Are tobacco subsidies a misuse of public funds?BMJ 1996; 312 doi: https://doi.org/10.1136/bmj.312.7034.832 (Published 30 March 1996) Cite this as: BMJ 1996;312:832
- a International Union Against Cancer, European Union Office, Rue Pascal 33, 1000 Brussels, Belgium
- b King's College School of Medicine and Dentistry, London SE5
- Correspondence to: Dr Joossens.
- Accepted 12 March 1996
The European Union spends about 1000m ecu (pounds sterling800m, $1240m) a year subsidising tobacco production but only about 1.55m ecu (pounds sterling1.2m, $1.85m) on smoking prevention. The subsidies, part of the common agriculutral policy, were originally intended to encourage farmers to grow commercially valued varieties of tobacco and thus reduce imports. But they also aimed to guarantee farmers' income, a goal in direct conflict with the first. The policy has failed to adapt production to demand or reduce imports, since most tobacco grown in the union has little commercial value. Reforms introduced in 1992 have had a limited impact on expenditure, and data produced as a result of the reforms show that it would be much cheaper to give farmers direct income support than to subsidise them growing tobacco. Tobacco subsidies should be abolished and more should be spend on smoking prevention.
Exchange rates and conversions
pounds sterling1=1.24 ecu
1 tonne=1000 kg
1 ecu=pounds sterling0.80
The common agricultural policy of the European Union subsidises tobacco production by about 100m ecu a year ($1240m, pounds sterling800m).1 This is in stark contrast with the tiny sums spent on initiatives to prevent smoking related diseases. One of the key goals of the common agricultural policy in relation to tobacco was to reduce dependence on imports by subsidising farmers to grow commercially valued varieties. In spite of huge expenditure this goal has not been achieved. Almost 70% of the union's manufacturing needs for tobacco products are still met by imports, and almost two thirds of union production is still of tobacco of low commercial value.
In 1991 we concluded that the system was incapable of real reform because of its complexity, vulnerability to exploitation, and internal contradictions and because of its fundamental contradiction of European Union health policy. We recommended that tobacco subsidies should be phased out entirely by the year 2000 and that the money should be spent on direct income support for farmers, early retirement schemes, and research on reconversion.1 We predicted that limited reforms would be announced but that the system itself would be left intact.
This happened: in 1992 the policy was simplified and a ceiling set on production, but the principle of tobacco subsidies was not challenged.2 In 1994 the European Court of Auditors (responsible for monitoring the financial activities of union institutions) published the most serious attack yet on tobacco subsidies,3 highlighting poor management of the policy and questioning the principle of tobacco subsidies.
We look here at the effects of the 1992 reforms and present new data, available as a result of the reforms, which show the true commercial value of the tobacco crop. These data seriously undermine the European Commission's defence of tobacco subsidies as an effective means of providing income for farmers in poor regions. We believe they leave tobacco subsidies with no credible defence and support our previous recommendation, and that of the Court of Auditors, that tobacco subsidies should be phased out and replaced with direct income support for farmers.
The 1992 reforms
The reforms of 1992 (see box 2) had some positive effects. Production fell from 430000 tonnes in 1991 to 328000 tonnes in 1994, and quotas have reduced (but not eliminated) overproduction of varieties of low commercial value. Eliminating export subsidies is certainly welcome. The Court of Auditors described them thus: “subsidies are paid for producing tobacco which has practically no market in the Community. Almost all this tobacco is exported to Central and Eastern Europe and North Africa, where there are insufficient controls of tar content and where the countries can hardly afford to cope with the additional bought-in mortality and high health care costs.”3 Nevertheless, exports of cheap high tar tobacco continue (in 1994 to Egypt, Algeria, Russia, Ukraine, among others) so it is too early to see the long term effect of this measure on exports.
1992 Reforms of tobacco subsidy system
Two measures to limit the total cost of the system: a limit on production (390000 tonnes in 1992, 350000 from 1994) and quotas above which no subsidies are paid
An end to export subsidies (paid so that low value high tar tobacco could be “sold” at giveaway prices)
An end to intervention subsidies (used to buy unmarketable tobacco into intervention stores)
The creation of a tobacco research and information fund, financed by up to 1% of annual subsidies, to (a) support research into producing the least harmful varieties of tobacco and (b) improve people's (especially young people's) knowledge of the harmful effects of tobacco.
