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Examining the UK Soft Drinks Levy, one year on

May 1, 2019
Consumer Packaged Goods

A year has passed since the UK’s Soft Drinks Industry Levy was imposed. Does the success of the ‘sugar tax’ depend on how economically successful it has been, or how socially successful it will be in terms of health and wellness choices?

We spoke to Kate Smith, senior research economist at the Institute for Fiscal Studies, to explore this question and to ask, could the levy be imposed on other sectors of the industry?

Has the Soft Drinks Levy been a success?

It’s still quite early to tell, as acquiring data is difficult in such a small timeframe.

There are some people in Oxford trying to evaluate the effects the levy has had on the consumption of soft drinks, prices, health data and so on, but as far as I know there hasn’t been anything published that spells out all of the impacts.

One thing we’ve seen – this we can observe anecdotally – is that there have been price increases and the reformulation of soft drinks to either put them in the lower band or remove them from the tax completely.

You might think this has potential – but the effects of the reformulation on health and wider outcomes are ambiguous. It depends on whether people continue to buy the reformulated products post reformulation, or if they switch to products that contain more sugar, which will offset the effects of reformulation.

I think another thing that is often lost in a lot of the public health debate is that people derive value from consuming sugary drinks.

If you take away a product from the market, it will make people worse off and have a societal cost. We know there has been reformulation, but we don’t know the full impact on health outcomes.

In terms of the effect on purchases and prices, you will be able to see soon from the data on how much people buy and what that will cost.

And impacts on health? We will have to wait a bit longer before we start to see the data on these. I think the levy will have a dramatic effect on health.

Even if you reduce 20% sugar consumption to 0% in beverages, people will still consume large amounts of sugar and calories elsewhere. I’d be surprised if we looked back in five years’ time and saw a dramatic decrease in childhood obesity just after the introduction of this tax.

Is the success of the levy dependant on the amount of tax generated, or more so on the outcome of health, and who determines this?

The way economists look at these types of taxes is that there are various types of costs associated with consumption of certain types of goods, for example fuel, cigarettes, alcohol, or sugar, that are not fully taken into account when the individual decides to purchase.

This might come through in the fact that higher sugar intake increases the risk of diabetes, which impacts on costs for the NHS, and the consumer might not acknowledge this when consuming these kinds of goods.

There might also be a case of unawareness of these costs, or there might be future costs not taken into account which could manifest in the form of social costs associated with sugar consumption.

Economists have set a benchmark for evaluating levies: there is the belief that people are well-placed enough to evaluate the costs of consuming beyond the economic price we have to pay.

When people underestimate various costs, we can put the prices up on products to make up for that lack of awareness, in order to match what they would pay if they were fully aware of such costs.

In practice it’s very challenging to measure all these costs. Whether or not tax acts to reduce consumption is another aspect. People are responsive to price – there could be a large reduction in consumption for a relatively small tax, but in another scenario they could not be very responsive to a tax but you’d raise a lot in revenue, so saving health costs.

In a simple setting, it doesn’t matter if the tax acts in raising revenue or reducing consumption.

In reality, this gets more complicated. For example, something that gets lost in discussing cigarette taxes for example is that if the unaccounted for social costs are very high, you might impose a very large tax.

In economics, the Laffer Curve is the idea that at some point, the tax becomes so high, that the more you increase tax you reduce revenue. You could get into a situation where you could easily raise more revenue by reducing the amount of tax imposed.

If the costs are as high as they are, you might want to impose that tax. What we’re trying to do is set a tax so people take into account the wider implications of their consumption.

In practice this gets more complicated when we consider the variations in costs across different people, so we might think that people who consume a lot of sugar, or children, might have higher social costs than other people who are fully able to understand the repercussions This complicates things because of course you can’t set individual taxes.

Imagine a stylised setting where you had adults and children, and let’s say that there were no social costs associated with adults consuming sugar, but there were with children. Our aim is to reduce children’s sugar consumption.

If children are not very responsive to price and adults are, then that would affect how high you set the tax. Because in increasing the tax, you are creating a large reduction in purchases with one group, but not the group you want to target.

That’s a case where that tax wouldn’t be effective for your goal as a policy maker.

Are people making healthier choices just because of the levy?

Even with data, it can be challenging to assess this. There are many things that have happened alongside the levy that could influence outcomes like healthier choices.

If you looked at sugar consumption from 2016 to today you would not be able to attribute any specific change to the levy. What you want is some kind of control group in order to assess how they were affected by the tax; even if we had all of the data right now it wouldn’t be straightforward to perform a before and after assessment.

Another issue is the effects the tax may have in other areas. Prices have certainly been increased, and one of the things that we know manufacturers or retailers might do is that price changes might not always be relative to the tax.

So when you introduce a tax, it could go up by the amount exactly equal to the tax. But companies could also increase the price by more or less, and they could also increase the prices of other products that consumers turn to – this all depends on how consumers are going to respond in their purchases.

It can also change product compositions in the reformulation of products.

Finally, the levy might impact on information that is given to consumers in terms of what is healthy and what isn’t – we currently can’t easily measure this as such a varied response has come about here.

Do you think the levy or a similar one can be applied to other areas such as confectionery?

This often comes up. Going back to what we said at the beginning, in that these taxes are set to ensure people are aware of how their consumption affects different costs, the reason for taxing soft drinks is that they are disproportionately consumed by people who consume a lot of sugar, and children, both of whom are groups you might want to target.

The challenge when you start using a broader set of products depends on what people switch to and from. With soft drinks, people are switching from sugary drinks to diet alternatives and untaxed sugary products such as milkshakes, which can be a downside to the levy.

If we tax confectionery we’d need to be careful about people switching to unhealthy snacks such as crisps. If you taxing alcohol you can just tax the amount of ethanol, so it’s a one-dimensional approach.

Because of nutritional factors, taxing confectionery becomes a trade-off between sugar, fat, and calories; you may reduce sugar consumption but increase fat or salt consumption. A confectionery levy could work but it is important to think about the unintended consequences.

Even if you ignore the reformulation element, whether or not someone has a healthy diet cannot be measured by one single aspect, for example sugar intake.

They might consume a lot of sugar but also have the right amount of fat and salt which is probably a lot better than having a low sugar, high-calorie diet.

There isn’t going to be one sweeping policy that will solve all the issues surrounding diabetes and sugar related diseases, but levies can encourage people to think more about healthy living choices.

By Harriet Jachec

Source: FoodBev

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