A fizzy drink dispenser. File picture: Mario Tama/Getty Images/AFP
A fizzy drink dispenser. File picture: Mario Tama/Getty Images/AFP

Why sugar tax won’t work

By Nicola Mawson, IOL Business Editor Time of article published Jun 15, 2016

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Johannesburg - SA’s proposed sugar tax, which government hopes will inflate its coffers and cut down on obesity, is bound to fail.

KPMG SA chief economist Lullu Krugel points out that sugar taxes globally have mostly been applied to developed countries, with the exception of Mexico, where it has been too recently applied to judge whether it is a success or not.

Denmark, which was among the first countries to introduce a sugar tax and later abandoned it after losing more in VAT from illegal cooldrink sales than it was earning.

Finance minister Pravin Gordhan announced the proposed levy during his budget speech earlier this year. Some expect the tax to be as high as 20 percent, and National Treasury says it will help reduce the budget deficit.

South Africa is ranked the worst in sub-Saharan Africa for obesity. The country has also been ranked second in the world for deaths related to sugary drinks, below only Mexico.

In December 2015, the Department of Health published a policy paper on the issue and said it aimed to reduce obesity by 10 percent by 2020 with National Treasury’s aid.

Krugel is doubtful that sugar tax will be implemented next April as National Treasury has indicated because such policy changes often take longer.

Read also: Gordhan proposes date for sugar tax

The tax is likely to be charged on any product to which sugar is added, which could include iced tea, milkshakes and fizzy drinks, says Krugel. However, she says, there is very little in the way of clarity from National Treasury, so her thinking is based on international practices.

The way in which the drinks will be taxed is also not clear, although it is likely that government will tax based on the percentage of sugar in the drink, and not apply a fixed amount across the board, adds Krugel. However, she says, this is not easy to work out and the tax man will have to rely on accurate labels on products.

Costing the poor

Since the February announcement, several parties have come out in praise of the tax, while others, such as the Democratic Alliance, have said it would affect the poor the worst because it will drive up food prices.

Krugel concurs, noting that it will hurt the poor the most. She notes, according to Statistics SA figures from 2010, poor homes spend more, as a percentage, on sugar sweetened beverages than middle-income homes, with the poor spending 1.3 percent of total expenditure compared with 0.55 percent for middle-income households.

Read also: 'Poor will bear brunt of proposed sugar tax'

In addition, Krugel says its mooted purpose, of alleviating obesity, is doubtful because just collecting a tax will be short-sighted if government doesn’t supplement the levy with other programmes, such as education. This is unlikely as she points out national treasury does not ring-fence income for specific purposes.

“Obesity needs to be addressed, but I’m not sure this is the way to go.”

It is also unlikely that the target group will be impacted, says Krugel, noting that sin tax has not affected the target group, which can afford cigarettes and booze. She adds the lower income groups will retain their brand loyalty because they cannot afford to waste, and may even find a way around what they will view as “another form of regressive tax”.

Counting the cost

The accumulated losses to South Africa’s gross domestic product between 2006 and 2015 from diseases linked to obesity such as diabetes, stroke and coronary heart disease were estimated to cost the country $1.88 billion, or R28.8 billion, Krugel says research has shown.

She points out that, according to the Public Health Journal, obese people run up an average of R15 732 in additional health-care expenses each year compared with the non-obese. The individual obese patient is also on the hook for R1 654 in extra out-of-pocket expenses, according to the report.

Read also: Beverage sector sceptical on 'sugar tax'

Despite this massive cost to the fiscus, Krugel anticipates that the tax will only bring in an additional R2 billion in tax. This pales in comparison to the overall budget, which has topped the R1 trillion mark, and is also much less than what the tax on beer reaps government - R12 billion.

Interestingly, although the tax on beer is six times the amount Krugel expects to come in from sugar tax, the cost of alcohol abuse is just over ten times what the country forks out on obesity-related illnesses. According to the latest research from the Medical Research Council, which was published in the SA Medical Journal, South Africa lost about R300 billion in 2009 as a result of alcohol abuse.

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