THE BLOG

The Sugar Tax: Being Right vs Being Effective

13/04/2016 16:05

There was an unexpected addition to this year's budget that pleasantly surprised health professionals across the country. It was the introduction of a new soft drinks levy intended to decrease the consumption of sugar-laden beverages, particularly in children. The levy (dubbed a 'sugar tax') will be introduced in April 2018, and will hope to generate close to £1.5 billion in the period 2018-21. The government intends to invest the tax revenue for increased physical education, extracurricular activities and breakfast clubs at schools.

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Eoin Kelleher, Cartoonist. All rights reserved. For more of his work: eoinkelleher.com

HOW HARMFUL IS SUGAR?

Chronic consumption of refined sugar ( a combination of glucose and fructose) leads to obesity, resulting in insulin resistance, and thus perpetuating the vicious cycle. We know that obesity is a direct risk factor for hypertension, diabetes, and cardiovascular disease. The Global Burden of Disease study found that dietary risk factors and physical inactivity accounted for 10% of all global health disability. In 2012 amongst 11-15-year-olds, an estimated 34% of boys and 37% of girls were obese or overweight. Public Health England claim that soft drinks (including energy drinks) are the single largest source of sugar in teenagers.

Was George Osbourne right in imposing a levy on sugary drinks? Will the levy be effective in achieving its intended benefit of reducing overall sugar consumption?

IS IT RIGHT?

Apart from the health benefits, one of the main arguments for supporting the tax is that sugar leads to negative externalities. A negative externality occurs when the economic, social, environmental or health implications of consumption (e.g. sugar, alcohol, smoking, etc.) or production (e.g. factories creating pollution) of a particular good go beyond the individual and pose wider costs to society. It is estimated that obesity and poor dental health costs the NHS £8.1 billion a year. Also, the loss of labour productivity in the workplace due to sick leave has a direct impact on employers and the taxpayer. This 'spill-over' effect means that individuals making healthy choices can indirectly be affected by the behaviour of individuals making unhealthy ones.

Negative externalities justify taxation by virtue of their net welfare loss to society. In theory, taxation would dis-incentivise consumer purchasing behaviour, and drive down demand. Over time, buying habits would sufficiently change - having the overall effect of creating a healthier environment for children to grow up.

The principal advantage of taxation over regulation is that the government generates revenue rather than spending money on imposing law; it also happens to be less threatening. The government hopes to invest this in sporting activities at primary schools, extracurricular activities, and breakfast clubs.

The tax has also been introduced in other countries, adding legitimacy to the argument. Examples include Hungary, France, and Mexico. A study in Mexico of 6253 households over a three year period suggested a 6% reduction in the purchase of taxed beverages compared to pre-tax trends. However, the impact on obesity and health remain undetermined.

IS IT EFFECTIVE?

Significant criticism points to the tax being regressive for the poor who will pay a higher proportion of their income than the wealthy. Lower-income households spend a greater portion of their income on consumable goods than higher-income households, and so will shoulder a greater economic burden.

Another pitfall to the price hike is that people will switch to the consumption of fruit juices. These substitutes would offset the intended effect of the soft drinks levy as sugar consumption would remain much the same. Consumers may also continue to purchase the same amount of sugary beverages but forgo healthier items like fruit and vegetables to mitigate costs.

Retailers and producers may use a range of marketing strategies to alleviate the effects of the tax. The Behavioural Insights team state that "the levy will likely have a greater impact on behaviour if the total, additional cost of a sugary drink is passed on to customers and be strongest if retailers make these changes more salient (visible) at the point of purchase". Current regulation does not mandate retailers to display the amount of tax on the item at the point of transaction. Retailers may also use cost-shifting strategies to encourage consumers to purchase larger versions of the product (e.g. 2L bottle of Coke vs. 500ml bottle), which are cheaper per litre - proving more cost-effective for everyone.

The next snare is a design failure. The two-tier system means that drinks containing between 5-8 grams of sugar per 100ml will face a levy, while drinks containing more than 8 grams per 100ml face a higher levy. Beyond that, there is no proportional rise in tax per gram of sugar. This means well-established brands like Red Bull, Pepsi, Coca-Cola, and Tropicana (all exceeding 8g/100ml) would not be proportionally penalised for their very high sugar content. The Institute for Fiscal Studies give a useful example:- 3 litres of Coca-Cola contain 318 grams of sugar and cost 72p of tax (based on 24p per litre) while 2 litres of Sainsbury's Orange Energy Drink also contain 318 grams of sugar but cost only 48p of tax.

The promise of investment into primary and secondary schools as a result of the tax can only be sustainable providing sugar consumption habits do not change. In simple terms, the investment benefits of the tax are riding on consumers continuing to purchase high amounts of sugar - two paradoxical priorities.

Another factor is a false positive belief that sugar purchasing equates to sugar consumption. In the days to weeks before the introduction of the tax, there may be mass hoarding of shopping isles, and research post-tax will wrongly attribute lower purchasing to lower sugar consumption.

In a BMJ paper entitled "Taxing unhealthy foods and drinks to improve health," the authors explore evidence surrounding food and drink taxes. They state there is currently weak evidence supporting the correlation between food (and drink) prices and population weight. Randomised controlled trials also have their limitations as participants may consume drinks away from the study environment. The authors did later conduct a theoretical modelling study, which concluded that a 20% sale tax on sugary drinks would reduce the prevalence of obesity in the UK by 1.3%.

Affixed to all these issues, and with currently no convincing evidence on its impact on obesity, this fiscal lever seems rather ineffective.

THE VERDICT

In principle, the introduction of a tax on sugary drinks was right . It is ethically justified by virtue of soft drinks being a demerit good and taxation mitigating the wider costs to society. However, this does not at all correlate to its effectiveness. One should not readily conclude that fiscal policy would be effective just because it 'sounds good'.

Human behaviour is often unpredictable and irrational. Our decisions are also influenced by non-financial values like social norms, reliance on defaults, the presence of relative choices and the way things are branded. By playing on these irrational yet very real behavioural traits, we can successfully implement non-fiscal strategies in combating obesity. This is what behavioural economists call 'Nudging'. When will we explore these possibilities?

As health professionals, we need not jump on every public health bandwagon. There exists a distinction between what is 'Right in principle' and what is 'Effective in reality'. If we fail to make that distinction, our personal biases may well jeopardise our ability to separate the good solutions from the bad ones.

(The original article was posted here)

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