13.4 The affordability of tobacco products

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13.0 Introduction

13.1 Price elasticity of demand for tobacco products

13.2 Tobacco taxes in Australia

13.3 The price of tobacco products in Australia

13.4 The affordability of tobacco products

13.5 Impact of price increases on tobacco consumption in Australia

13.6 Revenue from tobacco taxes in Australia

13.7 Evasion of taxes on tobacco products

13.8 Tobacco industry arguments against tax increases

13.9 Smuggling a result of tax increases?

13.10 A regressive tax?

13.11 A threat to government revenue?

13.12 Future directions for reform of tobacco taxes

13.13 Hypothecation

13.14 Public opinion about tobacco tax increases

Acknowledgments

References

Attachment 13.1 Legislation relevant to tobacco taxation mentioned in this chapter: Commonwealth

Attachment 13.2 Legislation mentioned in this chapter: States and territories

The affordability of cigarettes is affected not just by their price and not just by their price compared to the costs of buying other goods and services. Affordability of cigarettes is also affected by the amount of disposable income people have to buy them.

13.4.1 Changes in affordability of cigarettes over time in Australia

The World Health Organization has suggested that the affordability of cigarettes can best be assessed by examining prices relative to earning capacity.48 Little data is available historically in Australia about the actual prices paid for cigarettes. However, using recommended retail prices as a guide, it is possible to assess changes in the affordability of cigarettes over time. Figure 13.16 shows the time taken by an Australian worker on average wages to earn seven days' worth of cigarettes in the most popular brand category sold at recommended retail prices since 1984. Table 13.10 shows detailed calculations.

In 1984, it was possible for a 20-cigarette-per-day smoker to earn enough money to purchase a week's supply of cigarettes in just over one hour. By 1998 it took two hours to buy the same number of cigarettes, and by February 2005, over two and a half hours.

Clearly cigarettes have become significantly less affordable to Australian workers over the past 25 years.

13.4.2 Affordability of cigarettes to Australian children

As with adults, young people's perceptions of the costliness of cigarettes are affected not just by recent price changes and the price of other goods and services but also by the amount of money they have available to spend on themselves. A study of 17-year-old students in Spain showed for instance that pupils with less pocket money were less likely to experiment with tobacco and less likely to become regular users.143 In Australia, a study by the National Centre for Research into the Prevention of Drug Abuse144 demonstrated that the probability of children having smoked in the last month was clearly related to the amount of pocket money children had at their disposal. The study showed further that between 1992 and 1994 increases in pocket money resulted in cigarettes becoming more rather than less affordable to students in Perth and Sydney, despite increases in cigarette prices—see Chapter 5, Section 5.3 for further discussion of factors affecting uptake.

Table 13.11 shows the recommended retail price of the most popular brand of cigarettes among children over the period from 1996 to 2005. It also indicates the average amount of pocket money that Australian teenagers reported having to spend on themselves in each of the years of the Cancer Council's triennial survey of smoking among secondary-school students. Based on this data, Figure 13.17 plots the number of cigarettes that could have been purchased by a 15-year-old on average levels of pocket money as determined in the surveys.[31]

Table 13.11 and Figure 13.17 make it clear that cigarettes became significantly less costly to young people between 1996 and 1999 relative to the amount of money they had available to spend on themselves. This has reversed markedly since 1999. On average pocket money, a 15-year-old child could afford to buy 16 fewer Peter Jackson cigarettes each week in 2005 compared with 1999, a decline of almost 16%.

Some commentators have speculated146 that greater spending on mobile phone calls, messages, ring-tones and so on may have contributed to declining smoking rates among teenagers, providing both an alternative item to denote social status, and resulting in less disposable pocket money for cigarettes.[32]

13.4.3 International comparisons in cigarette affordability

In their analysis of cigarette affordability internationally, Blecher and van Walbeek point out that it is not surprising that cigarettes tend to cost more in high-income than in middle-income and low-income countries: people also earn more in high-income countries.35 To compare the relative affordability of cigarettes in a range of counties they calculate the cost of 100 packs of cigarettes as a percentage of per capita GDP in two periods—the year 1990 and the years 1999 to 2001. Over the years 1999 to 2001, their data indicates that Australia ranked 48th of 70 countries. This means that, given average prices of cigarettes and GDP, cigarettes were less affordable in that period in Australia than in 48 other countries, including most of those included in Figures 13.14 and 13.15 above. Cigarettes were more affordable in 21 other countries. Interestingly these included the US, Canada and Singapore, all of which had higher cigarette prices than Australia did in 2006 (expressed as US dollars). Compared with prices and GDP in 1990, the price of cigarettes relative to income in the years 1999 to 2001 had increased more in Australia than in 71 other countries, meaning that affordability of cigarettes in Australia declined over the 1990s by more than it did in most other countries.[33]

In another international analysis of cigarette affordability, Guindon, Tobin and Yach compared prices and average weekly earnings in a range of countries in 1991 and 2001.147 In 2001, it took approximately 24 minutes to earn a single packet of 20 cigarettes in Australia[34]. Sydney ranked 33 out of 87 cities, meaning that it took longer to earn a single packet of cigarettes in 54 of the other cities for which data was collected than it did in Sydney. Guidon et al also found that, between 1990 and 2000, cigarettes became more expensive in most developed countries but relatively more affordable in many developing countries. Looking at increases between 1990 and 2000 in the number of minutes required to earn a single packet of cigarettes, Sydney ranked 11th of the 87 cities.

Analyses of cigarette prices, per capita GDP and average earnings for years subsequent to 2000 will no doubt be published in the international journal, Tobacco Control. In the meantime, a 'quick-and-dirty' analysis of international cigarette affordability for 2006 is provided by the so-called Big Mac index.

The Big Mac Index of Cigarette Affordability was proposed in 1996 as a light-hearted way of assessing the relative affordability of cigarettes internationally.148 The index calculates the number of cigarettes that can be bought for the price of a Big Mac hamburger in each country. The index uses figures from the Big Mac Index published each year by The Economist magazine149 which lists the price of a Big Mac in US dollars in a range of countries. Despite distortions caused by trade barriers on beef and other differences in input costs, several academic studies have concluded that the Big Mac Index provides a good indicator of purchasing power in each country, and an unexpectedly accurate predictor of exchange rates in the long run.150-152

A comparison of the Big Mac Index of Cigarette Affordability for 1996 and 2002153 showed that 15 of the 16 countries included in both analyses reported declines in this indicator of affordability over the period. A further update showed that 12 of the 20 countries for which data were collected in both periods showed declines between 2002 and 2006.154

Figure 13.18 shows relative affordability for 32 countries for which data were collected in 2006 and indicates that in 2006 Australia ranks fourth in the Big Mac Index of Cigarette Affordability[35]. Cigarettes in Australia remain much less affordable relative to the price of McDonald's fast foods than cigarettes and fast foods in most other countries.