The Crowding Out Effect of Tobacco Spending in Pakistan

This Report was written by Social Policy and Development Centre (SPDC) in Pakistan. The report discusses the impact of tobacco consumption on overall household spending in the country after the cigarette excise tax rate reduction in 2017-18. The tax rate on low-price brands decreased 48%, leading to an over 27% decline in price. As a result, households spend 0.2% less of their budget on cigarettes, while consuming 27% more cigarettes (326 sticks to 414 sticks). Low-income households spend a larger share of their budget on tobacco than high-income ones- 3.0% and 1.8%, respectively. The researchers find that tobacco expenditure occurs at the expense of spending in other commodity groups. Simulating the effect that a 50% decrease in tobacco expenditure would have, the results show that the share of expenditure on food and housing increase substantially as a result, especially in low-income households. The report finds strong evidence of the crowding out effect in Pakistan, which shows that reducing the demand for tobacco is necessary to improve the economic wellbeing of low-income households.