Budget 2006 and Smoking: What it Will Say and What it Should Say

Monday 20 March 2006

ASH Media Briefing: Monday 20th March 2006


Budget 2006 and Smoking:

What it Will Say and What it Should Say


ASH experts are available for comment before and after the Budget statement.


  • Deborah Arnott: 020 7739 5902 and 07976 935987 (m)
  • Ian Willmore: 020 7739 5902 and 07887 641344 (m)

ASH has an IDSN line for radio interviews


What the Budget Will Say


The Chancellor is expected to raise the price of cigarettes only in line with inflation. Newspaper reports this weekend have suggested this will mean a rise of 8p a packet for an average pack of 20 cigarettes.


In October 2005, according to HM Revenue and Customs, cigarette prices were as follows:

  • Premium price cigarettes: £5.05
  • Mid price cigarettes: £4.79
  • Economy price cigarettes: £4.50
  • Ultra low price cigarettes £4.11.

(Source: HM Revenue and Customs Tobacco Factsheet: November 2005, http://www.uktradeinfo.com/index.cfm?task=facttobac)


In January 2006, consumer price inflation stood at 1.9%. This would suggest price rises as follows:

  • Premium price cigarettes: 10p
  • Mid price cigarettes: 9p
  • Economy price cigarettes: 8p
  • Ultra low price cigarettes 7p


However, the Bank of England’s quarterly inflation attitudes survey published today (Monday 20th March) shows predicted inflation over the next year at a median 2.6%. This figure would suggest price rises as follows:

  • Premium price cigarettes: 13p
  • Mid price cigarettes: 12p
  • Economy price cigarettes: 11p
  • Ultra low price cigarettes 10p


Therefore, if the Bank’s inflation forecast is correct, tax rises at the levels suggested in the weekend media would lead to a fall in cigarette prices in real terms. This would be bad news for public health.


Tax Rises: Previous Policy

In his 2000 Budget Statement the Chancellor raised cigarette taxes by 5 per cent above inflation, adding 25 pence on a packet of 20 cigarettes. In 2000, the Chancellor also hypothecated some of the additional moneys accruing from the duty increases on tobacco towards the NHS. In his Budget Statement in March 2000, the Chancellor said that “every penny of the extra revenue….[would go] to funding our hospitals and the National Health Service”. However, by the March 2001 Budget the Chancellor had abandoned this policy and announced that tobacco taxes would only increase in line with inflation.

Tax Rises and Consumption

Tobacco taxation reduces tobacco consumption because as the price goes up people quit smoking, cut back on the amount they smoke, or in the case of young people never start. Studies show that a 1% rise in relative cigarette price results in a fall in the amount smoked in the range -0.25 to 0.5% (Chaloupka et al 2002), commonly referred to as price elasticity. The young and poor people have been found to be most price sensitive with their consumption falling up to 10% in response to a real price increase of 10% (World Bank 2001).

Tax Rises as a Proportion of Total Price

Since 1997, tax levels for most brands of UK cigarettes have fallen as a percentage of total price. HM Revenue and Customs figures show:


  • Premium price cigarettes: tax 54.4% of total price in 1997 and 52.4% in October 2005
  • Mid price cigarettes: tax 56.2% of total price in 1997 and 53.7% in 2005
  • Economy price cigarettes: tax 57.5% of total price in 1997 and 55.2% in 2005.


In 2004, the total tax take from tobacco (smoothed) was £8.1 billion.


Smuggling and Counterfeit


Tobacco firms have used the level of smuggled and counterfeit cigarettes coming into the UK as an argument against further tax rises. HM Revenue and Customs Annual Report for 2004/5 showed revenue loss from tobacco fraud and smuggling at £2.9 billion in 2003/4. Of 72.5 billion cigarettes consumed, 12 billion were estimated to have been “successfully smuggled” (table 21). Of those cigarettes seized, 48% were counterfeit. Of genuine cigarettes seized, 8% were Sovereign (Gallaher), 7% were Superkings (Imperial) and 5% Dorchester (Gallaher) (Section 2.1). Major UK-based tobacco firms have themselves been accused of profiting from tobacco smuggling. ASH has previously criticised HM Revenue and Customs for complacency and bureaucratic inertia” over the issue.


What the Budget Should Say


<spanstyle=’font-size:11.0pt;mso-bidi-font-family:arial’>The price paid by the enduser should be increased by more than the growth in incomes so that tobaccobecomes less affordable, in order to decrease consumption. This requires notonly increasing tax rates but also controlling smuggling and reducing theincentive to trade down to budget brands or hand rolling tobacco.


<spanstyle=’font-size:11.0pt;mso-bidi-font-family:arial’>In particular:<spanstyle=’mso-spacerun:yes’>

  • <spanstyle=’font-size:11.0pt;font-family:symbol;mso-fareast-font-family:symbol;mso-bidi-font-family:symbol’>Tax on cigarettes should be raised by at least the rate of inflation.
  • <spanstyle=’font-size:11.0pt;font-family:symbol;mso-fareast-font-family:symbol;mso-bidi-font-family:symbol’>Increases should be on the specific tax element as far as possible toensure that the price of the cheapest tobacco is increased proportionately morethan that of higher priced brands, so discouraging trading down.<spanstyle=’mso-spacerun:yes’>
  • <spanstyle=’font-size:11.0pt;font-family:symbol;mso-fareast-font-family:symbol;mso-bidi-font-family:symbol’>Hand rolling tobacco (HRT) – the tax rate should be increased at leastin line with cigarettes, to discourage trading down.
  • <spanstyle=’font-size:11.0pt;font-family:symbol;mso-fareast-font-family:symbol;mso-bidi-font-family:symbol’>Cigars – increases should also be kept in line with cigarettes.


On smuggling, ASH would like to see the following commitments:


  • At the first Conference of the Parties of the Framework Convention on Tobacco Control it was agreed to develop a protocol on illicit trade and the UK should work collaboratively with the EC and other Member States to help develop such a protocol.
  • The UK should join with OLAF (the European Union anti-fraud organisation) and other EU Member States in the case against RJ Reynolds and Japan Tobacco for money laundering.
  • The Government’s enhanced strategy to tackle smuggling as announced in the pre-Budget report should be effectively implemented.




Commenting, ASH Director Deborah Arnott said:


<istyle=’mso-bidi-font-style:normal’>“Taxation on tobacco is a hugely important way of discouraging peoplefrom starting to smoke and helping them to quit. That’s why the tobacco firmsare so desperate to prevent further rises and why they use smuggling as anexcuse to persuade the Chancellor to give up on tobacco tax increases.


<istyle=’mso-bidi-font-style:normal’>It looks very much as if this Budget may see a continuing fall in tax asa percentage of total tobacco prices, encouraging more smoking and underminingthe good work done by the House of Commons recently in voting for comprehensivesmokefree legislation in workplaces and enclosedpublic places. Let’s hope the Chancellor has enough nerve to ignore mediaspeculation and the blandishments of the tobacco trade and do what’s right forpublic health.”


<spanstyle=’font-size:11.0pt;mso-bidi-font-family:arial’>- ENDS –