Sifiso Skenjana: SA should be sweeter on the sugar tax

Sifiso Skenjana
Sifiso Skenjana

Sugary drinks have joined the sin list, following proposals for a tax on sugar in 2016 which officially came in to effect on April 01, 2018. This makes SA the first African country to impose a tax on sugary drinks.  

Sin taxes are generally understood to be a tax on substances and consumption goods that have a negative impact on society and individuals. In the case of sugar tax, a World Health Organisation report in 2016 argued that 28.3% of South Africans are obese – giving SA the dubious distinction of being the most obese country in Sub-Saharan Africa, distantly followed by Botswana, with 18.9% of their population being obese.

The sugar tax is therefore targeted at sugary beverages and is called the Health Promotion Levy, to be administered by SARS, in support of department of health initiatives towards a healthier population.

Obesity statistics in South Africa have been getting worse by the year; this alongside frightening sugar consumption trends among children. The National Health and Nutrition Examination Survey found that 66% of learners buy sugary drinks at least twice a week, consuming 40g more sugar than the recommended maximum daily limit for children.

Is it working?

The 2018/2019 tax year Health Promotion Levy was recorded at R2.4bn, against an initial budget of R1.7bn.

The empirical findings on the efficacy of sin taxes are conflicting. Those against it suggest that the policy is both regressive and contradictory.

If its purpose is to increase tax revenue and reduce demand for sin goods, they argue, then if it works, tax revenue is lower and output – i.e. GDP contribution – is lower. One would therefore need to assume that tax revenue is secondary to the effect on demand on order for this policy not to be contradictory, as those in opposition suggest.

The latter version is more believable, as government only collects an approximate 3% of total budget revenue from sin taxes.

It is, of course, unambiguous that higher intake of sugary beverages increases the risk of weight gain and certain non-communicable diseases like Type II diabetes, but what does taxation do for consumption?

Taxation, consumption

A EuroMonitor 2016 report found that higher taxation on sugary drinks did, in fact, reduce consumption through two channels. The first is the income effect – higher prices means we are able to buy less with the financial resources that we have.

The second is the substitution effect – a more expensive sugary drink increases the likelihood of consuming a less expensive drink, thereby substituting one for another.

The corporate factor

Corporates typically respond by citing potential job losses, as opposed to interrogating the merits of the proposed policy amendments and providing impactful insights on the most efficient course for implementation – particularly given the risks associated with consuming sugary drinks. (Imagine vehicle makers absolutely diverted the conversation about carbon footprints, to purely a conversation just about potential jobs loses if they moved towards greener automotive vehicles.)

According to the South African Sugar Association, the sugar industry provides 72 000 direct jobs and approximately 350 000 indirect jobs. Beverage SA has suggested as many as 47 800 jobs could be lost due to the sugar tax; the National Treasury Socio-Economic Study, on the other hand, suggests job losses attributable to the sugar tax would be as low as 1 475.

The consumer factor

A Coca-Cola annual review found South Africa to be in the top ten consumers per capita of Coca-Cola products.

In addition, in a 2017 study by Wits and UCT, lead author Nick Stacey found that between 2010 and 2014, the consumption of sport and energy drinks rose from 98 million litres to 168 million litres - the highest sales volume growth globally.

The sugar levy is a standardised 2.1 cents per gram of sugar content that exceeds 4g per 100ml – and fruit juices are exempt. This suggests that a can of Fanta Grape, which contains an approximate 10.5 grams per 100ml, would be taxed an approximate 80 cents more, which the producing company would most certainly pass on to consumers.

Some empirical evidence found a 6% decrease in consumption of sugary beverages and a 4% increase in bottled water purchases in the first year of the introduction of a sugary tax (Colechero et al, 2016b). In Mexico, sugary drinks consumption decreased by an average of 7.6% over two years following the introduction of a sugary drinks tax, and water consumption increased by 10%.

South African public hospitals are said to be receiving more 25 000 patients for hypertension and more than 10 000 new diabetic patients each month. Interestingly, one aspect of the impact of Mexico's sugar tax is that consumption decreased the most amongst the poorest households - the very households who would have less access to quality healthcare.

If this is anything to go by, we can hope the same materialises in South Africa, improving the health and longevity prospects for particularly the most financially vulnerable groups in the country.

Sifiso Skenjana is a Financial Economist at AFRA Consultants. He is an economic and investment research specialist and is working on his PhD.

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