New sugar levy will cost taxpayers billions & do more harm than good

22 Aug 2016 01:52 PM

The sugar levy will fuel inflation, cost the government more than it brings in, and is very unlikely to have any measurable impact on obesity. Expectations that the levy will incentivise reformulation ignore the fact that extensive sugar reduction has already taken place; further changes are either physically impossible or commercially suicidal.

Sugar Levy Briefing PDF.pdf

It is widely known that a sugar tax hits the poorest the hardest, but a new report from the Institute of Economic Affairs goes further in exposing the flawed justifications for the tax, debunking its purported health benefits and unearthing new figures which show there is no correlation between sugary drink consumption and obesity.

Key findings:

Justifications for the sugar levy are based on myths:

• Obesity has risen while sugary drink sales have fallen sharply, and that there’s no link between sugary drink consumption and obesity if you look country-by-country.
• The steep decline of sugary drinks – consumption has fallen 45% since 2003 – has been driven by consumers shifting to low-calorie alternatives, which are set to overtake the sales of sugary drinks.
• Sugary drinks are often claimed to be the largest single source of sugar for under 18s. This is only true if fruit juice is included. Teenagers get 5.1% of their calories from soft drinks. Younger children and adults get even less (2.3% and 2.4% respectively).
• There is no correlation between childhood obesity and soft drink consumption when we look at the international picture. In Belgium, 35% of 15 years olds consume sugary drinks daily, with 15% of children classed as overweight or obese. In Greece, just 6% of 15 year olds consume soft drinks every day, yet the overweight and obesity rate is over 40%.Sugary drinks taxes in other countries have been associated with a rise in the sale of fruit juice, milkshakes and alcohol. In the US, a moderate reduction in calorie intake from soft drinks was completely offset by consumption of other high-calorie drinks.

75% of drinks are immune to reformulation: 

• If the aim of the sugar levy is to encourage reformulation, it’s difficult to see how the industry can go further. There is no more sugar to be removed from diet drinks – which represent 50% of the market -  whilst companies will not change the recipe of popular original brands. Regular Coke and Pepsi make up a quarter of the market
• This leaves just a quarter of the existing market which can plausibly be reformulated, including brands unlikely to change, such as Irn-Bru, and brands already reformulated, such as Oasis.
• For many brands of soft drinks, the levy provides no incentive to further reduce sugar levels, meaning that manufacturers have the perverse incentive to raise sugar levels in reduced-sugar drinks up to the limit of the tax bracket they are in.

The sugar levy is going to cost both consumers and non-consumers alike:

• The OBR has suggested the levy will increase the inflation rate by a quarter of a per cent in 2018-19 – equivalent of adding £1bn to accrued interest payments on index-linked gilts. This will raise the costs of index-linked salaries, pensions and benefits by several millions of pounds, arbitrarily punishing the entire population.
• The levy will also require taxpayers’ money to be spent on enforcement and administration, meaning that the sugar levy will be loss-making for at least its first few years.
• If tackling obesity is to be a government priority, it should be funded through general taxation, not a regressive sugar tax.

Commenting on the briefing, its author Chris Snowdon said:

“The sugar levy will be a regressive stealth tax adding to the shadow economy and creating avoidable costs to the taxpayer, whilst doing nothing to improve the country’s health.

“The international evidence is clear: there is no correlation between sugary drink consumption and obesity. It’s time for the government to come clean about its flawed logic and admit that its new levy will do nothing to reduce obesity, childhood or otherwise. It is a bad idea, poorly implemented.”

Notes to Editors:

To arrange an interview with an IEA spokesperson please contact: Stephanie Lis, Director of Communications: 0207 799 8909.

The full report, by Christopher Snowdon, can be downloaded here.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems.

The IEA is a registered educational charity and independent of all political parties.