The Sugar Tax

Will the sugar tax work?

Unless the Chancellor, George Osborne, changes his mind or his plans are deemed too crazy by Parliament, as seems so often with his Budgets, then the UK Government is to introduce a sugar tax. But will it work?

It really depends on what they mean by work? Will it improve the health of young people and help to stem the inexorable rise of obesity? Here, I think the answer is much clearer: no.

It’s naïve to think that obesity has a single cause and if something is done about that cause, the problem will go away. Embedded sugars, with no nutritional benefit, are rife throughout the food and drinks industry. But they’re not the only problem causing obesity.

My moment of sugar awakening was when I checked how much sugar was in my regular low-fat yoghurt. It turned out that 25% of my recommended daily allowance was embedded in one small pot of yoghurt.

At least I know when I buy and drink a can of fizzy pop it’s loaded with sugar. In fact, it’s often why I buy one – it helps with an unwanted hangover.

What else is going on then?

The sugar tax is what’s known as a Pigovian Tax named after a Cambridge economist. When a market produces, unintentionally, bad outcomes that the market system itself can’t correct, a tax is levied to pay for the negative outcomes. Part of George’s plan is to use the money levied to tackle childhood obesity. Politically it sounds great – evil corporations pay for their evil.

So the baddies as far as the Government is concerned are the corporations and so the sugar tax is being levied on them rather than on consumers. Now, I’m no economist but what effect will this have on supply and demand? Will corporations change their behavior and stop making these products because of the tax? I doubt it. Or will they lower the sugar levels so their products do not incur the tax? Or, as has happened elsewhere, will the tax simply be passed on to consumers, making the products more expensive? Either of these two outcomes is possible.

Let’s assume the tax has its desired effect and UK sales of fizzy pop will fall. How would a well-known, global producer of soft carbonated drinks and one of the biggest brands in the world respond? They will simply offset any loss in sales in one territory by promoting their products in other territories where the tax doesn’t exist. This is exactly what happened to the tobacco companies as their markets in the West shrunk.

One unintended consequence of the sugar tax in Britain is that some less wealthy, less privileged people, somewhere else in the World, whose life expectancies are already far worse than ours, will get the sugar instead.

This is because once the raw commodity of sugar has been grown and refined it has to go somewhere. Most goes into global food supply chains and some into ethanol production. But since the early 1990s, the World’s production of sugar has increased by 50%. Now we get to the old chicken and egg problem. Has global sugar production increased to meet global consumer demand or has global consumer demand increased because of increases in global sugar production? Conventional economics would suggest the former; but perhaps it’s the latter.

The sugar tax is a tax too late in the supply chain. It’s a tax on corporations. What’s needed is to reduce the amount of sugar the World produces in the first place. If less is produced, the price will go up and corporations who buy sugar will be forced to innovate or find alternatives.

However, did you know that around 25% of all sugar produced comes from advanced economies? Why do we grow sugar in the EU and are EU farmers who grow it receiving subsidies? Certainly farmers of high fructose corn syrup in the US get them.

What if the West got out of the sugar business, and stopped subsidising its own farmers to produce a product we don’t need to grow and that’s harming its own people? Perhaps then, those countries whose economies are based on sugar (and many are a legacy of our colonial past and the sweet-teeth of our forebears) could benefit from higher commodity prices.

The sugar tax deflects attention away from our Government’s complicity and responsibility in subsidising the production of too much sugar. It’s too easy to cast evil corporations as sugar-dealers praying on weak-willed consumers hooked on their sugar cravings. The problem is more systemic than the Government would have us believe.