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Tobacco tax might be Indonesia’s solution to budget deficit in healthcare program

The Indonesian central government is using Rp4.9 trillion from regional tobacco excise duty, one of the three taxes on cigarettes sales, to cover a budget deficit in the country’s health insurance program.

But this will still not be enough. The Healthcare and Social Security Agency is facing an estimated deficit of over Rp10 trillion (US$672.5 million) this year.

The government should consider increasing the national tobacco excise and allocate a portion of that revenue to the national healthcare program, the largest healthcare program in the world. The government should also consider adding excise to other goods that harm public health and the environment.

Biting off more that it can chew

Indonesia’s social health insurance program covers 203 million people. Indonesia plans to have the nation’s entire population of 260 million covered by 2019. This will make its insurance scheme the largest universal healthcare program in the world.

The program has succeeded in improving access to health services for Indonesians. The country launched its healthcare program in 2014. By March 2018 the number of members had more than tripled. Some 51.6% of the members are the poor, whose contributions are paid for by the government.

The number of claims grew with the number of members. In 2014, 66.8 million people used health services covered by the insurance program. By 2016, the number had doubled to 120.9 million.

The insurance scheme is not only the largest in the world, it is also the cheapest. And here lies the problem. Members’ contribution is below the agency’s spending on hospital claims and other services.

The cost of the insurance premium is below the actuarial cost. Political and social reasons influence the low monthly contribution. With the presidential election next year, the government is avoiding an increase in premiums that would increase people’s burden, which would be an unpopular decision.

Members currently pay a monthly premium of Rp25,500-Rp80,000. In 2015, the agency received on average Rp27,000 per member every month. Meanwhile, it had to pay average claim expenses of Rp33,000 per month per member. In 2017, the agency estimated that without additional contributions the deficit would increase from Rp13 trillion (US$857.9m) in 2018 to Rp30 trillion (US$1.9 billion) in 2030.

Tobacco excise for healthcare program

Indonesia is the second-largest tobacco market in the world with 100 million smokers.

Cigarettes in Indonesia are subject to three types of taxes. For each cigarette, the government charges 44.7% of the retail price for national tobacco excise, 4.47% of the price for local cigarette tax and 9.1% of the price for value-added tax.

Income from national tobacco excise (around Rp 148 trillion in 2017) and value-added tax goes into the central government’s coffers. Revenue from regional tobacco excise (around Rp 14 trillion) is distributed to regional governments.

Under a 2009 Law on Local Tax and Local Retribution, half of the local cigarette tax received, local governments must use it for health services and policing illegal cigarettes and smoke-free areas. But the implementation of this regulation varies with each regional government.

The government’s strategy to cover the healthcare deficit is to take a portion of local administrations’ income from local cigarette tax and from tobacco excise revenue-sharing. The new presidential regulation instructed local administrations to channel three-quarters of the budget for health services and anti-cigarette campaigns to the Healthcare Agency.

This is in line with a 2017 Health Ministry regulation that requires that three-quarters of the local cigarette tax allocated for health services, up to Rp5.25 trillion, can be used to cover the healthcare program.

Sustainability strategy: extending and earmarking tax

Using tobacco taxes to fund the health insurance program is the most plausible approach because the government is not ready to raise members’ fee.

It also makes sense. In 2016, 21.75% of healthcare claims were used to cover chronic illness associated with smoking.

A large body of research has showed that tobacco consumption is a mayor risk factor for diseases like cancer, heart attack, stroke, and other illnesses. Macro-economic losses from consumption of cigarettes are four times higher than the tobacco excise received by the Indonesian government.

But the government should not only take local cigarette tax – a large portion of local administrations’ health budget – to cover for the healthcare program.

It should also significantly increase the national tobacco excise. The World Health Organisation has suggested tobacco excise duty be up to 70% of the retail price. The government should dedicate a portion of the national tobacco excise income to the healthcare program.

Currently, state revenue from tobacco excise is around Rp 140 trillion. If the government allocates 15% of the excise revenue to healthcare, that’s an extra Rp 21 trillion for the healthcare program.

To accommodate this, the government and parliament have to revise the 2007 Law on Excise that limits cigarette excise to 57% of the retail price.

It would be even better if the government applied excise to other goods that harm public health and the environment – for example, sugar, plastic and fossil fuels.

Since 1995, Indonesia has charged excise on tobacco and alcoholic beverages only. Indonesia can follow the example of Thailand, which charges excise on 26 goods and services to decrease consumption and economic inequality as well protect the environment.

Broadening excises can decrease the state’s dependence on cigarette tax. Our study estimates that by adding excise to other products, the government will be able to increase revenue by Rp 77 trillion. This will even allow more space for the government to support the healthcare program.

Increasing tobacco excise duty and adding excise to goods that harm the health of Indonesian people will hopefully reduce consumption more drastically and improve the quality of public health at the same time.

This article was first published in Indonesian. The author added new information for the latest policy on the Indonesian health care.

This article was originally published in Indonesian

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