OPINION: Sugar tax may eat into the economy - CNBC Africa

OPINION: Sugar tax may eat into the economy

Southern Africa

by Lullu Krugel, Cézanne Samuel and Maura Feddersen, KPMG* 0

Sugar crystals. Picture: publicdomain.net

There has been a great deal of public discourse about the possible impact of the proposed tax on sugar sweetened beverages (SSBs) in South Africa, with estimates of potential job losses landing in the tens of thousands.[i] In the context of high unemployment, poverty and inequality, any news about potential job losses attracts serious attention. At the same time, the increased pressure on the healthcare system due to obesity and related lifestyle diseases also requires urgent consideration.

KPMG’s economic impact assessment assumptions

Given KPMG’s interest in the potential implications of the introduction of a sugar tax[ii], we conducted our own analysis of GDP, employment, tax revenue and poverty alleviation.

Assuming a full price pass-through of the proposed sugar tax, we base our analysis on the premise that a tax of 20% on the price of SSBs leads to a 20% reduction in sales of the targeted products. This assumption is based on a price elasticity of -1, implying that for every 1% increase in the price of a product, the quantity demanded of that product will decrease by 1%. This price elasticity assumption is aligned with research produced by Priceless SA at Wits University[iii], which according to various media sources has informed National Treasury’s policy paper, ‘Taxation of sugar sweetened beverages’ released in July 2016. We anticipate that a higher responsiveness of consumers to the tax-induced changes in the prices of SSBs, however, would increase the potential economic impacts associated with this tax. Therefore, a specific assessment of the price elasticities, reflective of consumption behaviour in the South African beverages market is essential to understand the impact of the proposed sugar tax.

The retail sales estimate that KPMG has access to suggest that SSB sales amounted to approximately R41bn in 2015.[iv] In view of our assumptions, a 20% excise tax would therefore generate around R8.2bn in excise tax revenues.[v]

In our quantitative analysis of the proposed tax on SSBs, we use the 2015 KPMG Economic Impact Assessment Model to derive the potential impacts, based on a 20% reduction in sales.[vi] We present our estimates in the table below.   

KPMG

Based on the assumptions we outline above, we estimate the number of jobs that could be lost with the introduction of the proposed tax at 34 475. This is more than the population of a town like Mossel Bay.[ix]

While excise revenue is expected to increase, other tax revenue sources may exhibit a revenue decline. The potential tax revenue loss from other revenue sources like VAT, CIT and PIT is estimated to be R2.78bn. This amount is approximately equivalent to the cost of building 192 schools or the annual salaries of 15 400 nurses.[x]

National Treasury should carefully consider the combination of the uncertain impact on obesity and the potential economic losses associated with this tax during this period of consultation. It is important to understand how South Africans will react to the potential price changes to offset the broader costs of introducing a new tax in the economy against the possibility of reducing obesity. While it is paramount that the problem of obesity is addressed, introducing this sugar tax requires a better understanding of the links between the consumption of SSBs and obesity. The costs and benefits of various potential interventions should be carefully considered.

*Article by: Lullu Krugel (Chief Economist and Director at KPMG), Cézanne Samuel and Maura Feddersen (Economists in Financial Risk Management, KPMG in South Africa)

For references and full report: Taxing-Your-Sweet-Tooth

 

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