This blog, based on a forthcoming IPS publication, discusses the impact of tobacco spending on other basic needs. The findings of the study show that spending on tobacco results in households foregoing other critical expenditure.
At a juncture when government finances are tight, policy solutions such as taxing tobacco which can be leveraged to boost government revenue, without threatening economic growth, are essential. However, Sri Lanka’s 2021 Budget does not specify any tax increases on cigarettes. Instead, it proposes a simplification of taxes across a variety of sin goods and other goods. Details on how such a complex proposal is to be implemented across an array of industries are yet to be revealed. This blog dissects some of these issues pertaining to cigarette tax proposals in Budget 2021.
While Sri Lanka has made notable strides in recent times to reduce the overall smoking rate, smoking continues to remain a significant health threat. A challenge for Sri Lanka now is to identify the groups where smoking prevalence is highly concentrated – referred to as ‘Last Mile Smokers’ (LMS) – and implement policy measures that are specifically designed to reduce smoking among LMS.
A recent study by IPS projects that government tax revenue can be boosted by LKR 37 billion by 2023, if taxes on cigarettes are streamlined and raised in line with inflation. Although the government assumed a policy stance of cutting taxes across the board when they came into power, excise taxation of sin-goods such as cigarettes is one area where it is still politically feasible to raise taxes in order to boost much needed revenue. This month’s budget is therefore an opportune moment to increase tobacco taxation, which will simultaneously help raise revenue at a critical time for the country, and generate significant and positive health benefits that would flow from reducing smoking.
Implementing tobacco control policies to reduce smoking prevalence will enhance the economic well-being of people, particularly the poor, as it would free up more resources for basic needs such as food and education, resulting in a positive gain for the whole economy. For a developing country like Sri Lanka, it is essential to integrate tobacco control measures into poverty alleviation policies and programmes to benefit the individual, the household and the national economy.