The government has threatened to reverse the recent growth in the lower-priced tobacco sector by changing the way in which it levies duty, narrowing the price differential between premium and economy cigarette brands, and between cigarettes and hand-rolled tobacco.

Revealing his Budget for 2011, Chancellor of the Exchequer George Osborne said new structures would put a stop to manufacturers "exploiting" the duty regime to produce cheap tobacco products.

"Why would smokers choose to pay higher prices in my store when they can easily source cheap smuggled cigarettes for a fraction of the price? Europe's illicit traders must be having a party." 
Arif AhmedAhmed's News, Coventry 

"In this age of austerity smokers are looking for a bargain, so I expect these increases to have a negative impact on small shops, especially when the price of cigarettes has already gone up more than 70p in the past 18 months." 
John Abbott, Millbank News, Darlington 

"I was shocked to see how much economy priced cigarettes had risen by at the cash and carry. Cheaper tobacco products are important to my shoppers, so I'm worried about the impact." 
Paresh PatelCockburn Convenience, East London
The change has seen the cost of a packet of economy priced cigarettes, such as Imperial's JPS Kingsize Blue, rise by 50p compared with 33p on premium cigarettes such as Silk Cut.

The duty shake-up would help to "reduce smoking and improve the nation's health," said Osborne, who also announced further 2% above-inflation tax increases on all tobacco products.

However, retailers fear the moves will simply push cash-strapped smokers towards the cheaper illicit trade.

"People buy economy because that is all they can afford, particularly in the current economic climate. Surely this is just another tax increase for those who can least afford it," said Dave Newman of Westhill Stores, Hastings, East Sussex. "The only winners are smugglers, because these increases will drive more people to seek out smuggled and counterfeit tobacco. At £7 for 50gm of tobacco, can you blame them?"

Retailers would also lose out, Dave added. "If margins are maintained then we will earn a few pennies more per pack, but as stated this will not compensate for the lost sales, as people switch to 'under the counter' stock. Then with a wholesale increase of about 8% plus VAT, retailers' stockholding has increased, which is a massive burden for those whose cash flow is tight."

The increases were also likely to undermine the effectiveness of the government's new Tackling Tobacco Smuggling Strategy to be published this month, tobacco manufacturers said.

Tobacco Manufacturers Association chief executive Christopher Ogden said the2011 Budget demonstrated a "complete lack of joined-up thinking" as taxation was "the acknowledged driver of the illicit tobacco trade".