5. The Budgetary Impact of Tobacco Use Smoking affects government budgets, by changing the levels of both public expenditures and tax revenues. There will be evident expenditure increases, particularly on health services, but there will also be some, smaller, expenditure reductions resulting from the premature deaths of smokers. In addition to tax revenue increases there will also be some, usually smaller, revenue reductions attributable to smoking. They result from the declines in income and consumption tax revenues arising from the premature mortality of smokers. The budgetary impact of smoking does not indicate the impact of smoking on the community as a whole, merely on governments. From the point of view of the community as a whole, tobacco tax revenue is a pecuniary, not a real, benefit. An important question is whether the tax revenue from smokers covers the external costs of smoking (that is, the costs borne by the rest of the community). This is a more important issue than whether tobacco tax revenues exceed tobacco-related public expenditures In addition to the call which tobacco use places on real resources (such as the resources, particularly labour and capital, used in supplying health care services) it also puts pressure on government budgets, as a result of the need to fund public expenditures on these types of services. However, the use of tobacco also produces government revenue, mainly as a result of the high consumption and excise taxes which tobacco bears in many countries. Calculation of the impact of tobacco use on government budgets, therefore, involves estimating both public expenditures and tax revenues resulting directly or indirectly from tobacco use. On the outlay side of the budget there will clearly be increased expenditures attributable to tobacco use but there will also be some reductions resulting from that use. In particular, the premature mortality resulting from tobacco consumption will lead to some reduction in welfare and health expenditures. However, health and welfare expenditures attributable to tobacco use in any particular year will almost certainly be positive even after these "savings" are taken into account. On the revenue side, in addition to the evident gains there will also be losses in revenue. Premature mortality will lead to reduced output, incomes and consumption and so to reductions in revenue from personal income tax, company income tax and indirect taxes. The estimation of the budgetary impact of drug abuse is an exercise subsidiary to that of estimating the tangible and intangible costs of abuse. The latter represent the impact of abuse on the community as a whole. The budgetary impact is largely an indication of the funding impact of drug abuse on government. While tobacco consumption generates substantial tax revenue this should not be taken to imply that the revenue generates resources for the community as a whole. In fact it merely redistributes resources from one group to another, that is from smokers to the community as a whole. Tax revenue is a pecuniary benefit to governments but not a real benefit to the community as a whole. There is, however, one sense in which the real and pecuniary effects are inextricably linked-the concept of negative externalities. Smokers impose costs both upon themselves (internal costs such as deterioration in health and fitness) and upon others (external costs or externalities such as the health effects on non-smokers of passive smoking). The effect of negative externalities is to produce a situation in which consumption is above optimum levels The economist's response to this situation is the imposition of taxes which reflect the level of externalities and which are designed to reduce consumption to optimum levels. It is, therefore, sensible to ask whether smokers are, through tax payments, bearing the full costs which they impose upon the rest of the community. Does tax revenue from smoking cover the externalities imposed by smokers? Estimation of the budgetary impact of smoking indicates whether smokers compensate governments for the revenue and expenditure impacts of smoking (that is, whether smoking reduces budget deficits). It does not indicate whether smokers fully compensate non-smokers for the total costs of smoking because it takes no account of some types of costs borne by non-smokers (for example, pain, suffering, death and bereavement). If smokers were to be required to compensate the rest of the community fully for the negative externalities which they generate, drug tax revenues should substantially exceed drug-related public expenditures. There is a fundamental flaw in analyses often presented by the tobacco industry on its revenue and expenditure effects. To include in the analysis all revenues attributable to the tobacco industry implies that the industry, in the absence of taxes targeted specifically at it, would be required to pay no taxes at all. It would be quite wrong to attribute all tax revenue from tobacco as compensation for the smoking-related externalities, rather than attributing some to the tax burden that is inevitably borne by all industries, whether they impose negative externalities or not. If there were no externalities, tobacco could still be expected to bear sales or other consumption taxes consistent with the tax burden borne by other commodities.