Other measures, including a simpler classification of plant varieties and the creation of national control agencies to minimise fraud
Overall expenditure remains high. In 1994 the total budget of the European Union was 60305m ecu and of the common agricultural policy 33605m ecu (56% of the total EU budget). Tobacco subsidies cost 1057m ecu (3.1% of the common agricultrual policy and 1.8% of the total union budget), more than the combined budgets of the European Parliament, Council of Ministers, Economic and Social Committee, and the Committee of the Regions. Estimated expenditure for 1996 is 1106m ecu, over 3m ecu a day or 2000 ecu a minute. Furthermore, the total figure is unlikely to fall below 1000m ecu because in 1995 the main subsidy paid to the farmer (the premium) was increased by about 20%. The rise in the total cost of subsidies may have been stopped, although even this is not clear from figure 1 which shows an upward trend.
Adaptation of production to commercially demanded varieties never succeeded. As a result imports have remained high. In 1990 they were 463000 tonnes, in 1992 (the year of the reforms) 527000 tonnes, and in 1994 still 490000 tonnes. Growing conditions in the union, especially in the south, are better suited to varieties for which there is now little commercial demand—most of the sun and dark air cured varieties. And even the sought after varieties, especially flue cured varieties like Virginia, are often of poor quality. Most tobacco grown in the union is unsuitable for making the popular types of (American blend) cigarettes.
And because growing conditions are not favourable attempts to adapt production to demand have conflicted with the aim of providing income for farmers. For example, huge sums were invested in Greek flue cured tobacco through increased premiums (the subsidy paid to processors to persuade them to buy from union farmers rather than buy cheaper tobacco from outside the union) in the 1980s and in the early 1990s through investment by the producers and Greek national authorities in equipment and infrastructure. The result was increased production from 1042 tonnes in 1986 to 29598 tonnes in 1994. The cost was just over 73m ecu in 1994 for premium support, and from earlier years about 36m ecu for ovens and 23m ecu for things like power, a total investment of about 132m ecu.4 What was the market value of this crop?
Are tobacco subsidies a good way of supporting farming jobs?
Before 1992 we could not have answered that question because the processors did not have to declare how much they paid farmers. After the 1992 reforms contracts that attracted premium payments had to show the purchase price.5 For the first time the commercial value of the crop would be known and hence the efficiency of the subsidy could be evaluated.
In 1994 the processors paid farmers 0.084 ecu/kg for Greek flue cured tobacco, a total of 2.5m ecu. Thus 132m ecu were invested to produce a crop worth 2.5m ecu.
Table 1 shows the value of the 1994 crop by variety. The total value of the year's production (328000 tonnes) was 105m ecu. Two thirds (68%) of this production, 223000 tonnes, was of low value tobacco with a value of 22m ecu. Only 32% of the crop, 105000 tonnes, was of commercially valued varieties, worth 84m ecu. In other words, most tobacco subsidies are for a product with very little commercial value. The exception is Greek oriental varieties sought after for their aromatic qualities and used in American blend cigarettes. What of the European Commission's defence that this is a good way of providing a living for farmers?
The premium figures for the 1994 crop are not yet available so we have based our calculations of farmers' income on 1993, the latest year for which complete data are available. The Court of Auditors' figures show the 1992 crop as 408000 tonnes produced by 180000 farmers. The 1993 crop was 343000 tonnes, a decrease of 16%. We have assumed a similar decrease in the number of farmers. The actual decrease may well be less, so the effect on our calculation is conservative and if anything we have overestimated average income. In 1993 the total paid to farmers in premiums was 883m ecu and the total value of the crop was 93m ecu, so the farmers' total income (purchase price plus premium) was 976m ecu, an average of 6500 ecu per farmer.
The Court of Auditors estimated farmers' expenses (seeds, fertilisers, rent, and so on) as 43% of gross income (Court of Auditors, personal communication), which leaves an average annual income of almost 3700 ecu. This is not a huge sum, but if that amount was paid to the farmers direct as income support rather than as a subsidy to grow tobacco (thus no expenses) the total cost would be 556m ecu not 883m, a saving of 327m ecu.
