How will the proposed sugar tax impact spaza shops which employ 360,000 people and rely on soft drink sales?

The next Coca Cola you drink will cost you more. So, too, will that energy drink you down after a hard workout. Why? Because of the proposed Sugar Sweetened Beverage (SSB) tax; a tax that many would agree is noble in its intent, but the effects of which are potentially devastating and far-reaching. A tax of this kind needs to be scrutinised and rationally critiqued as much as possible, because it will seriously affect people’s jobs and incomes.

The proposed SSB tax is to be levied on producers and importers as an indirect excise tax. It will be levied, in general, at the rate of 2.29c per gram on the added and intrinsic sugar contained in all soft-drinks other than 100% fruit juices and milk products. The stated aim of this tax is to tackle the growing obesity problem in South Africa. Fundamentally, it portrays obesity as a very simple problem to solve, and therein, already, lies a problem.

A 2014 McKinsey Global Institute study stated that obesity is a ‘critical global issue’ and has many and complicated causes. Furthermore, the study says that: ‘Much of the global debate on this issue has become polarized and sometimes deeply antagonistic. Obesity is a complex, systemic issue with no single or simple solution.’. Even if we were to believe government’s assertion that the intention is not simply to increase revenue from taxes, most of us can immediately see that taxing certain beverages and companies more is not going to solve the problem of obesity. The McKinsey study found that a 10% sugar tax was among the least effective of interventions as there is no direct evidence that such a tax had any impact on body weight at all.

Predictably, sweet-toothed consumers will respond to tax-induced higher prices of sugar-loaded drinks by switching to alternative products such as fruit juice, sweets, cakes, biscuits etc. The Institute for Economic Affairs (IEA) in the United Kingdom conducted a thorough review of some 880 studies dealing with the assumed link between food and SSB taxes and the prevalence of obesity and found little evidence of this purported link.

How will the proposed tax affect us? If sugar consumption of SSBs is reduced by as much as the government has stated, the soft drinks industry will be hit very hard. Its contribution to gross value added (GVA) (a proxy for Gross Domestic Product) could decrease from roughly R60bn to around R47bn. An estimated 42,000 direct, indirect, and induced jobs (out of a current total of 185,000 jobs) could be lost. The industry’s contribution to tax revenues could drop from R17bn to R14bn. Moreover, this decrease of R3bn in tax would be only partially offset by the new tax that, on the envisaged reduced consumption is estimated to amount to about R7.6bn.

Of all the sectors of the economy, the retail sector would be particularly hard hit. It could well lose a further 15,000 jobs. Anticipated job creation of between 10,000 and 20,000 jobs would become almost impossible to generate – the more taxes there are, the less willing people are to start and maintain a business.

The government says that its plans are intended to help the poor. The people this tax would affect the most, however, are the informal and often home-based ‘spaza’ shops which currently employ some 360,000 people and rely on soft drink sales for some 15% to 20% of their revenue. This tax would significantly reduce the sales and profit margins of these small enterprises and could lead to the closure of between 6,500 and 11,500 of these outlets.

Instead of risking people’s livelihoods and minimising the possibility of creating desperately needed job opportunities, the government’s goal to reduce obesity would be better served by using the large tax revenues it already garners on educating people about healthy eating and living habits rather than by attempting to control the way people live their daily lives. The Treasury’s policy paper implicitly acknowledges this. It claims that the SSB tax will be part of a ‘comprehensive package of measures’ aimed at stimulating ‘healthy food choices’, promoting an active lifestyle and better monitoring. It is highly doubtful, though, whether these extra measures will ever be pursued. The SSB tax will simply be the easiest way to look as though something is being done, but it will not solve anything. What it will do, without any doubt, is harm producers and consumers.

Author Chris Hattingh is an intern at the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.


Help FMF promote the rule of law, personal liberty, and economic freedom become an individual member / donor HERE ... become a corporate member / donor HERE