1 Banning Smoking in Public Places Cost benefit analysis of the proposed legislation for England Public Expenditure Analysis 3 rd May 2006 Caroline Godkin Jennifer Potter Jennifer Sleppy

2 Structure of this presentation 1.Background and outline of the CBA 2.Review of the costs 3.Review of the Benefits 4.Sensitivity Analysis 5.Summary and Conclusions

3 1. Background

4 An analysis and critique of the case for a smoking ban in enclosed public places Legislation in February 2006 was debated for banning smoking in all enclosed public places in England Cost benefit cases were constructed for four options: To continue with the voluntary approach To make all enclosed spaces smoke free To give local authorities powers to make enclosed spaces smoke free To make all enclosed spaces smoke free with exceptions The option that was passed, and that will be considered in this critique, was a ban in all spaces without exceptions

5 Some smoking facts about the UK Smoking rates in Great Britain have fallen every year and are currently at about 26% of the population Cigarettes are extremely highly taxed Duty of 22% of price plus £100 per 100 Value added tax of 17.5% There are significant rates of cigarette smuggling from Continental Europe exploiting lower taxes in other EU countries Percent of Great Britain Population who Smoke

6 The Net Benefits for a complete ban were estimated to be c. £1.7bn for a single year Costs Year 1 £m Implementation0 Enforcement20 Education / Communication1 Tax revenue losses from falling tobacco sales Employees1,145 Customers150 Losses to the tobacco industry129 Production losses (smoking breaks)430 Consumer surplus losses to continuing smokers155 TOTAL COSTS2,030 Benefits Year 1 £m Averted deaths from SHS371 Averted death from smokers giving up (quitters)1780 Averted deaths from reduced uptake of smoking550 Estimated savings to NHS for reduction in overall prevalence100 Reduced sickness absences Production gains from reduced exposure to SHS Safety benefits63 Estimated annual savings for maintenance and cleaning100 TOTAL BENEFITS3,374-3,784

7 Smokers, smokers trying to quit and non-smokers are all given standing The study considered the losses in consumer surplus for smokers who would not be able to smoke indoors both at work and in bars The consumer surplus loss of those trying to quit was not considered as it was viewed that they would be “happy to give it up” The considerable number of non-smokers were given standing through the reduction to second hand smoke The tobacco industry as well as The Exchequer were given standing through consideration of their losses from any ban

8 The study contained few details of calculations and was inconsistent The study used many calculations and assumptions that were not stated in the paper Detailed research was required to be able to understand values given for costs and benefits Both sections were full of inconsistencies Reductions in smokers and amount of cigarettes smoked varied Items were double counted

9 2. Review of the costs

10 The total costs are estimated to be £2bn for the first year Costs Year 1 £m Implementation0 Enforcement20 Education / Communication1 Tax revenue losses from falling tobacco sales Employees1,145 Customers150 Losses to the tobacco industry129 Production losses (smoking breaks)430 Consumer surplus losses to continuing smokers155 TOTAL COSTS2,030 These are the costs that will be looked at in detail

11 Many of the costs are overstated For employees the loss in their consumer surplus is counted as though they would stop smoking altogether – you would just go outside to smoke In addition counting the production losses from people going outside double counts the employee losses i.e. you either stop smoking or you go outside Losses to the tobacco industry are taken at a flat 10% of the tax revenue with no explanation of the basis of the calculation

12 Inconsistent assumptions are used Employee smokers’ consumer surplus is considered but not that of customers Overall the predicted fall in revenue represents a 19% fall in duty for England In 2004 – 05 tobacco duty collected in the UK was £8.1m or £6.88m for England The suggested revenue losses for the smoking ban is £1.3m or 19% of the total revenue receipts Compare this with reduction in smoking of 6.5%

13 The cost to the health service of additional years of life is not considered Increasing life expectancy will place an additional burden both on the health service and also on the pensions system The report states that there has been no additional value assigned to the costs of increasing health care and pensions We have considered the additional costs of healthcare after 10 years of the ban being in place

14 After the first year we have assumed the costs will reduce Revenue losses to the Exchequer will reduce as there are fewer people giving up smoking Consumer surplus losses will be reduced as there are fewer people smoking We have assumed that the additional health and pension costs will be seen after 10 years of the ban

15 Our costs are significantly lower than the costs estimated in the study Sources of Decreased Costs

16 3. Review of Benefits

17 The study miscalculated the benefits Health Benefits: Reduction in illness and mortality from: Lung cancer Heart disease Asthma attacks Childhood respiratory disease Sudden infant death syndrome Life expectancy gain from reduced smoking uptake as a result of the ban Life expectancy gain for smokers who quit as a result of the ban Environmental and Economic Benefits: Reduction in insurance costs to the Department of Health, National Health Services (NHS), from reduced smoking and exposure to secondhand smoke Reduced cost from sickness absences and productivity gains Reduced fire risk – including damage, injury, and death Reduced cleaning and maintenance costs

18 Research from other studies informed the calculations for our study Department of Transport Value of a human life lost at 43 yrs - £1m Value of an injury at 43 yrs - £40,000 Value of an additional year of life £28,571 Scaling the research to reflect the population of England Estimates of costs to the NHS for smokers British medical journal - death rates from SHS in public places

19 Estimate of Benefits from Smoking Ban Benefits from RIA study Year 1 £m Averted deaths from SHS371 Averted death from smokers giving up (quitters)1780 Averted deaths from reduced uptake of smoking550 Estimated savings to NHS for reduction in overall prevalence100 Reduced sickness absences Production gains from reduced exposure to SHS Safety benefits63 Estimated annual savings for maintenance and cleaning100 TOTAL BENEFITS3,374-3,784

20 Our benefits are significantly higher than the benefits estimated in the study Sources of Increased Benefits

21 4. Sensitivity analysis

22 Original study ignored sensitivity; we tested our assumptions Discount Rate Original study did not discount Base Case: 6% (Treasury Green Book - standard in UK) Vary Between: O% and 15% Time Horizon Original study looked at only 1 year Base Case: 10 years Vary Between: 1 year and 40 years Other Point Estimates Reduction in cigarettes smoked and people smoking them Savings from reduced illness; productivity gains Vary each around our best estimates Monte Carlo analysis

23 NPV falls but remains positive as discount rate increases

24 NPV increases as time horizon extends

25 Focus on time benchmarks for easier assessment DescriptionYearsNPV Original Study1£2,971 Million Max Parliament Term5£10,885 Million Base Case10£18,594 Million Generation View40£35,914 Million

26 Used excel’s RAND function to set up Monte Carlo analysis Ran 5,000 iterations Recorded NPVs in data table Mean£18,773 Million Median£18,200 Million Max£41,369 Million Min£3,950 Million Descriptive Statistics

27 Monte Carlo analysis shows NPV will most likely fall between £15-30B

28 5. Summary and conclusions

29 Original study rife with bad data and opaque analysis Cost and benefit calculations were: Not transparent Based on inconsistent assumptions Subject to double counting in numerous instances Failed entirely to consider cost to the health service of additional years of life No discounting; involved time horizon of only one year

30 Shortcomings of study possibly explained by political realities Some of the gap may be due to the fact the intent was to pass a less stringent restriction Wanted Option 4: partial ban – smoking allowed where no food served Got Option 2: complete ban – all enclosed spaces smoke free Overstating of costs to the tobacco industry could reflect significant campaign contributions Despite the poor analysis, Option 2 was passed into legislation, and the ban will be in place in 2007.