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Australia to Raise Tobacco Tax to Narrow Budget Shortfall

Australian Prime Minister Kevin Rudd will increase taxes on tobacco to raise an extra A$5.3 billion ($4.7 billion) as he seeks to offset a revenue shortfall and boost the government’s economic credibility before elections.

The government will introduce a staged 12.5 percent rise in the excise from Dec. 1 to help return the budget to surplus by 2016-17 and combat smoking-related cancer, Treasurer Chris Bowen said in a statement today. The move will increase the price of cigarettes, which sell for about A$20 in a packet of 25 now, to about A$1 per stick.

“We know that increasing excise is the single most effective way for government to reduce premature death and disease due to smoking,” Bowen said. He is expected to provide updated budget figures in a statement tomorrow as Rudd prepares to announce the date for a ballot due by the end of November.

Rudd, who is trailing in polls to Tony Abbott’s Liberal-National coalition, is building a policy platform for his Labor party before heading to an election. Under predecessor Julia Gillard’s leadership, Australia became the first country to require cigarettes to be sold in uniform packages with no company logos, in the same font and with graphic photographs of victims of smoking-related diseases.

Photographer: Brendon Thorne/Bloomberg

A man smokes a cigarette outside an office building in Sydney. Close

A man smokes a cigarette outside an office building in Sydney.

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Photographer: Brendon Thorne/Bloomberg

A man smokes a cigarette outside an office building in Sydney.

Tobacco-related diseases cost Australia more than A$31 billion annually and take up more than 750,000 hospital beds a year, Bowen said.

Easy Targets

“The government needs more revenue to reach its surplus target and smokers are the easiest target,” said Nick Economou, a political analyst at Monash University in Melbourne. “Labor clearly wants to project itself as a party that’s responsible in government. Who can argue against a proposal that’s couched as an attack against smoking?”

Bowen is preparing a budget update as declining tax revenue and lower export prices threaten the government’s projections of a return to balance in 2015-16. An underlying cash deficit for the 12 months to June 30, 2014, was projected at A$18 billion in the last budget released May 14.

The government will also propose a new levy on banks to provide insurance in case future bailouts are needed, the Australian Financial Review reported today, without saying where it got the information.

Bank stocks declined, with Commonwealth Bank of Australia falling 1.5 percent and National Australia Bank Ltd. (NAB) dropping 1.6 percent at the close of trading in Sydney.

Labor Support

Along with trying to prevent asylum seekers entering Australia by boat, Rudd, 55, has announced plans to scrap the world’s highest carbon price and changed Labor’s rules for selecting its leader since defeating Gillard in a June 26 leadership ballot. He needs to boost Labor’s reputation as economic managers after the government backed away from a pledge in December to return the budget to surplus in the last financial year.

Support for Labor fell for the first time since he ousted Gillard, according to a Newspoll published in The Australian July 23. After rising to its highest level on a two-party preferred measure in almost nine months in a poll two weeks before, Labor fell two percentage points as the coalition took a 52 percent to 48 percent lead.

Newspoll surveyed 1,141 people and the poll had a margin of error of plus or minus 3 percentage points. The two-party preferred measure is designed to gauge which party is most likely to form government under the country’s preferential voting system.

‘Nearest Solution’

The government’s announcement of a higher tobacco excise was triggered by economic concerns and was “not about health,” Opposition Treasurer Joe Hockey said.

“It’s Kevin Rudd running out of taxpayers’ money and just going for the nearest solution,” Hockey said in an Australian Broadcasting Corp. radio interview today.

While facing higher taxes, tobacco companies are engaged in a global fight against government moves to curb cigarette advertising and smoking through graphic health warnings and elimination of branding. New Zealand plans to follow Australia’s plain-packaging laws, while Japan Tobacco Inc. (2914), Asia’s biggest listed cigarette maker, is suing the Thai government over a plan to increase the size of health warnings on packages, claiming the move is unconstitutional.

Smokers Pay

“There are over 3 million poor old smokers out there that will now have to pay for this government’s financial mismanagement,” British American Tobacco Plc (BATS)’s Sydney-based spokesman Scott McIntyre said today of the planned rise in Australia’s tobacco excise. These smokers “are sure to remember the price hike every time they pull their cigarettes out in the lead up to the election,” he said in a phone interview.

New South Wales, Australia’s largest state, has more than 12,000 tobacco retailers, according to a study published by the Cancer Institute NSW in December 2012.

“Our results strongly suggest that tobacco outlets are concentrated in areas of higher disadvantage, and that are at greater risk of poor health outcomes,” the study said.

Labor, traditionally the party of the working class, risked alienating some lower-income supporters through the excise increase, said Rob Moodie, professor of public health at the University of Melbourne.

Even as “Labor may take a hit in voter sentiment,” in the long term “it’s an incredibly good move,” Moodie said in a phone interview. “This rise will decrease consumption so in the long run reduce the burden on the health system, it will increase budget revenue, and it’s in the interest of smokers themselves as it will help keep them alive.”

To contact the reporter on this story: Jason Scott in Canberra at jscott14@bloomberg.net

To contact the editor responsible for this story: Rosalind Mathieson at rmathieson3@bloomberg.net

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