17.4 Benefits of tobacco to the economy?

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17.4.1 Greater consumer spending?

Retail sales of cigarettes and other tobacco products totalled $10.1 billion in 2006–07, representing about 5% of all retail sales in Australia.37 About 35,000 retail businesses sell cigarettes and tobacco products in Australia.38 A study commissioned by British American Tobacco Australia estimated that in 1999–2000, about 57,500 full-time equivalent jobs were generated by the demand for tobacco products.39 This total included 310 people employed in growing, 3270 in manufacturing, 18,460 in retailing and distribution and 35,650 as a result of the flow-on effect in other sectors.38

The tobacco industry argues that it generates much-needed employment and government revenue. However there are two basic flaws in this argument. Firstly, it underestimates the magnitude of tobacco's impact on the economy by ignoring costs such as lost productivity and provision of health care for illnesses caused by smoking. Secondly, the industry overstates the importance of jobs in the tobacco industry by assuming that resources devoted to tobacco production and distribution would disappear if tobacco production were reduced or if sales were to decline.

As explained by Warner and Fulton in a full appraisal of the tobacco industry's economic arguments, 40 if smoking prevalence were to reduce significantly, it can be expected that expenditure previously allocated to tobacco would be reallocated to alternative goods and services. Similarly, if no tobacco companies existed, financiers would invest their capital in other industries.40 The effect on employment would be minimal and normal growth in output and employment would absorb the minor economic effects of reduced smoking.40 Tax revenues could decline if governments chose not to raise the levels of other taxes to compensate for declines in tobacco tax revenue, but new economic activity without tobacco would naturally generate increases in revenues from other sources.40 Growth in incomes would also increase income-related and employment-related taxes.40

Warner and Fulton's arguments are borne out in the results of an Australian study carefully modelling the marcroeconomic and distributional effects of reduced smoking prevalence in New South Wales.41 In this study prepared for the Cancer Council NSW, Junor, Collins and Lapsley simulate the economic impact of a 25% reduction in smoking prevalence in NSW on output, employment and other marcoeconomic variable under seven different scenarios with different combinations of assumptions concerning the reallocation of smoking expenditures and the government's budgetary response to reductions in tobacco tax revenue. Under the four scenarios where the resources saved due to reduced expenditures on smoking are reallocated to other forms of spending, Junor et al find that total output in NSW following a 25% reduction in smoking prevalence would change by between ?0.006% and +0.003%. Total employment would reduce by between 407 and 908 jobs. Across the whole economy in NSW this is a decline of between 0.015% and 0.034%, (that is, less than four one hundredths of one percent).41

17.4.2 Reduced lifetime demand for health care services?

It is often argued that smokers actually save the taxpayer money by dying early, thereby avoiding lengthy and expensive care in old age.42, 43

A Danish study has examined the question of lifetime impact on health care by estimating the health costs to society over the entire lifetime of smokers compared to those who quit smoking.44 The researchers found that the potential lifetime health costs to society associated with continuing to smoke are substantial, in terms of both excess health care utilisation and reduced labour supply. The potential direct and productivity lifetime health cost savings to society associated with quitting are highest at the younger ages. Comparing 35-year-old ex-smoking men who quit smoking at the age of 35 with 35-year-old continuing smokers, the direct lifetime health cost savings of smoking cessation to society are 30–42%. The corresponding results are 34–43% in ex-smoking women. However the direct lifetime cost savings of smoking cessation to society is reduced to less than 12% in ex-smokers who quit later than at the age of 55.

17.4 3 Additional revenue for government?

Revenue from excise and customs duty and GST on the sale of tobacco products in Australia exceeded $6.5 billion in 2005–06, contributing a total of almost 3% to total government revenue.45 As the prevalence of smoking declines, fewer tobacco products will be purchased and fewer will attract excise and customs duty and GST.

Would reducing tobacco consumption have a negative impact on government budgets?

The answer to this question is 'no' if declines in tobacco consumption were achieved through increases in tobacco taxation. It could still be 'no' even in the absence of increases in tobacco taxes.

As discussed in full in Chapter 13, Section 13.11, because tobacco taxes make up less than 70% of the final price, and because demand for tobacco products always decreases by a smaller percentage than the percentage by which prices increase, then increases in taxes on tobacco products will always result in additional revenue for government.

People who do not purchase tobacco are likely to purchase other goods and services, most of which will also attract GST. However, because only a limited number of goods and services attract customs and excise duty, revenue from indirect taxes will also therefore decline along with reduced use of tobacco products unless the federal government continues to increase rates of excise and customs duty on tobacco products.

Even without increasing customs and excise, is would still be possible for the government to fully compensate for declining indirect tax revenue due to declining use of tobacco products. It could increase rates of income tax (admittedly not popular with voters); it could increase other taxes and charges; it could reduce expenditure on programs and services; or it could do a combination of these things.

17.4.4 Net positive impact on government budgets?

We know that the total costs of tobacco use to Australian society are very great. But what is the picture if we look more narrowly at the current levels of revenue from taxes on tobacco products in comparison to the total levels of expenditure by federal and state governments that result from tobacco abuse?

Tables 17.9 and 17.10 indicate the impact of tobacco abuse on federal and state budgets in 2004–05.

Apart from the net costs to the federal government of treatment of diseases attributable to tobacco use, smoking also reduces revenue to government from taxes on income, duties on other goods and other indirect taxes. This is because citizens who smoke tend to leave the workforce earlier. Further, many people who smoke die prematurely before their productive years are over. People who die early no longer earn income or consume and therefore do not pay taxes on that income and those purchases.

Even taking into account the considerable revenue forgone in income and indirect taxes resulting from smokers having died prematurely and not being in the workforce or consuming products, in 2004–05 tobacco tax revenue exceeded tobacco-attributable costs borne by the public sector by more than $3.5 billion. Of this surplus, $2.7 billion accrued to the Commonwealth and about $800 million to state and territory governments.

Does the net positive impact of tobacco abuse on government budgets mean that society is better off because smokers die early due to smoking?

A report commissioned by Philip Morris in 2000 attempted to quantify the effects of smoking on the public finance balance in the Czech Republic.43 The report claimed that benefits from tobacco, such as savings on health care costs for people who die prematurely from smoking, far outweighed the costs of treating smokers while they are alive. Authors of the report also claimed that since smokers die younger, the government saves on old age pensions.

Apart from the ethically dubious notion that it is acceptable for a group of people to die prematurely in order that government spending and taxes may be lower, unlike Collins and Lapsley's full analysis of social costs, the Philip Morris study only considered the immediate effect on public finances and not the full costs for government, the business sector or for individuals. It thus provides a misleading and incomplete representation of the economic impact on society as a whole.46 The study fails to take into account the value of forgone smokers' income and the value of the smokers' contributions to their households and to the rest of society.46