by Kate Smith
Since 6 April, the UK’s sugar tax has seen shoppers asked to pay 18p or 24p more per litre of soft drink bought, depending on how much sugar the drink contains. In Scotland, from May, alcohol is now not allowed to be sold for less than 50p per unit, with Wales also looking at similar measures.
The rationale for these price policies is that sugar and alcohol are associated with problems that impose a substantial cost on society. For example, problem drinking can lead to anti-social behaviour, crime, pressure on A&Es and increased liver disease. Excessive sugar consumption is linked to rising obesity rates, diabetes and heart disease.
But these costs are not the same for everyone. Excess alcohol consumption is concentrated among a relatively small number of people and the government is particularly concerned about obesity among children and young people. The aim of policy should be to reduce the most socially costly consumption (and hence, achieve potentially large improvements to public health) while limiting the impact of higher prices on everyone else.
Price increases will be most effective if the people who consume too much sugar and alcohol significantly reduce their intake. Research by the Institute for Fiscal Studies (IFS) suggests that heavy drinkers respond less strongly to price increases. For example, if the price of alcohol increases by 1%, the percentage fall in consumption among households which buy more than 40 units per adult each week is only half as large as among those which buy fewer than eight units.
It is also important to take into account what people choose to buy instead. In the case of sugary drinks, increasing the price of a bottle of cola might work if people choose water instead. But only some drinks, and no foods are taxed – not cakes, chocolate, or ice cream. So, if people choose to buy a milkshake or a chocolate bar, instead of the cola, then the impact of the tax on sugar consumption will be reduced.
The food and drink industry will react to the taxes – but not necessarily in the intended way. The extent to which firms pass on the tax to consumer prices is important in determining how much consumption falls. Manufacturers may also change their products – a move which could make the policy more effective.
For example, several soft drinks companies have already reduced the sugar content of their products to avoid the tax. If people are happy to buy the reduced sugar varieties, this could be a relatively effective way of reducing the nation’s sugar intake. Research from the IFS found that voluntary reformulation targets led to a 5% reduction in the salt content of groceries between 2005 and 2011.
It is also important to consider where the revenue from higher prices will go. Money from the sugar tax will go to the government, which could use this revenue to improve public health. But minimum unit pricing is likely to create windfall profits for manufacturers and retailers. If the alcohol industry uses the money to increase promotions, or advertising, this could undo some of the potential benefits of the policy.
The challenges posed by obesity, poor nutrition and alcohol consumption are substantial, and all the options involve trade-offs. The sugar tax is a reasonable start in addressing some of the problems associated with excess sugar consumption. However, it is likely that a whole range of policies will be needed to tackle these major public health challenges, and it will be important to assess carefully whether these policies are likely to have their intended impact.
Kate Smith is Senior Research Economist at the Institute for Fiscal Studies. Her research interests are in public economics, applied microeconometrics and microeconomic theory.
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This article first appeared in the spring 2018 issue of Society Now.