By increasing the tax on tobacco in his autumn statement, chancellor George Osborne could boost the population’s health and the public finances, writes Craig Pickering
The link between smoking and lung cancer and other diseases is so well substantiated that nowadays we take it for granted. Successive governments have had as a priority a reduction in the prevalence of smoking. There has been a good deal of progress but there’s a long way to go.
‘The 1947 tax raise provided convincing evidence of the health and revenue effects of a large increase’
Smoking has reduced in volume significantly in recent decades but a significant minority continues to smoke. In England, the number appears to be flatlining. According to government statistics for 2012, 20 per cent of people 16 and over in England reported smoking, almost the same as in 2007, 2008 and 2011, suggesting other measures are losing their impact.
New Zealand had an identical experience. For three years the proportion of adult smokers was stuck at 21 per cent. The authorities acted decisively. The Treasury raised tobacco taxation by 10 per cent a year over 2010-12 and is contemplating a further increase, with the explicit aim of discouraging smoking. Revenue has increased since 2010.
Although it is too early to assess the impact on smoking volumes, it seems likely that such a swingeing increase has had a perceptible effect that will continue for some time.
The 50 per cent increase
New Zealand is not alone. France is a well documented example of the deterrent effect of higher taxes. Between 1990 and 2001, cigarette taxation was raised significantly. More than 97 billion cigarettes were bought in 1991, down to under 70 billion in 2003. Revenue rose steadily throughout the period.
No British government has ever announced such a significant increase to combat the health effects of smoking. But there is one fascinating episode in UK history of a huge increase designed to discourage smoking, which provides lessons if the chancellor will listen to them.
‘Young people are now much more likely to smoke than pensioners, despite extensive anti-smoking campaigns’
It happened in 1947. The economy was in some respects in even worse shape than in wartime. Our reserves of dollars were disappearing fast, despite a US loan negotiated as Keynes’ last act in government.
Officials of the day liked to say that our reserves were going up in smoke. A significant share of dollar reserves were used to buy Virginian tobacco to make cigarettes for a huge UK market. Around 80 per cent of adult men and 40 per cent of women smoked.
Hugh Dalton, the first chancellor in Attlee’s government, decided dollars could no longer be burned up in this way. He increased tobacco tax by 50 per cent. His customs officials were horrified. Their strategy was to maximise revenue from tobacco duty by setting it at a level that would not discourage successive generations from taking up the habit.
For many years afterwards, one of customs’ chief concerns was that young people were not taking up smoking in sufficient numbers. As they paradoxically liked to say, tobacco duty was paying for the NHS − it made up a sixth of government revenue at its height.
Dalton ignored customs’ warnings. He was right to do so. The impact on smoking was dramatic. Over a decade later, the tobacco industry was still complaining that 3 million people had been lost to smoking. Nor were customs right in their apocalyptic prophecies about revenue. In the year after the 50 per cent increase, revenue jumped by 27 per cent.
Dalton did not have health in mind in making his decision. The first epidemiological research providing strong evidence of a link between smoking and lung cancer was not published in the UK or the US until 1950 (though Nazi Germany published such work as early as 1938). But the 1947 raise provided convincing evidence of the health and revenue effects of a large increase.
Yet the lesson of 1947 was quickly forgotten. Customs, the Treasury and the industry fought a rearguard action, successful for many years, against even admitting that tax might affect cigarette consumption. Even the Royal College of Physicians, in its seminal report on smoking and cancer in 1962, argued against a tough tax increase.
You might think times have changed. Certainly, chancellors since the 1970s, when announcing tobacco duty increases on budget day, have often cited public health as their rationale. But such claims should be taken with a canister of salt. No budget increase has ever come near 50 per cent. Since 2008, no budget increase has even come close to 10 per cent.
‘There is evidence from British history and internationally that tax can be used to discourage smoking’
The flatlining in smoking volumes since 2008 suggests other measures are losing their impact. It is particularly concerning that those aged 20-24 reported the highest prevalence of cigarette smoking in the 2012 report (28 per cent), while those aged 60 and over reported the lowest prevalence (13 per cent). Five per cent of 11-15 year olds are regular smokers.
This is in marked contrast to the early 1950s. That is, as economists say, “non-trivial”. Young people are now much more likely to smoke than pensioners, in a reversal of the trend that worried customs and Imperial Tobacco so much in the late 1940s and early 1950s. Yet the younger generation has been subjected to extensive anti-smoking campaigns and education, which was almost unknown when the over-60s were children.
There is evidence from British history and internationally that tax can be used to discourage smoking. The industry will argue that smuggling will blunt the effect of an increase and encourage crime. But it seems a very brave assumption to believe the reduction in demand for legitimate cigarettes could come close to being matched by increased smuggling (and it is open to the tax authorities to put more resources into combatting smuggling).
So there’s an opportunity for the chancellor. He can certainly reduce the number of people who suffer because of smoking-related diseases. He may well find that a sorely needed windfall for public finances is also on offer. A modest 30 per cent increase might be a good place to start.
Craig Pickering was formerly head of the industry division at the Treasury and is the author of Death and Taxes: how the government shortened the lives of smokers, published as an e-book from Amazon on 9 January