153

8th March, 1928

PERSONAL & CONFIDENTIAL

My dear Prime Minister,

AUSTRALIAN WINE AND THE BUDGET

During the last ten days I have received from Australia three personal cables from people associated with the wine trade, urging me to do everything I possibly could to influence the situation here in favor of further action by the Chancellor [1] to assist Australian wine against Portuguese and the so-called 'British' wine in the coming Budget.

The situation is roughly as follows: You will remember what occurred in the last Budget. [2] Immediately following the Budget, the London trade felt that the Lisbon and Tarragona wines had received a knockout blow and it is certainly true that, for some months, trade in these wines was very stagnant. The British importing houses and the Portuguese and Spaniards, however, put their heads together and devised a method which consisted of importing 2 gallons of wine at N.E. 25, paying 3/- duty, and 1 gallon of N.E. 42, paying 8/- duty. These wines are blended ex- bond London, with the result that a wine of somewhere about 30 strength is obtained, on which the minimum duty paid would have been 4/8d as against the Australian wine of 34 strength which has to pay 4/-. I used the term 'minimum duty' because I think that, in most cases, the blend does not consist of exactly two parts of low strength foreign wine to one part of high strength and I understand that, on an average, the blend results in payment of a duty of about 5/6d per gallon. This, however, is a very different story to the 8/- a gallon which war the Chancellor's intention.

The other side of the picture concerns the progress made in British wines. These, as you will remember, had an excise of 1/- per gallon levied on them for the first time in last year's Budget. The so-called 'British' wine is chiefly made from concentrated grape juice mainly imported from Greece and, to a certain small extent, from South Africa. To this is added a certain amount of sugar. The mixture is then fermented to a wine which may be fortified with any form of potable spirit, not necessarily grape spirit.

It is estimated that 3,000,000 gallons of this 'British' wine has been placed on the market during the twelve months.

As a result of a number of enquiries, I have reached the conclusion that the costs of placing the various wines in question on the British market in a duty or excise paid condition are as follows:-

Australian sweet wine 34 strength from 8/9d to 9/3 P. gal.

Blended Tarragona or Lisbon wine 8/- per gallon 'British' sweet wine 5/- " "

To the advantage enjoyed by the 'British' wine must be added the fact that the wine is delivered in returnable casks. Of course, the casks in which Australian wine is delivered could also be returned but, in that case, freight must be considered and further I understand that the Australian Coopers Union have refused to handle the re-imported casks. These facts suggest that Australian wine is still in a position of very considerable disadvantage on the London market in spite of the quite excellent intentions of the British Government, as expressed in the Budget of 1927.

There is, however, another side to the picture, as the following table will show:

Imports of wine for the years ending 1925 1926 1927 Portugal 8,500,811 7,844,698 6,498,181 Spanish red 2,272,839 2,017,696 1,586,525 Australian 1,028,464 1,756,746 4,248,576 This table shows a tremendous expansion in the importation of Australian wine but there is yet another factor, namely the quantity of wine that has actually gone into consumption. When one looks at these figures, one finds that the Portuguese and Spanish red wine have gone into consumption just to about the same extent as they have been imported, whereas, in the case of Australia, the figures are as follows:-

1925 1926 1927 Entered for home gal gal. gal.

Consumption 782,459 1,415,773 2,305,141 The result of this is to show that somewhere about 2,000,000 gallons of Australian wine in excess of home consumption have been imported. This last fact is quite sufficient to explain the anxiety of Australian wine makers as regards the situation and the slump in prices which has occurred.

To my mind these figures show, in the clearest way, the urgent need for better organization of marketing. At present every wine maker is offering Australian wine on the London market quite independently of everybody else and, as far as I can gather, the lack of system has given our competitors the chance of re- establishing their position.

The action which I have taken has been, firstly, to see Amery [3] and to place the whole facts fully before him. I attach hereto copies of two statements which I prepared at Amery's request. I told him that I was not prepared to make any representations on the subject of 'British' wine. He strongly approved this attitude but said that he would just like to have all the facts put before him in an unofficial way so that he could discuss the matter with the Chancellor. Secondly, I called on Sir Francis Floud, the Chairman of the Board of Customs. Floud, who has only been in this office for some six months, sent for the two other members of the Board and we had a very long conversation.

The Board assured me that they had received representations from British merchants importing Tarragona and Lisbon wines to the effect that the new duties were having a most detrimental effect.

The Board also said that the tendency of the Chancellor would be not to make any further alterations this year but to desire to give the trade another year in which to settle down and to see just what the developments were. They also said that, in view of the import figures shewing the great increase in the import of Australian wines and the decrease in Spanish and Portuguese, it would be extremely difficult for the Chancellor to make a case to the House for any further penalisation of the foreign wines.

I urged that the successful blending of the foreign wines was a development in the last few months and that the great disparity between Australian imports and the figures for Australian wines entered for consumption indicated that things were by no means satisfactory. I strongly suggested that, in the event of the Board of Customs satisfying itself that this blending of foreign wines was really taking place on a large scale, [the Board] should indicate that the Chancellor's intention, as expressed in the 1927 Budget, was being defeated and that, therefore, steps should be taken to render more difficult the practice of this blending.

The Board of Customs promised to place all these matters before the Chancellor but certainly held out no sort of hope of any probability of definite action.

In discussing this question with the Board of Inland Revenue, I did not raise the question of 'British' wines but they themselves told me that they were to receive a deputation from the British wine importers urging that the excise on 'British' wines should be increased from 1/- a gallon to a considerably higher figure. As Vine Products Ltd., the chief firm making 'British' wine, have had an extraordinarily prosperous year and have just declared a dividend of 30%, I should think there was a reasonable prospect of the Chancellor making some increase in this excise in the coming Budget, especially as if he only adds 1/- to the excise, it would mean an additional 150,000 to the Revenue. [4]

Yours sincerely, F. L. MCDOUGALL

1 Chancellor of the Exchequer, Winston Churchill.

2 See Letters 101, 103 and 111.

3 Leopold Amery, Secretary for the Colonies and for Dominion Affairs.

4 Bruce wrote on 14 April (the letter is on file AA:M111, 1928) that he was obliged to McDougall for this long letter. He referred to 'a fairly spirited brawl' in the Commonwealth Parliament over a reduction of the wine bounty in accordance with an undertaking given when the bounty was introduced to reduce it if the British preference on Australian wine increased. Even if the practice of blending continued, thus reducing the effective preference, the position was better than it had been when the bounty was first introduced, although he agreed that the position of Australian wines vis-a-vis 'British' wines had deteriorated. He concluded:

'The real necessity...is that the wine industry itself should take the steps which it has promised to take for the past three years, and put itself on a proper basis of organisation in connection with the marketing of its products'.