Sugar tax paper set to stir up sticky debate

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Finance Minister Pravin Gordhan announced in his February budget that the government was looking to introduce such a tax but details of the Treasury’s thinking emerged only in the policy paper last week, which proposes a tax of R0.029 (2.9c) per gram of sugar in all sweetened drinks except for 100% fruit juices. The tax, which would make SA one of the first countries to introduce a "dose-based" tax on sugar, would add about 20% to the price of a can of Coca-Cola, for example.

Oddly enough, SA has done this before in some form with an excise tax on soft drinks and mineral water which was in place until 2002 as a revenue-raising measure.

And the new tax would serve to raise as much as R4.5bn, about R3bn of which would come from carbonated soft drinks, according to an industry estimate that followed the release of the policy paper last week.

This is higher than earlier estimates of slightly more than R2bn. But either way, the sugar tax would raise a lot less revenue than the "sin taxes" on beer which in 2015 raised about R8bn or tobacco (R12bn).

Treasury officials were quick to emphasise last week that the new tax is not about revenue. The amount that would be raised is minuscule in the context of total revenue of about R1-trillion, and there are much easier ways for government to raise it — if it just declined to compensate tax payers for fiscal drag, for example, that could add R13b-R15bn to revenue in the current year (fiscal drag boosts the tax take when individuals receive salary increases which notch them up to higher tax brackets).

The sugar tax is designed to change behaviour, to "nudge" people to make healthier choices that will help curb the incidence of sugar-related diseases such as obesity and diabetes which are increasing at a rapid rate in SA, burdening the health system and the economy.

No one disputes that SA has a big problem. SA has one of the highest rates of obesity in the world and the highest in sub-Saharan Africa. Diabetes in SA has doubled over the past decade and is being diagnosed not just in older people but in teenagers, and it impacts on poor households particularly severely.

Wits University’s Centre for Public Health estimates diabetes and heart disease are costing R1.8bn a year of GDP and this will balloon in the next decade, says the centre’s Professor Karen Hofman — "if we don’t start with a simple first step" in the form of a tax on sugar-sweetened beverages.

Why beverages? The evidence is, says Hofman, that "liquid sugar in particular is very toxic because when you drink it in liquid form it goes into your bloodstream very quickly". Many sugar-sweetened beverages also have little or no nutritional value.

The pure fruit juice industry has welcomed the exemption for 100% pure fruit juices but Hofman believes this is an omission by the Treasury and that all sweetened drinks should be taxed. The dose-based tax, she argues, will give producers an incentive to reformulate drinks so that they contain less sugar. She hopes too that it will force them to start marketing water.

Research and evidence is that tax on sugar-sweetened beverages is the most important and most effective measure, says Hofman. The next choice is food advertising regulation, which would for example stop the Coca-Cola billboards which the Centre for Public Health found in the grounds of 50% of Soweto schools despite a voluntary pledge by the industry to stop marketing to children

Will the sugar tax help? When Mexico introduced it in 2014 it cut consumption by 12% and among the very poor the decrease was 17%. Hofman says the centre estimates the tax will cut the number of obese people in SA by 250,000 in three years — and if it is not introduced, the number will jump by half a million in those three years. Hofman adds that obese people cost employers 50% more than non-obese workers, because of higher rates of illness and time off.

A key question, however, is the unintended consequences for the sugar-sweetened beverage industry. Pioneer Foods, which produces Liqui-Fruit, has welcomed the exemption of 100% fruit juices, in part because it will be positive for the fruit value chain in agriculture and agro-processing. But what of the value chains in carbonated soft drinks or other drinks?

A recent study by KPMG raised the question of potential implications for the industry, with manufacturers, employees and shareholders standing to lose. In the UK, which plans to introduce a sugar tax in 2018, the share prices of the beverage manufacturers fell when the tax was announced.

In Mexico, a reported 1,700 jobs were lost due to the tax implemented in 2014 with estimates of a total 11,000 jobs having been lost along the value chain.

The Beverage Association of SA (BevSA), whose members include the bottlers of Coca-Cola and a range of other sweetened drinks, has said the tax was discriminatory. It did not respond last week to repeated requests for comment on the policy paper. However, it said in June that "the targeting of a single product with a tax will not help the government meet its objectives. The tax is discriminatory and will have a disproportionate effect on lower income earners, who spend a greater proportion of their budget on food.

"There is also a growing body of evidence that shows that a sugar tax on sugar-sweetened beverages doesn’t reduce calorie intake," BevSA said.

There has been debate in the UK about whether, if the government is going to tax fizzy drinks, it should not also be taxing crisps or other junk food which are just as implicated in obesity and other lifestyle diseases.

On its own, the tax clearly is not going to solve SA’s obesity and diabetes problems and the policy paper recommends it should be part of a suite of measures to improve the nation’s health. The question is whether the expected benefits will be substantial enough to outweigh the expected costs.

With the paper now open for comment, the discussion promises to be heated.