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Banning Smoking in Public PlacesCost benefit analysis of the proposed legislation for England

Public Expenditure Analysis

3rd May 2006

Caroline Godkin

Jennifer Potter

Jennifer Sleppy

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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

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1. Background

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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

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Some smoking facts about the UK

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25

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1974 1982 1990 1994 1998 2001 2003

Perc

en

t o

f P

op

ula

tio

n

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 Smoke1974 - 2003

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The Net Benefits for a complete ban were estimated to be c. £1.7bn for a single year

CostsYear 1

£m

Implementation 0

Enforcement 20

Education / Communication 1

Tax revenue losses from falling tobacco sales

Employees 1,145

Customers 150

Losses to the tobacco industry 129

Production losses (smoking breaks) 430

Consumer surplus losses to continuing smokers 155

TOTAL COSTS 2,030

BenefitsYear 1

£m

Averted deaths from SHS 371

Averted death from smokers giving up (quitters) 1780

Averted deaths from reduced uptake of smoking 550

Estimated savings to NHS for reduction in overall prevalence 100

Reduced sickness absences 70-140

Production gains from reduced exposure to SHS 340-680

Safety benefits 63

Estimated annual savings for maintenance and cleaning 100

TOTAL BENEFITS 3,374-3,784

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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

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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

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2. Review of the costs

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The total costs are estimated to be £2bn for the first year

CostsYear 1

£m

Implementation 0

Enforcement 20

Education / Communication 1

Tax revenue losses from falling tobacco sales

Employees 1,145

Customers 150

Losses to the tobacco industry 129

Production losses (smoking breaks) 430

Consumer surplus losses to continuing smokers 155

TOTAL COSTS 2,030

These are the costs that will be looked at in detail

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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

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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%

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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

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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

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Our costs are significantly lower than the costs estimated in the study

904

2,030

4863118

1,024

0

500

1,000

1,500

2,000

2,500

Orignal Study Decrease in taxlosses

Decrease inlosses to the

tobaccoindustry

Increase inproduction

losses

Decrease inConsumer

surplus losses

OurAssessment

Po

un

ds

Mill

ion

Sources of Decreased Costs

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3. Review of Benefits

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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

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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

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Estimate of Benefits from Smoking Ban

Benefits from RIA studyYear 1

£m

Averted deaths from SHS 371

Averted death from smokers giving up (quitters) 1780

Averted deaths from reduced uptake of smoking 550

Estimated savings to NHS for reduction in overall prevalence 100

Reduced sickness absences 70-140

Production gains from reduced exposure to SHS 340-680

Safety benefits 63

Estimated annual savings for maintenance and cleaning 100

TOTAL BENEFITS 3,374-3,784

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Our benefits are significantly higher than the benefits estimated in the study

3,875

3,614

14040

322726

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2,500

2,750

3,000

3,250

3,500

3,750

4,000

4,250

4,500

OrignalStudy

Increase inaverted

deaths fromSHS

Increase inaverted

death fromsmokersgiving up

Decrease inaverted

deaths fromreduceduptake ofsmoking

Decrease inestimatedsavings to

NHS

Decreaseddeducedsicknessabsences

Our Estimate

Po

un

ds

Mill

ion

Sources of Increased Benefits

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4. Sensitivity analysis

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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

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NPV falls but remains positive as discount rate increases

NPV Sensitivity to Discount Rate

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5,000,000,000

10,000,000,000

15,000,000,000

20,000,000,000

25,000,000,000

30,000,000,000

Discount Rate (%)

10 y

ear

NP

V (

Po

un

ds)

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NPV increases as time horizon extends

NPV Sensitivity to Time Horizon

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5,000,000,000

10,000,000,000

15,000,000,000

20,000,000,000

25,000,000,000

30,000,000,000

35,000,000,000

40,000,000,000

1 4 7 10 13 16 19 22 25 28 31 34 37 40

Number of Years

NP

V (

Po

un

ds

)

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Focus on time benchmarks for easier assessment

Description Years NPV

Original Study 1 £2,971 Million

Max Parliament Term 5 £10,885 Million

Base Case 10 £18,594 Million

Generation View 40 £35,914 Million

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Used excel’s RAND function to set up Monte Carlo analysis

Point Estimates Expected High Low RangeFirst Year Reduction in amount of cigarette smoked (RAND()*Range)+Low 8.00% 0% 8.00%First Year Reduction in smokers (RAND()*Range)+Low 1.40% 0% 1.40%

Further Year reduction in amount of cigarettes smoked (RAND()*Range)+Low 2.00% 0% 2.00%Further year reduction in smokers (RAND()*Range)+Low 1.00% 0% 1.00%

Savings from reduced smoking illness and productivity gains (RAND()*Range)+Low 680,000,000 340,000,000 340,000,000

Discount Rates (RAND()*Range)+Low 12% 0% 12.00%

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

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

Histogram of Monte Carlo Analysis for NPV of Smoking Ban

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5. Summary and conclusions

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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

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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.