15 December 2016
Just a spoonful full of tax helps the sugar go down
Lateral thinking on a sugar tax.
by Frank O’Nomics
The UK has an obesity problem of epidemic proportions and it is costing the country a great deal of money. According to a recent report for the Department for Work and Pensions, more than one in three of the 2.3 million people receiving the Employment and Support Allowance – the key benefit for illness and disability – have conditions potentially driven by weight problems. The additional long-term costs of this are difficult to quantify, but the burden on an over-stretched health service could be such that it will be able to do little else than cope with its effects. One of the main causes of obesity is the nation’s dependency on sugary food and drink, particularly soft drinks such as Cola which has 35g of sugar per 330ml can (around 7 teaspoons) – 5g more than the recommended daily amount for anyone aged over 11. However, fear not, the government is doing something to address the situation. George Osborne announced earlier this year that the government would seek to introduce a tax on sugary drinks and we were recently given more details regarding its extent and timing. There will be 2 bands of taxation from April 2018. Drinks that have more than 5g of sugar per 100ml (Tango for example) will see one level and those with more than 8g (Cola) an even higher level, of 20%. The OBR has estimated that this will add 18-24p per litre to the price of sugary drinks, and that this will raise £520 million that can be channelled into sport programmes at schools. At a stroke, problem solved – people will be discouraged from buying sugary drinks, manufacturers will be encouraged to reduce the sugar content, and our children will be running around on new playing fields. Sadly, what may seem like an ideal solution may be far from what is needed. Indeed, there are strong arguments to suggest that the tax will have little impact at all. Clearly this needs explaining, and I will, but don’t despair – there is an alternative solution.
58% of women and 68% of men in the UK are overweight or obese. The DWP report shows that the overweight are far more likely to suffer from related health conditions such as diabetes, high blood pressure, musculoskeletal disorders, respiratory conditions, heart problems, and poor mental health. The Treasury estimates that treating obesity, and its consequences, is currently costing a staggering £5.1 billion per year. That such a problem needs to be addressed is in no doubt. There are many initiatives to educate people as to the benefits of a healthy diet and of taking regular exercise. Such initiatives have not stopped the rise on obesity so something else needs to be done, hence the new tax initiative supported by Cancer UK, who estimate that a 20% tax could prevent 3.7 million cases of obesity over the next decade. However, such estimates make a number of dubious assumptions and the reality is likely to be very different.
Consider other punitive tax initiatives. Has the continued rise in duty on alcohol had any material impact on alcohol related disease in the UK? There is little evidence to suggest that it has, with the data from the Health Survey for England showing consumption fairly constant for some years. The nation’s sugar dependency will similarly take a lot of shaking, and the extent to which people cut down is unlikely to have a material impact on their wellbeing. Economists forecast that a 20% price increase is likely to lead to a fall in consumption of 15%. Not a lot when you think that young people are consuming 3 times as much sugar as they should (on average 234 cans of fizzy drinks a year), with adults taking around twice their recommended intake. Even a modest reduction caused by the impact of a tax rise may not occur if the price change is minimalized by manufacturers taking a hit to their margins by not passing all of it on. You might argue that the tax will be raised either way, and the £520 million will be used to further counter obesity via encouraging more sport. However, experience suggests that hypothecated taxes may start out going in the right direction, but are quickly lost in the huge numbers that constitute public sector spending. It sounds like a lot of money, but it is modest compared to landfill tax (twice as much), betting levies (three times) and the duty on wine (six times). Using money to address dietary habits may be more important than promoting exercise. Only this week Lord McColl, from Guy’s Hospital, said. “Exercise has very little to do with it. It is good for other things but not for reducing obesity”.
There are also other economic consequences to be considered. Oxford Economics say that, of the 346,518 jobs that depend on the making and selling of soft drinks, around 4,000 could be lost as a result of the tax rise, coming from a combination of lower sales and smaller margins. A large impact for a tax that may produce little of the benefit it intends
This is not an argument against doing something to counter the obesity problem, or against trying to reduce the consumption of sugary soft drinks. It is an argument for trying other methods, and one proposal is to introduce a tax incentive for those who produce and sell the healthier, low calorie alternatives. It currently costs the same to buy a diet cola as it does to buy the full dope version. If the VAT on the diet option were reduced from 20% to 5%, this would create a very strong incentive for people to switch. The demand for fizzy drinks will be very hard to turn around, but the type of drink chosen can be more readily influenced. The team at Oppo Ice Cream, who use natural ingredients to create a product that has 50-60% less calories than a standard brand (a portion has the same number of calories as an apple), have petitioned the Chancellor to consider a VAT reduction along these lines, but hitherto have been ignored. The fimancial impact of a VAT reduction would be insignificant if it prompts a long-term shift in consumption patterns, given both a fall in future demands on the health service and the additional productivity generated by a healthier work force.
Regardless of tax incentives, some companies are making efforts to reduce the amount of sugar in their products. The British Soft Drinks Association has a target of a 20% reduction in calories by 2020, and Waitrose recently reduced the amount of sugar in their own brand breakfast cereals by 30% – in total of 90 tonnes less sugar, (22.5 million spoonfuls) per year. There are some marketing benefits to be had from making such changes but, without the introduction of an incentive, change is likely to be glacial. Rather than the use of a higher tax stick, the government should look to a (healthy, high fibre, low calorie) carrot.
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