THE NATIONAL LOTTERY
The National Lottery has been running for nearly 18 months. This article discusses its operation and considers some of the effects it may have had on the economy at large.
The idea of state run lotteries is not a new one. Britain's first national lottery was in 1569, and from the mid-18th century to 1826 was an annual event. Indeed, funds for the construction of the British Museum were raised in this way. Today, all European countries operate national lotteries as do many other countries including Australia, Brazil, Canada, Israel, Japan, New Zealand, the former Soviet Union and the US, where each state runs its own lottery. But the UK National Lottery is unique within Europe in involving private enterprise in its operation.
The UK National Lottery, which was launched on 14 November 1994, was set up to raise money for a variety of good causes and thereby "benefit the public and enhance the quality of life in our country". There is no doubt that it has been a remarkable success. It is estimated that 90 per cent of adults have played the National Lottery game. There are around 30 million regular players, and it is the largest lottery in the world.
The chart shows the weekly lottery sales to date. In an average week, about £65 million is spent on the weekly draw, but this can swell to more than £100 million in 'rollover' weeks. The upsurge in the series in March 1995 corresponds to the introduction of scratchcards. Scratchcard sales peaked soon after their introduction, but are still around £20 million a week. In total, lottery ticket sales amounted to nearly £5 billion in 1995. This exceeds consumers' expenditure on newspapers and magazines, and that on confectionery.
For every £1 spent on the National Lottery, 5p is kept by the retailer and the remaining 95p is passed to Camelot, the Lottery operator. The 95p is disposed of by Camelot as follows:
50p returned as prizes
28p paid into the National Lottery Distribution Fund
12p paid to Customs and Excise as betting duty
5p for Camelot's operating costs and profits
About 28p of every £1 spent on the Lottery tickets goes to 'good causes': the arts, sport, national heritage, charities and the Millennium Fund. This money is paid into the National Lottery Distribution Fund (NLDF) each week by Camelot, and is subsequently allocated equally between the five distributing bodies.
In terms of the economic impact of proceeds going to the NLDF, there are two related areas of interest. In the first few years, as initial projects take time to get off the ground, there will be a lag between payments into and payments out of the NLDF. As money paid into the NLDF score in the National Accounts as general government revenue, this will tend to reduce the Public Sector Borrowing Requirement in the short term, all other things equal.
Secondly, much of the money spent on good causes will be used to finance capital projects. Hence, the net effect of the Lottery will probably involve some redistribution of expenditure from consumption to investment.
This will be of particular benefit to the construction industry.
The National Lottery is subject to a betting duty levied at 12 per cent. This raised nearly £600 million in 1995. The rate of duty was set taking into account the level of tax on other forms of gambling and the extent to which spending is likely to be diverted from other activities. Indeed, the Lottery betting duty of 12 per cent is intended to be broadly 'revenue neutral'. This means that the revenue it raises should offset the indirect tax lost from expenditure diverted from other goods and services. It is difficult to say whether the outcome meets this aim because of the many factors that influence the level of tax revenue, and because it is difficult to assess with any certainty what expenditure has been displaced. However, at present there is no substantive evidence to suggest that the introduction of the lottery has had a significant impact on overall receipts from indirect taxes.
Consumers' expenditure on the Lottery is, by national accounting convention, stake money less prizes. Hence, with sales of £5 billion in 1995 (and 50p of each pound going to prizes) the direct effect of the Lottery was to boost consumers' expenditure by £2 1/2 billion. In order to assess the net impact of the Lottery on consumption, we require an assessment of (i) other expenditure displaced by money spent on Lottery tickets, and (ii) what winners do with their prize money.
Displaced expenditure
At least some of the money spent on Lottery tickets will have displaced spending on other goods or services. The balance must by definition be diverted from saving.
It seems clear that the Lottery has at least hit other betting and gaming expenditure, and the Chancellor acknowledged this in cutting general and pool betting duty in the November 1995 Budget. However, it is extremely difficult to identify which other items of consumer spending have been displaced (or indeed boosted in the case of items that are complementary to the Lottery) by ticket sales. Surveys have attempted to answer this question, but with little success, since few people are able to say what they forego in order to buy their tickets.
Nevertheless, some estimates have been produced. For example, the Henley Centre estimate that the Lottery displaced £2.6 billion of consumer spending in its first year, reducing expenditure on entertainment by around £650 million, and expenditure on food, confectionery and tobacco by £450 million. Lloyds Bank have suggested that the Lottery reduced retail sales growth by as much as 2.5 per cent in its first year, by diverting spending away from retail items. However, this estimate does not account for spending from prize money.
Spending from prize money
50p from every ticket sale is returned to consumers in the form of prizes. What winners decide to do with their prize money - in particular how much of it they decide to spend - will be important in determining the overall impact of the Lottery on the economy. This in turn will depend on the size and distribution of prizes.
On average, around half the prize money is distributed in sums of less than £100, and it seems quite likely that a significant proportion of these smaller prizes will be spent. The majority of the remaining prize money goes to the jackpot winners. Anecdotal evidence suggests that jackpot winners tend to make one or two large purchases and then save the rest of their prize.
Changes in the pattern of consumer spending may also have implications for the demand for money. In general, Lottery tickets are bought with cash, so to the extent that spending on the Lottery is additional expenditure, or expenditure that replaces other credit or cheque financed expenditure, it will have tended to boost holdings of narrow money (M0), with a one off effect on its growth rate in 1995.
However, against this, retailers receiving the cash are likely to demand less cash in net terms from banks. Therefore, the net effect of the National Lottery on the demand for narrow money is difficult to quantify.
The National Lottery has had an extremely successful first 18 months. So far, it has raised around £1.8 billion for good causes, and at the same time it has provided a great deal of enjoyment.
It is extremely difficult to estimate the Lottery's effect on the economy. All estimates are sensitive to assumptions about what expenditure has been displaced, and what winners do with their prize money. However, it may be possible to make more informed judgements when a longer run of data is available
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