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December 31st, 2010:
The Effects of Increasing Tobacco Taxation: A Cost Benefit and Public Finances Analysis
www.ash.org.uk/tax/analysis
Executive Summary
1. Johnson P (2009) “Cost Benefit Analysis of the FCTC Protocol on Illicit Trade in Tobacco Products”
London, ASH. http://www.ash.org.uk/ash_7iqt6hvz.htm
This report undertakes an economic analysis of the impact of increasing the level of taxation
on tobacco products in the UK, building on previous work for ASH by Paul Johnson.1 Because
smoking imposes significant costs on the UK economy through increased NHS expenditure
on smoking-related health conditions and increased mortality rates for smokers of working
age, increasing tobacco taxation is likely to have a number of indirect benefits in terms of
reduced early deaths in the population (and hence lower NHS costs), reduced ill health,
reduced absenteeism from work, and so on.
We find that a tobacco price rise of 5% results in net benefits to the economy as a whole
of around £10.2 billion (measured as a net present value of the stream of benefits over 50
years.) The economic benefits in the first five years of the policy are around £270m per
year on average. Just over half of these gains are accounted for by the ‘human value’ of the
deaths averted through a reduction in the number of smokers in the UK population. The rest
of the gains are split between the value of the increased economic output resulting from fewer
working age deaths, reduced absenteeism from work and lower NHS costs as a result of the
tax increase.
Our analysis also shows a positive effect of the policy on the public finances, with a net
revenue gain to the government of around £520m per year in the first five years on average.
Just over four-fifths of this gain is due to the direct effects of increased revenue from tobacco
taxation itself, but increased revenue from taxes, reduced benefit spending and reduced NHS
costs all have a positive impact on revenues in addition to this.
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