ALLOW me to comment on the increase in alcohol and tobacco excise tax contained in the 2017 Budget.
Alcohol and tobacco are determined to see increase in their indexation base from 2.5 per cent to 5 per cent for alcohol and a one off increase for tobacco.
In economics, alcohol and tobacco each have an inelastic demand due to habitual consumption by consumers.
When the prices for alcohol and tobacco increases, demand responds at a rate fairly below the rate of changes in their prices hence, the possibilities for increased tax revenues from their sales.
Over the years, excise tax on alcohol and tobacco have been progressively increasing as a revenue measure however, it is worth noting that these increases were implemented alongside higher GDP growths.
There was no window period implemented for the successive alcohol and tobacco excise tax increases, such as a biannual or a one off increase resulting in a progressive increase overtime for both items.
Higher levels of excise base on alcohol and tobacco are a sign of a general decline in economic welfare as a higher proportion of consumption expenditure is taxed which is a policy downside.
Sadly, PNG is already in this path as 75 per cent of the price of a can of beer and a loose cigarette is collected by the government as tax.
Also, this increase will be an upside to inflation and the already higher cost of living as shown by various international index which ranks the country with a higher tax rates which is far above rates in Singapore, India and other economies.
On the other hand, there are a number of unintended outcomes when there is a government intervention in the market place.
In the case of alcohol and tobacco, there are risks associated with increases in their respective excise base.
Consumers in general have the tendency to shift their demands to illicit substitutes thus, triggering the proliferation of illicit alcohol and tobacco trade.
PNG is already in this path as seen by the trading of counterfeit tobacco from Asia which has affected the market share of genuine tobacco and the proliferation of low quality alcohol beverage already on the market and the production, sale and consumption of homebrew.
Consumption of illicit substitutes is generally harmful to the economy as it will indirectly result in the proliferation of black markets, contribute to law and order problems and weaken important health indicators.
Proliferation of black markets will siphon off a significant amount of the country’s liquid assets (held by banks) ‘underground’.
This will in turn weaken economic productivity as there will be a mismatch between savings and borrowing and tax revenue will be adversely affected.
General health of the country’s population will also be affected at a much faster rate by the consumption of illicit substitutes which will increase the burden on the already saturated health care capacity and finance thereby weakening economic productivity.
Also, law and order problems associated with the sale and consumption of illicit substitutes will be worsened thus, triggering a social time bomb which will have a catastrophic spillover on the wider society.
The tax hike in the 2017 Budget is not beneficial for the country’s economic woes because it will encroach on prudent fiscal policy management by being unsustainable and unaffordable.
Mike H, Via email