Budget 2004: What it will say and what it should say

Thursday 11 March 2004


1)      The price of cigarettes should increase by more than the growth in incomes, so that tobacco becomes less affordable and consumption falls.

2)      In particular:

·         Tax on cigarettes should be raised by 3% above inflation.

·         Increases should be on the specific tax element so that the price of the cheapest tobacco is increased proportionately more than that of higher priced brands, discouraging trading down.

·         The tax rate on hand rolling tobacco (HRT) should be increased at least in line with cigarettes, to discourage trading down

3)      When the EU directive on taxes is reviewed in 2006 the UK should push for:

·         An increase in the minimum rates of tax for HRT, to discourage cross border shopping and bootlegging.

·         An increase in the maximum specific tax limits of 55% to 60%, to ensure that the UK is not prevented from using the flat rate specific tax increases to decrease the differential between high and lower priced tobacco products.

HM Customs & Excise assume that a 10% real price increase leads to a fall in consumption of 3%. But the young and the poor have been found by some researchers to be more price sensitive, with consumption falling up to 10% in response to a real price increase of 10%. Increasing real prices for tobacco above inflation is the World Bank’s and the World Health Organisation’s recommendation and will be crucial to achieving the significant reductions in smoking prevalence and consumption required for the UK to meet the recommendations of the Wanless review on public health.

A further reason for increasing taxes more than inflation is to counter other factors which are likely to work to reduce the average prices paid by consumers. These are:

1)      The advertising ban, acknowledged by the manufacturers to increase price competition (an effect they refer to as a ‘disorderly market’) and to reduce their ability to charge premium prices.

2)      The current OFT investigation into allegations of price fixing by cigarette manufacturers in the UK. Imperial Tobacco and Gallaher have over 80% of the UK market and had operating profit margins in the UK of 47% and 46% respectively in 2002. The companies openly co-ordinate price increases and the market shows strong price-following behaviour. This investigation is likely to increase price competitiveness in the UK market, particularly in the prices for premium brands.

3)      Trading down by consumers to cheaper cigarettes or hand rolling tobacco.

HOWEVER, the Chancellor is likely to announce only a “revalorisation” rise in tax: i.e. only enough to keep pace with inflation – a rise of about 3%. This would be a missed opportunity to cut the continuing toll of death and disease from smoking – 114,000 premature deaths in the UK every year.



4)      Tackling cigarette smuggling requires action on container and freight smuggling, which still accounts for 80% of the market, while holding the line on bootlegging.  We recommend that the National Audit Office review HM Customs & Excise strategy on tobacco smuggling and how it can be improved.

5)      Specific protocols with binding obligations need to be developed to ensure that the Framework Convention on Tobacco Control (FCTC) is fully effective once it is ratified.

6)      Imperial Tobacco should be pursued for past losses to the Exchequer due to smuggling either through criminal or civil action.

7)      The DTI report on BAT, which we understand has been completed, should be published.

The Chancellor MAY announce increased funding for anti-smuggling action.



8)      A statutory Nicotine and Tobacco Regulatory Authority should be set up which is independent from the tobacco industry, to oversee and regulate all aspects of nicotine-containing products, including the development of less harmful products.

Nothing likely in the Budget, the Department of Health may consider this as part of its review of arms length bodies (recommended by Wanless).



9)      The UK should support phasing out the EU tobacco subsidy regime alongside reinforced conversion efforts.

ASH Director Deborah Arnott commented:

“Last month’s Wanless report on public health was commissioned by the Chancellor and the Treasury. It showed that smoking is the number one killer in the UK. Raising the price of cigarettes is one key policy to cut the terrible toll of death and disease caused by smoking. It’s particularly important in reducing health inequality – half the difference in life expectancy between social classes I and V is due to smoking.

But it looks as if the Chancellor will bow to the tobacco lobby and raise tax only by enough to keep pace with inflation. This would be contrary to the clear implications of the Wanless report and would be a real missed opportunity to help cut the number of smokers, save money on the NHS and save lives too. We hope the reports we have heard prove wrong – or that the Chancellor changes his mind.

A Wanless also points out, raising the price of cigarettes is only fully effective if smuggling is under control and smuggled cigarettes still have an 18% market share. Wanless has said ‘there is a case for further action’ on smuggling and the Chancellor should take this advice.” ” 



Deborah Arnott      020 7739 5902 (w)  079 7693 5987 (m)

Ian Willmore          020 7739 5902 (w)  07887 641344 (m)



ASH Budget submission (pdf)