Claims plain packaging works go up in smoke

Judith Sloan
JUNE 16, 2014
THE AUSTRALIAN
THE nannies are panicking. Why hasn’t the consumption of cigarettes collapsed after the introduction of mandatory plain packaging? How can we explain this one? Like kids who haven’t done their homework, the excuses are coming thick and fast.
• We never expected the consumption of cigarettes to fall immediately.
• The tobacco companies are making up the figures to suit their case.
• A closer examination of the figures points to a fall in tobacco consumption this year.
• Lower prices are driving up consumption; it has nothing to do with plain packaging.
So what do we know about the consumption of cigarettes in Australia since plain packaging was introduced in December 2012, thanks to Head Nanny, Nicola Roxon?
The first thing to note is that relying on expenditure is tricky because it is the product of quantity and price. If we look at just total expenditure figures, we cannot be sure whether quantity (number of sticks) or price is responsible. We do know, however, that there has been massive price discounting going on ever since plain packaging was introduced. For anyone with the slightest knowledge of economics and business, this should come as no surprise.
Unable to charge a premium price for a branded product, the rational thing for profit-maximising companies is to lower the price to induce higher consumption. Profits are still lower, but they are higher than would be the case if the prior price schedule were retained. I’m not sure Nanny Roxon and her band of fervent supporters had quite thought this one through, assuming there were any economists among them.
Whether he was in the original inner circle of plain packaging devotees is not clear, but the Kouk, economist Stephen Koukoulas and former economic adviser to Julia Gillard, has now waded into the debate. Just look at the latest figures on seasonally adjusted expenditure on cigarettes — spending has fallen out of bed, according to the Kouk.
There are at least four problems with the Kouk’s analysis. The first is that expenditure figures do not allow us to know precisely what has happened to quantity, a point made above. And here’s the second problem — through most of 2013, total spending on cigarettes rose. Given that we know the cigarette companies were engaging in deep price discounting, we can be reasonably confident the number of cigarettes consumed rose in 2013, after the introduction of plain packaging. Third, while it is true expenditure on cigarettes fell in the first quarter of this year, it needs to be borne in mind that the rate of excise on cigarettes rose sharply, by 12.5 per cent, in December last year.
Finally, we know the seasonally adjusted figures are subject to substantial revision and the March figure will almost certainly be adjusted to show a smaller decline. (For details of this debate, see Sinclair Davidson’s analysis at catallaxyfiles.com.)
So are there any reasons to doubt claims by The Australian’s Christian Kerr that tobacco sales volumes have increased by 59 million sticks since December 2012 (an increase of 0.3 per cent) and consumption of the cheapest cigarettes has risen significantly more? The short answer is: Kerr 1, the Kouk 0.
There is additional evidence to back up the claim that plain packaging is failing to have an impact. Take the chart on imports of cigarettes, which shows a significant rise since December 2012. And then we have the information from the budget papers which shows actual and projected excise revenue from cigarettes. (Note that excise is levied on a per-stick basis.) The data is not quite complete because then treasurer, Wayne Swan, had something of a meltdown in his last budget and refused to release any figures because of supposed taxpayer confidentiality.
The messages from this chart are twofold: actual excise has exceeded projected excise in every year. And the year in which there is the largest gap between actual and projected excise is 2012-13, which includes six months during which plain packaging was in force. Moreover, the government is expecting to rake in large increases in future excise revenue.
Sensing that the game might be slipping away from them, Nanny Xenophon is calling for a floor price on cigarettes. Gosh, that would be a good idea — loading another ill-conceived intervention on one that doesn’t seem to be working.
But the final point should go to Professor Sinclair Davidson of RMIT University, who has interrogated the data in a systematic way. “I have no doubt that the consumption of cigarettes has risen since plain packaging was introduced; we just can’t be sure whether it is by existing smokers or new smokers.”