Introducing a legal cannabis market to the UK could earn the Treasury between £1bn and £3.5bn a year in tax revenues, a new report suggests.

Health Poverty Action, an international development organisation, claims that regulating and legalising cannabis in the UK is an “idea whose time has come” and that the windfall could be used to plug the gap in the NHS budget.

“Prohibition has failed,” said the group’s advocacy officer, Natasha Horsfield. “From our perspective, it’s about regulating the market to improve public health outcomes and create a safer environment. But we can see the potential benefits from a taxation perspective if we were to regulate it.”

Support for such a move is growing. Both the Lib Dems and the Greens favour a regulated cannabis market, but the two main parties remain unenthusiastic.

In 2013, Uruguay became the first country to legalise cannabis. Last year New Zealand pledged to hold a cannabis referendum within three years.

But it is moves in North America that could really presage a change in UK policy. A bill that would make Canada the first G7 country to legalise marijuana is making its way through parliament in Ottawa. In the US, nine states, including Colorado and Washington, have legalised cannabis for non-medical use.

Benefits from a regulated cannabis market are said to include reducing harm to users by ensuring it is sold within required potency limits. Photograph: Gareth Fuller/PA

A recent poll suggested 47% of people in the UK support the selling of cannabis in licensed shops. Among those aged 18 to 44, the figure rises to 52%. Experience from the US has shown that once legislation is introduced in a state, more people come to view it favourably.

Health Poverty Action suggests that a regulated cannabis market would bring a number of benefits. It would reduce harm to users by ensuring that products were monitored, tested and sold within required potency limits. It would also reduce the size and reach of the high-strength skunk market, because many users would opt for the legal alternative. Decriminalisation would reduce pressure on the police and courts.

It quotes one study that suggests legalisation would save a total of £291m across the police, court, prison and probation services in England and Wales. In some US states that have introduced a regulated market, drinking has declined, so legal cannabis could also help alleviate some of the burden that excessive drinking places on the NHS.

But the most eyecatching benefit suggested is the potentially huge sums of money the measure would bring the Treasury. In 2013, the Observer reported that the Institute for Social and Economic Research estimated a regulated cannabis market in England and Wales could bring in between £397m and £871m a year, depending on demand and the level of taxation.

Once savings in criminal justice costs were factored in, the total value was estimated to be as much as £1.25bn a year.

But data from places with established cannabis markets suggests it could be a considerably bigger cash cow for the chancellor. If the Colorado and Washington model was introduced, the Treasury could expect to make about £2.26bn a year in tax revenues – more than enough to plug the £2bn estimated NHS deficit for this year.

A “coffee-shop system”, along the lines of the one that operates in the Netherlands, would generate £1.4bn in tax revenues – enough to pay the annual salaries of all the midwives and ambulance crews in England.

Alternatively, if the Treasury were to hit cannabis with a tax set at the same level as alcohol, this would bring in almost £2bn, Health Poverty Action estimates. Taxing cannabis in the same way as tobacco would generate £3.5bn.

“While we do not know exactly how the market will respond to regulation, and while we do not know exactly what regulatory model would be used, it would seem a fair assumption that a legal recreational cannabis market is likely to bring at least £1bn annually, and it could be much more,” the report states.

Yet it conceded a balanced view would need to weigh any potentially negative impacts against the benefits. Its report states: “We have to accept the possibility that use may increase for some groups of people, even if this is spurred in part by the novelty factor of a newly legal market.”