1 The economics of tobacco control in Jamaica: Will the pursuit of public health place a fiscal burden on the government? Presentation to the Public Forum, Jamaica Pegasus Hotel, 15 April 2005 Corne van Walbeek, University of Cape Town, South Africa

2 Policy tools to curb tobacco use Supply-side tools –Discourage production of raw tobacco –Youth access control –Smuggling control Demand-side tools –Increased excise taxes –Advertising restrictions –Clean indoor air policies –Health warnings on packaging –Content disclosure –Greater health awareness

3 Increased excise taxes Despite addictiveness, demand for cigarettes responds to price changes Price elasticity of demand –Developed countries: around -0.4 –Developing countries: between -0.4 and -0.8 Increased excise taxes → increased price Real price is important

4 Per capita cigarette consumption and cigarette prices in Jamaica

5 Aggregate cigarette consumption and real cigarette prices in South Africa

6 Advertising restrictions Industry position “Cigarettes are in mature phase of product life cycle. We advertise to smoking adults to encourage them to switch to our products. We don’t target non-smokers and youth…” Tobacco control position –Advertising enhances social acceptability of smoking –Advertising is inherently misleading: it glamorises a potentially deadly habit –If advertising was so ineffective, why do monopolists advertise so aggressively?

7 Advertising restrictions (cont.) The global empirical evidence –Econometric evidence not conclusive either way –Partial bans are less effective than total bans –Effect of total advertising ban: about 5 % reduction in consumption The Jamaican experience –Cigarettes are advertised less than in most other countries –Local peculiarity that most cigarettes are sold as single sticks –Impact of advertising ban is likely to be limited

8 Clean indoor air policies Rationale: protecting non-smokers from ETS Industry is strongly opposed to this policy –“Cater for the needs of both smokers and non- smokers” Little published empirical evidence on its impact on cigarette consumption Main benefits: –Denormalises smoking –Transfers property rights to non-smokers

9 The price-consumption relationship in Jamaica

10 Current taxation structure on Jamaican cigarettes (per 100 cigarettes) Before tax adjustments After tax adjustments Base value SGT (specific) SGT (ad valorem) Subtotal Excise tax (23%) Subtotal GCT (15 %/16.5 %) Tax inclusive price Tax amount Tax burden (Tax/Tax-inclusive price)

11 Estimating the demand for cigarettes in Jamaica The focus is on the magnitude of price elasticity of demand (ε p ) With current data ε p cannot be accurately estimated BUT it is statistically significant in practically all specifications Demand for cigarettes is price inelastic Implication: A price increase results in a less than proportional decrease in quantity consumed

12 Increasing the excise tax on cigarettes Price elasticity of demand has major impact on effectiveness of excise tax to (1) reduce cigarette consumption (2) raise government revenue Assumptions: –2003 base for cigarette price and consumption –Real industry price does not change because of tax increase –10 per cent increase in real excise tax

13 Impact of a 10 per cent increase in cigarette tax, given different price elasticities of demand Price elasticity% change in consumption% change in government revenue

14 Implications For any reasonable value for ε p, an increase in the excise tax results in –a decrease in cigarette consumption –an increase in government revenue There is no “trade-off” between the interests of the Ministry of Health and the Ministry of Finance At current tax levels, there is significant room for increasing the excise tax on cigarettes

15 Is there a ceiling for the tax rate? International perspective –Minimum EU tax incidence: 57 % of retail price –UK and Scandinavia: more than 75 % –South Africa: 50 % (from 32 % in 1993) Impact of raising tax to 57 % of retail price ( assuming real industry price unchanged and ε p = -0.5 ): –Real tax per pack increases by 22 % –Real price increases by 12 % –Consumption decreases by 6 % –Real government revenue increases by 15 %

16 The potential to increase taxes on cigarettes in Jamaica (with ε p =-0.5) Impact of yesterday’s tax increase The starting point Minimum EU tax

17 Conclusion Tobacco control is an important public health concern The best tobacco control tool is an increase in the excise tax For both Ministries of Health and Finance it is a WIN-WIN strategy The benefits of a tobacco control strategy are real and tangible

18 Back-up slides

19 Real excise tax and real excise revenue in South Africa

20 Industry response to the rapid excise tax increases in South Africa

21 Cigarette consumption, excise tax revenue and industry revenue in South Africa

22 The latest increase in recommended price of pack of Craven “A” Previous recommended retail price = J$ 180 New recommended retail price = J$ 220 Increase = J$ 40 Tax increases per pack –SCT: J$ –Excise tax: J$ 3.00 –GCT: J$ 2.41 –GCT (increased rate)J$ 2.09 –Total tax increase: J$ Increase in profits per pack: J$ 19.46

23 Cigarettes’ burden on the expenditure patterns of households Per capita consumption of cigarettes = 502 cigarettes per year (2003 figures) Of every six adults, one smoked and five did not Average consumption of smokers = 3016 cigarettes per year Average expenditure on cigarettes = J$ per smoker Per capita GDP = J$ for adults (approx.) in 2003 On average, smokers spent 14.3 per cent of their gross income on cigarettes