The unintended consequences of the sugar tax

March 24, 2016 10:37 AM

Sugary soft drinks will be taxed in an almost certainly futile bid to improve the nation’s health, that much we know. But what other effects will the measure have?

The first year that the levy comes into effect the treasury expects to raise about £520 million. Clearly there is not going to be a complete reduction in soft-drink consumption and neither will there be the widespread reformulation of products to reduce the amount of sugar.

In fact, generously assuming that all of this money was collected on drinks charged at the higher 24pence/litre rate this implies that 2.16 billion litres of such drinks are consumed (the true figure would be between that and 2.9 billion if they were all subject to the 18 pence rate). Given that there is likely to be some reformulation, it seems that there won’t be the obesity busting reduction in consumption that the policy is supposed to achieve.

But as others have pointed out, this tax is actually detrimental to the public finances despite being a revenue raiser. The OBR notes that the increase in price of soft drinks will raise inflation. This in turn raises the cost of interest payments on index-linked gilts by about £1 billion in 2018-19. So while the sugar tax raises £520 million for the treasury, its net effect is to cost around the same amount in the year of its introduction. And this of course ignores the fact that money raised from the sugar tax is being spent on sports programmes etc. rather than being used to reduce the deficit.

Taxpayers are, of course, on the hook for this money and it seems very strange to implement measures that make controlling public finances more difficult. That the health service will be saved many costs in the future is also unlikely given the lack of evidence that such levies reduce calorie consumption.

Besides this fiscal mess, there are rumours that soft-drinks makers will sue over the levy as they believe it is discriminatory. They argue that many other high-sugar products such as fruit juices or milk-shakes are not subject to the levy the government is favouring one industry over another. Of course, if the drinks makers win, taxpayers will be on the hook for the costs of any legal proceedings and any subsequent awards.

It is plain that the moves to get spending under control after the excesses of much of the last decade have not been swift enough. So it can only be thought that the sugar tax was put into the budget to distract from the fact that the public finances are not in the robust shape that we might hope for.

 

Latest Blogs: