The Crowding Out Effect of Tobacco Spending in Pakistan

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Pakistan is a high-tobacco-burden country where more than 29 million adults use tobacco in some form, and tobacco expenditures constitute a sizeable portion of household budgets. Tobacco expenditure occurs at the cost of spending on necessities such as basic food, health, education, and housing. Therefore, policy interventions aimed at reducing tobacco use can have a significant impact on household welfare. Tobacco taxation, the most effective and cost-effective intervention to reduce tobacco use, is utilized in Pakistan as a policy tool for tobacco control. However, the government made a substantial reduction to the excise tax on cigarettes in 2017–18, which led to a price decline and fuelled cigarette consumption. In this context, the current study assesses the impact of tobacco use on household expenditure patterns in Pakistan using data from the Household Integrated Economic Survey of 2015–16 and 2018–19. The study complements the authors’ earlier work on the crowding out effect of tobacco expenditure in Pakistan. The key findings are the following:

• In Pakistan, overall tobacco-user households spend nearly three percent of their monthly budget on tobacco, while poor households devote more of their budget to tobacco compared to rich households.
• As a result of the tax-reduction policy, the real prices of cigarettes declined sharply by more than 27 percent in 2017–18. A comparison of the inflation-adjusted price index of cigarettes between 2015–16 and 2018–19 shows a decline of 22 percent during this period.
• The share of tobacco in total household expenditure decreased from 2.9 percent to 2.7 percent between 2015–16 and 2018–19. However, despite a decline in the tobacco budget share, monthly consumption of cigarettes per household increased by 27 percent, owing to reduced prices.
• The study finds strong evidence of a crowding out effect in Pakistan, where tobacco expenditure occurred at the expense of other household expenditures, in both years of analysis. The results for 2018–19 suggest that despite the decrease in its budget share, tobacco spending had a negative effect on the shares devoted to food, health, education, housing, household durables, and other commodities. The simulation analysis suggests that a reduction in tobacco expenditures by 50 percent would lead to an aggregate increase of 12 percent in expenditure on these commodity groups. For lower-income households, the major share of this increase would be devoted to basic food (47 percent) and health (21 percent).
• Some significant differences are observed between tobacco-user households belonging to different income groups. Basic food is the commodity that is most affected by tobacco use in lower-income households. In contrast, the budget shares of basic food and education are not affected by tobacco spending in higher-income households. A comparison of 2015–16 and 2018–19 indicates no profound differences in the pattern of crowding out effects at the aggregate level.