KPMG have published their latest figures on illicit tobacco consumption in Australia. After a large rise between 2012 and the first half of 2014 (11.5% to 14.3%), there was a more modest rise in the consumption of illicit tobacco as a proportion of all tobacco in second half of 2014 (to 14.5%). The resulting tax gap is $1.35 billion.
Aussie Daily Telegraph notes that there has been "a 30 per cent increase in black market trade in the past two years". It's actually 26 per cent, but the point remains that the rise has been steep. It has, of course, coincided with the implementation of plain packaging (December 2012) and two large tax rises (December 2013 and September 2014). The 'public health' cult still laughably pretends that neither plain packaging nor tax rises fuel the illicit trade.
The KPMG research is based on inspection of 12,000 discarded cigarette packs collected around the country. For roll-your-own tobacco, sales of rolling paper are compared with legal sales of tobacco. This is how governments used to evaluate the size of the black market before they decided it would be cheaper to use guesswork or, as seems to be the case in Australia, not bother at all.
In Britain, HMRC simply estimates how many cigarettes are smoked (based on the number of people who say they smoke) and works backwards from the amount of tobacco duty received to estimate the number of cigarettes sold on the black market. The trouble is, people notoriously under-report their smoking status and smokers drastically under-report how many cigarettes they smoke. Even so, it is estimated that 48 per cent of hand-rolling tobacco does not have tax paid on it and, contrary to tobacco control dogma, HMRC says the illicit trade in manufactured cigarettes has been rising in recent years. Officially, it is currently at between 5 and 15 per cent, but this is very likely to be an underestimate.
It would be nice if governments put a fraction of the billions of pounds they receive in tobacco duty into measuring the illicit trade properly, but it is not in the interests of 'public health' lobbyists to let people know the true scale of the problem. And so it is left to the tobacco industry to commission research, which the aforementioned lobbyists dismiss out of hand because it is funded by industry. This is not a rational response, of course, unless the research itself is flawed. The anti-smoking lobby won't risk libel by calling a respected organisation like KPMG liars and frauds, and since their methodology is the best available, it needs to be taken seriously.
What is interesting about the KPMG data is the way the black market has evolved. I have noted before that it did not move exactly in the direction that was expected after plain packaging, ie. with large quantities of plain packs being counterfeited. Instead, there was a steep rise in the number of 'illicit whites' being sold. These are cigarettes which don't exist legally in the domestic market and, in some instances, have never existed legally anywhere. Well known examples include Manchester and Jin Ling. Interestingly, the surge of illicit whites seen in 2013 seems to have subsided, with unbranded tobacco (loose leaf rolling tobacco, known in Australia as 'chop chop') filling the gap.
KPMG reports a big decline in illicit whites and a big rise in unbranded tobacco. However, as a share of the tobacco market, illicit whites were always a relatively small player (less than 2%) whereas chop chop makes up more than half. The other illicit sector is contraband (ie. legal brands smuggled in from other countries) which has seen its share fall by 8.6 per cent.
Overall, KPMG estimates that 2,549 tonnes of illicit tobacco was bought in 2014, seven per cent more than in 2013. The quantity of unbranded, loose leaf tobacco rose from 964 tonnes to 1,375 tonnes. Most of the rest was contraband shipped in from abroad.
KPMG's estimates are supported by several other sources. The finding that unbranded tobacco is rising at the expense of counterfeit is supported by government figures which show that customs are seizing a greater proportion of the unbranded tobacco than they did in 2013. The overall rise in illicit tobacco is supported by survey data (see below) which shows that an increasing number of people are buying illicit tobacco and that those who buy it are buying more of it.
How much of this can be attributed to plain packaging and how much can be attributed to the tax rises? The major black market surge occurred in 2013, in the absence of any tax hike, so it is reasonable to attribute most of it to plain packaging. It is impossible to tell whether the decline of the illicit white market and the rise of chop chop is due to better policing of Australian ports or changes in the supply chain. Either way, Australia differs from Britain in that it has the climate for domestic tobacco growing on a large scale. Every tax rise provides an added incentive to budding entrepreneurs and the deliberate positioning of tobacco as a semi-prohibited product—sold from behind shutters in unbranded packaging—can only help them.
What are the lessons for Britain if and when plain packaging comes in? Unlike Australia, we don't have an illicit tobacco growing industry in our backyard, but we do have a great deal of loose leaf tobacco delivered from overseas which is then repackaged in the UK. Also unlike Australia, we have many countries with lower taxes on our doorstep. If smokers like cigarette packaging as much as ASH claim, cigarettes from Belgium and Spain will become even more attractive. Moreover, whereas it is illegal to bring in more than 50 cigarettes into Australia (seriously!), Brits can bring in virtually unlimited quantities from EU countries for their own consumption. In practice, they can bring in very large quantities for sale. The former is legal, the latter is illegal, but everyone knows it happens. Whether legal or illegal, it is bad news from Her Majesty's Treasury and it is they who will be most concerned when plain packaging arrives.
When I was in Australia last August, I saw plenty of cigarette packs that had clearly been brought in from other countries. Some were counterfeit (the giveaway is that they had no health warnings). And yet you could hardly ask for a better place to bring in plain packaging. Australia is a long way from anywhere. Britain is not.
If it does nothing else—and we can be fairly sure it won't reduce legal sales of cigarettes—plain packaging will bring the size of Britain's non-duty paid tobacco market into sharp focus. Any cigarettes that are not in 'standardised' packaging will, by definition, not have had UK duty paid on them. You will see them wherever you see smokers. This observable fact will come too late to prevent the ridiculous policy being introduced, but the reality of plain packaging will make it impossible to deny the reality of Britain's black market.