These figures provide no justification for using tobacco subsidies to provide agricultural employment. The money would be better invested in developing alternative crops and perhaps industries. Table 1 shows that all of the low value tobacco is grown in southern Europe. The commission has argued that it is impossible to grow other crops on these small family farms. Compared with the sums spent on subsidies, however, little has been spent researching alternatives. The tobacco research and information fund covers only research into less harmful varieties, not into alternative crops.
The Court of Auditors' conclusions
The Court of Auditors concluded: “Serious consideration has to be given by the Commission and the Budget Authority as to whether there is adequate justification to support a product which requires massive Community aid and substantial Member State resources to manage and control when its use results in an enormous social health cost … Thus the Community finances a product for which there is no real demand, instead of urgently seeking a switch to other products in areas where quality tobacco is not, or indeed cannot be grown.” Finally it describes tobacco subsidies as “a misuse of public funds.”
In its introduction the court regrets “that the Commission was not as forthcoming as it ought to have been in response to repeated requests from the Court for a copy of a report on an investigation ordered by the Commission into allegations of irregularities.” It recounts that it requested a copy of a report but the Commission, despite reminders, refused to provide one and talks about “the obstacles created by the Commission's lack of cooperation.” Why has reform been so fiercely resisted? The answer is probably political: lobbying by the growing countries, and reluctance to accept any criticism of a policy originated to protect farming jobs. To abolish tobacco subsidies would be to acknowledge that the common agricultural policy itself is flawed, and this will not easily be conceded. Attitudes will change probably only if other (especially newer) members of the European Union insist on change.
Are tobacco subsidies in conflict with health policy?
The Court of Auditors noted that the smoking part of the 1993 Europe Against Cancer budget was just 1.5m ecu, only 0.1% of total expenditure on tobacco subsidies. This does not suggest a serious commitment to health. Nor does the operation of the tobacco research and information fund. Tenders called for in July 1994 were vetted by a committee of experts in early 1995. Yet by the end of 1995 no projects had been given a final go ahead. About 11m ecu had been allocated for 1995 and only 6000 ecu spent.
More disturbing is the closure of BASP (the Bureau for Action on Smoking Prevention). This organisation was funded by the Europe Against Cancer programme to provide information and advice about smoking prevention. The ninth world conference on tobacco or health (Paris 1994) strongly urged the European Commission “to maintain its support for BASP in order to enable this organisation to continue its major contribution to tobacco control in the European Union.”6 Yet in July 1995 it closed. The commission claimed that it was free to apply for a competitive tender to continue its work. But its contract expired at the end of July 1995 and since the invitations to tender were not published until late April that year staff had to be laid off. The agriculture directorate of the commission, angered by criticisms of tobacco subsidies, had already asked for an end to the bureau's funding (letter from G Legras to Mr HC Jones, director general of direcorate V, 1994).
The huge disparity between the money spent subsidising tobacco and that spent campaigning against smoking suggests an ambivalence in European Union policy towards health goals. We believe that support should be increased for research into alternative crops and that research on “less harmful” varieties of tobacco should be stopped since there is no such thing as unharmful tobacco. The delay in funding projects from the tobacco research and information fund and the closure of the Bureau for Action on Smoking Prevention raise serious questions about the competence, motivation, and judgment of directorate general V of the European Commission.
The 1992 reforms did not address the fundamental issue: abolition of tobacco subsidies altogether. They had some limited benefits, including the abolition of export subsidies and intervention support, although it remains to be seen what long term effect the ending of export subsidies will have. Many of these exports are of high tar tobacco to less developed countries. The limiting of overall production is a small step forward, as is the reduction in overall expenditure. Nevertheless, the estimate for 1996 expenditure exceeds the 1995 figure, and overall expenditure is unlikely to fall much below 1000m ecu. This is still a huge sum for a crop whose commercial value is one tenth of that.
The new data on the commercial value of the crop clearly show that the European Union's tobacco subsidies are economic nonsense. They remove the last line of defence of the policy, that of income support for farmers. Tobacco subsidies have proved phenomenally expensive, have failed to adapt production to demand, have failed to reduce imports, are in direct conflict with health policy, and are an economically inefficient way of providing income for farmers. We agree with the Court of Auditors' conclusion that it would be better to provide direct income support to farmers not to grow tobacco. Tobacco subsidies are now indefensible.
Conflict of interest LJ was former director of BASP.