1 Banning Smoking in Public Places Cost benefit analysis of the proposed legislation for England...
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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
20
25
30
35
40
45
50
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
42
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
0
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
0
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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600
800
1000
1200
£0
£5,0
00,0
00,00
0
£10,
000,
000,0
00
£15,
000,
000,0
00
£20,
000,
000,0
00
£25,
000,
000,0
00
£30,
000,
000,0
00
£35,
000,
000,0
00
£40,
000,
000,0
00
£45,
000,
000,0
00M
ore
Bin
Fre
qu
ency
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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.