Raise tobacco taxes and prices for a healthy and prosperous Indonesia

During 2020–2024, the government of Indonesia is focused on improving the wellbeing of Indonesians by
taking advantage of the demographic dividend for allinclusive economic growth. And, recognizing the critical
dual causality concept, human capital development has been declared a top priority for the government –
specifically, improving the health of citizens to impact on productivity and growth.
Indonesia’s health profile indicates a high and increasing disease burden from noncommunicable diseases (NCDs)
with cardiovascular diseases (CVDs), chronic respiratory diseases and diabetes being prominent among the top
10 causes of long-term illnesses and early deaths. Three risk factors account for most of the disease burden: dietary risks, high blood pressure and tobacco use.Tobacco consumption is a critical public health challenge for the country. Indonesia has one of the highest prevalence of smoking in the world, with 62.9% of adult males smoking. Tobacco use kills about 225 700 Indonesians every year. Further, contrary to global trends, tobacco use continues to be high and even on the rise among young people and deprives the country of 6 million disability-adjusted years of life annually.
As one of the major risk factors for NCDs, tobacco use impacts resources available for economic growth in Indonesia in two ways. First, the increasing cost of providing NCD-related curative care has been the underlying cause of the growing deficit in the national health insurance, which has spearheaded the country’s efforts towards Universal Health Coverage (UHC) – increases in the health budget are simply drained off to meet this shortfall, jeopardizing the financial sustainability of the entire health system. Second, the premature morbidity and mortality caused by tobacco use directly impacts productivity of human capital including competitiveness and innovation – through
both lower output and absenteeism due to ill health.
Notably, this would apply to the entire workforce given the use of tobacco across all age groups (albeit lower
for women). Importantly, the health and human capital impact of tobacco use can be intergenerational. Two thirds
of children in Indonesia are exposed to secondhand smoking at home and evidence suggests that this contributes to stunting and impedes childhood development. Tobacco use has implications for equity as well, with the poor suffering disproportionately from both the health and economic impact of tobacco use.

The most cost-effective and impactful way to reduce the health and economic impact of tobacco use is to
implement an evidence-based tobacco tax policy. Higher tobacco taxes that reduce the affordability of tobacco
products would reduce the prevalence of smoking among all population segments. As youth and lowerincome groups are more price-sensitive, higher taxes will particularly decrease their consumption more than that of higher-income smokers. Therefore, a tobacco tax increase is a progressive tax policy that also supports the development of future human capital.
Indonesia has a complex, multi-tiered tobacco tax system. International experience suggests that such systems are
administratively challenging, they allow tax avoidance and evasion, and undermine the public health benefit
of higher tobacco taxes. However, Indonesia does have the requisite capacity to undertake necessary reforms to
simplify the tax system and enforce it effectively to both decrease the prevalence of smoking and health costs on
the one hand, and increase efficiency of tax collection and government revenue on the other.
Reforms in tobacco taxation to increase government revenue would bring a lasting impact on public health not only by curbing the direct health consequences of tobacco use but also by providing the opportunity to review allocations for health from the national budget. The argument that the tobacco industry or its impact on the labour market balances the negative influence on economy is misleading. The contribution of the tobacco industry to the Indonesian economy is relatively small. Tobacco manufacturing generates 0.6% of the total employment and tobacco farmers represent only 1.6% of the workforce in the cultivation sector. Moreover, most households involved in tobacco farming and kretek rolling are on social assistance, implying social subsidization by the tobacco industry and further reducing its net economic contribution. Alternative cash crops can bring better returns for farmers and the
economy. In fact, since any significant decline in tobacco use will be gradual, both the supply as well as demand
side shall have sufficient time to adjust to the changes in the market. Studies carried out in Indonesia show that
a reduced demand for tobacco products would increase spending on other products/services, fueling economic
growth and job creation in other competitive sectors of the economy.

Raising Tobacco Taxes and Prices During his second term of 2020–2024, President Joko Widodo has shared his government’s vision to maximize the human capital benefits of Indonesian  youth as a competent and healthy future workforce. This vision is embodied in implementing the Sustainable Development Goals that include reducing premature mortality from NCDs by a third by 2030. Reducing the prevalence of tobacco is one of the key indicators
to achieve reductions in premature mortality due to NCDs.

 

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