this country is £10.5 billion in financial year 2009-2010. These figures are supported by the 2011 budget, which shows that, as in the TMA figures, £8.8 billion was generated from tobacco duties. I would tend to agree that total VAT income from this would be around 20% of the take of the duties. This will be the baseline for assumptions on tax take from legalisation in this blog. 

Given the above, one now confronts the issue of counting drug users. As what they are doing is illegal, I think it not too unreasonable to assume that any data generated is going to involve a sizeable margin of error, though the methodology used does weight for such things to reduce it. This blog is going to use the British Crime Survey’s results from 2010-11, which break down by type of drug used and a variety of other factors. Working from this data set, one gets the figure of around 3 million individuals who have used drugs of one kind or another in the last year. Quite how regularly they consume them is another matter - but for brevity’s sake, let’s say there are 3 million people using currently illegal drugs. As with tobacco, some are going to be irregular users - only when drunk, for example - and some are going to be equivalent of 40-a-day users in terms of volume of consumption.

3 million versus 10 million - and from this we can estimate that the total tax take from legalisation of all drugs (setting aside a moment for debates over what to legalise) would be in the region of £3.15 billion today. Of course, it may turn out that people who report as irregular drug users, counted in the ”Ever taken in lifetime” column are in the other column, pushing numbers up. It may turn out that the government earns higher levels of VAT from legalisation as a result of higher prices of some drugs. A whole variety of variables can be introduced at this juncture. 

But how can we spend £3.15 billion in practical terms? If we set aside the deficit reduction strategy and convert that into spending commitments; annual spending, rather than capital spend; we can develop several packages. I’ve aimed to underspend under all models, in order to give some leeway. Here’s three options:

Option A: The Promoting Business Route

1. Treble spending on adult apprenticeships  (CSR, pg. 52) - £0.5 billion
2. Treble spending on the Higher Education Innovation Fund (HEIF) (HEFCE) - £0.3 billion
3. Boost investment in the Green Investment Bank - £0.5 billion
4. Additional funding to expand and improve the International Space Innovation Campus (ISIC) (Plan for Growth, pg. 120) - £0.3 billion
5. Treble funding for connections for “super-connected” cities (Ibid, pg. 22 & DCMS) - £0.2 billion
6. Increase by 50% funding for broadband roll-out, aimed at rural areas (DMCS) - £ 0.25 billion
7. Double funding for Technology and Innovation Centres (BIS) - £0.2 billion
8. Quadruple funding for Centres for Innovative Manufacturing (ibid) - £0.15 billion
9. Treble investment in manufacturing & technology facilities for wind power (CSR, pg. 61) - £0.4 billion

Option B: The Rolling Back Route

1. Roll back cuts in University budgets (HEFCE) - £1 billion
2. Replace the EMA scheme (BBC) - £0.5 billion
3. Restore the full legal aid budget (Ministry of Justice, pg. 5) - £0.35 billion
4. Bus subsidies to be reduced by half projected amount (CSR, pg. 46) - £0.15 billion
5. Retaining funding for the BBC World Service, BBC Monitoring and S4C with the Treasury (CSR, pg. 66) - £0.35 billion
6. Trim reductions in the DWP budget by roughly 10% (CSR, pg. 67) - £0.7 billion

Option C: The Aremay Route

1. Increase science budget by roughly 10% (CSR, pg. 51) - £0.5 billion
2. Increase the Pupil Premium by 20% (CSR, pg. 41) - £0.5 billion
3. Measures from Option A - 2, 4, 5, 7 - £1 billion
4. Rail Expansion Fund (based on full estimate of the Northern Hub) - £0.8 billion
5. Social housing renovation and construction in deprived Local Authorities - £0.2 billion

Of course, one could spend the money all at once - for example, a £3.15 billion annual investment in a sovereign wealth fund would soon build a considerable source for new capital investment and future government income. Tax cuts - an immediate raising of the income tax threshold, or abolishing the 50p tax band - could also be a means of injecting the capital into the economy.

Either way, it’s clear that legalisation could - by at least one projection - raise a significant sum of capital for the Treasury that could be invested or returned in a number of ways. The benefits of legalisation to the Treasury should be considered more fully than they currently are; in these difficult financial times, additional capital to help shape our economy should be welcomed. That is, provided the state spends it well.