South Africa: Sugar tax – bad for the economy?

In brief

Recent proposed changes to the rate of "sugar tax" on sugary drinks in South Africa point to a negative impact on the sugar, beverages and related consumer goods and retail industries. Similar sugar taxes implemented in other countries has also shown limited results in terms of the efficacy of increased levies to result in decreased sugar intake and increased personal health and wellbeing. More stakeholder engagement and economic assessments are clearly needed before higher levies are implemented on products containing sugar in South Africa.


Contents

In 2018, the South African Minister of Finance introduced the Health Promotion Levy (HPL) on sugary drinks that have more than four grams of sugar per 100 ml. The rate is fixed at 2.1 cents per gram of the sugar content that exceeds four grams per 100ml, i.e., the first four grams per 100ml are levy free. The tax, colloquially known as the "sugar tax", is charged on non-alcoholic sugary beverages, except fruit juices, and practically works out to about 10%-11% per liter of the sugary drink. At the time, the government had reasoned that the policy would disincentivize the excessive consumption of sugar, which was seen as the driver of increasing non-communicable diseases such as obesity, diabetes and high blood pressure. The logic was that, over the long term, the sugar tax would reduce sugar consumption levels, thereby decreasing the prevalence of these diseases - which are currently also placing people at a higher risk of severe forms of COVID-19.  

Recently, South Africa’s Healthy Living Alliance (HEALA) proposed that the government increase the sugar tax to 20% for all sugary drinks with four grams of sugar or more per 100 ml. A 20% sugar tax was first proposed in 2016, however, wisdom prevailed and the HPL came in at 2.1 cents per gram of the sugar content that exceeds four grams per 100ml, instead. This time, the proposal seems to be more about boosting government revenue to fund efforts to fight COVID-19. However, a 20% sugar tax would have a significant and negative impact on the South African sugar industry, as well as on the impacted businesses in the consumer goods and retail industry that are already facing post-pandemic challenges.

A recent report - Economic impact of the Health Promotion Levy on the sugar market industry - noted that within the first year of having introduced the HPL, the sugar industry suffered 16,621 jobs losses overall, and 9,000 job losses in the cane-growing sector specifically. Most of the 16,621 job losses have been in rural areas, where poverty levels are the highest. If this is any indication, the implementation of a 20% HPL at the height of unemployment, currently at a record high of 34.4%, would be catastrophic for the industry. This is especially the case when coupled with the already devastating impact of COVID-19.

According to the report, the proposed increase in sugar tax would translate into a further decline in output for the sugar-cane farming sector, which has already decreased by a cumulative ZAR 414.2 million. Further, the sugar-processing sector’s output had declined by a cumulative ZAR 772.1 million by 2019 as a result of the sugar tax. The same report estimated that 250,000 tons of sugar sales have been lost since the introduction of the sugar tax in 2018, which translated to a loss of more than ZAR 1 billion, with a disproportionately negative impact on farm and household incomes.  

Considering sugar tax through a global lens, it becomes clear that this kind of tax often has a domino effect, with the impact of the levy spreading to other commodities. For instance, in 2014 Chile increased its ad-valorem tax on high-sugar soda drinks by 5% and decreased by 3% the tax on low-sugar soda drinks, based on the 6.25gr/100 ml sugar threshold. There was a subsequent reduction in affordability for carbonates, concentrates and waters. The price of carbonates increased by 5.6% immediately after the tax was implemented. A sustained increase in the price of concentrates was observed after the implementation. Unexpectedly, however, a smaller increase was also seen for the price of bottled water – a category that saw no tax change.  

In 2015, Barbados implemented a 10% ad valorem tax on sugar-sweetened beverages, which immediately resulted in an average weekly sales decrease of 4.3%. In 2020, the UAE introduced a 50% excise tax on a range of products containing added sugar or sweetener, and similarly, it resulted in a 65% decrease in energy drink sales after the introduction of the excise tax.  

Most of these taxes failed to target the actual sugar content, because they were designed to tax both high and low sugar beverages at the same rate. This removes any incentive for the manufacturer or the consumer to replace a high-sugar product with a low-sugar substitute. 

This flaw in the tax base could, for instance, be remedied by targeting sugar directly, rather than liquid by volume. In any event, even if the sugar was taxed directly, the tax base would still only capture sugary beverages, thereby ignoring sugar consumption from other sources - which contain significantly more sugar by weight than sugar-sweetened beverages. This defies the logic of targeting only one sector, being the beverages industry, if the main aim of government is to reduce sugar consumption to address non-communicable diseases such as obesity, diabetes and high blood pressure.  

Only taxing sugar in beverages is analogous to taxing alcohol in beer but not in wine, or taxing tobacco in cigarettes and not in cigars. If sugar is the harmful agent and a clear externality can be identified, then all sugar, regardless of consumption method, should be taxed. 

While there are some indications that sugar taxes are effective on consumption, in a narrow way, it is debatable whether such taxes are effective in reducing overall caloric intake. Overall, it remains unclear whether an excise tax on sugar-sweetened beverages has any beneficial effect on public health.  

Before implementing a higher levy, the expertise and experiences of stakeholders in the sugar industry, the consumer goods and retail sector as a whole, as well professionals in the medical health and wellbeing industries should be drawn upon, so that a more balanced consensus can be reached. This process should include conducting a broad economic impact assessment on the proposed increase and its impact on South African industries. As South Africa begins its post-pandemic recovery, these measures will help ensure that any tax change is considered in terms of its ability to assist in the promotion of personal health and wellbeing, while also ensuring that the sugar industry, the beverages industry and impacted businesses in the consumer goods and retail sector, are able to thrive.

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