The UK soft drinks industry levy: implications for dental health

The Soft Drinks Industry Levy

The announcement of the UK Soft Drinks Industry Levy on SSBs in the Westminster budget on 16 March 2016 was, for many in the medical and dental professions, a welcome surprise. Table 2 lists common names for sugars that should be included. The Chancellor of the Exchequer stated that he was “……not prepared to look back at my time here in this Parliament…… and say to my children's generation, I'm sorry. We knew there was a problem with sugary drinks. We knew it caused disease, but we ducked the difficult decisions and we did nothing. We are introducing the levy on the industry which means that companies can ……. promote low-sugar or no-sugar brands….’.¹³

The Westminster Government plans to introduce the SSB levy in 2018, with legislation passed in a finance bill during the 2017 Parliamentary year. The Chancellor of the Exchequer stated that this was, ‘…to give companies plenty of space to change their product mix’. Unusually, the expected revenue raised by the levy will be hypothecated to fund physical activity and breakfast clubs in English schools.¹⁴

Essentially, the SSB levy announced by the Chancellor is a banded duty; similar in structure to some UK alcohol excise duties (Table 3).

The Office for Budget Responsibility forecast that the Soft Drinks Industry Levy will operate with a specific revenue target of £500 million for 2019–2020, the second year of implementation.¹⁵

One criticism of this approach is that there is no incentive for producers to reduce sugar content further below the thresholds of the bands. The use of a volumetric levy or tax would avoid this issue. An alternative would be a scaled volumetric levy or tax where the rate is scaled down on low sugar drinks and scaled up on high sugar drinks. One unfortunate effect of setting these legislative thresholds might be to encourage the general public to assume tacit government approval of soft drinks with lower sugar levels that nevertheless could still be health harming.¹⁶

The choice of the content thresholds of 5 g and 8 g for the SSB levy may have been derived from the UK front of pack (FoP) nutrition labelling for prepacked products sold through retail outlets: the voluntary UK food traffic light system rejected by the European Union following intense lobbying by the food industry. The traffic light system has an upper threshold of 5 g/100 g for low sugar foods to be given a ‘green’ rating.¹⁷

A separate FoP green traffic light upper threshold was proposed for healthy drinks at 2.5 g/100 ml, exactly half of the sugar content proposed by the Chancellor for the lower threshold of the SSB levy.

To put these figures in context, most original sugar-sweetened beverages contain around 10 g/100 ml across the UK. Scotland's second national drink contains 10.3 g/100 ml of sugar. These products would fall into the higher tax band.

Interestingly, more recent innovations, such as Coca Cola Life (other brands are available) is now marketed in the UK with a green label and is sold as reduced sugar compared to the original formulation (6.7 g/100 ml, or 63% of the original). Sweetness is maintained with a plant-based extract called Stevia. That means it would exceed the exemption threshold or 5 g/100 ml and be subject to the basic level of SSB levy. However, the same product sold in Germany only has 5 g/100 ml and, if sold in the UK, would be entirely exempt from the SSB levy: an example of how soft drinks manufacturers already reformulate their products to suit taste and regulations in different countries. However, from the dental health viewpoint, a 2.5% sucrose solution will drop dental plaque pH to below the critical level, causing demineralization of enamel, ie tooth decay.¹¹ So sugar concentrations at the 5 g/100 ml, or 50 g/litre (50 g is 12 teaspoons of sugar) threshold for tax exemption will cause tooth decay. They may also encourage continued habituation to a diet with an intensely sweet taste.

An additional problem with health harming industries adopting a harm reduction approach is that they may then claim they have ‘done their bit’ to improve the health of the nation and may attempt to exploit this through their marketing and advertising strategies.

The new SSB levy is aimed at the producers and importers of sugar-sweetened beverages, who will need to register with Her Majesty's Revenue and Customs (HMRC) to allow enforcement of the new regulations. The aim is to use the market to influence the SSB producers and importers.

In reality, the response of the soft drink industry is likely to be a mix of approaches as, in 2014, the proportion of sugar-free and levy-exempt soft drinks already sold in the UK was estimated at 49% of total sales, and is expected to continue to rise.¹⁸

The Republic of Ireland will also introduce a levy on sugary drinks from 2018. The Irish Finance Minister made an announcement in their Budget on 11 October 2016 and confirmed the approach would likely be aligned with the UK's Soft Drinks Industry Levy.

No simple solutions exist to the problems caused by the ultra-processed or ‘neoliberal diet’.¹⁹ Aside from highlighting the health problems of sugared drinks and obesity to the UK population, what evidence exists that a levy on home produced or imported sugar-sweetened beverages will produce a health gain?

Impact of SSB levy: economic theory

The economic argument for taxes reflects basic economic theory. If a tax or levy raises prices for a product, demand for that product will fall. If, as shown with sugar, this product is harmful, the effect of the tax should be to reduce harms through reducing consumption. The impact of the levy will depend in part on the response of consumers: how do they react to any price changes arising from the levy, what do they consume instead and is this less harmful than sugar? It will also depend on the reaction from the soft drinks industry. They may choose to absorb the cost, pass on some of the cost to the customer through higher prices, reformulate the product so that the tax or levy is not payable, or some combination of all three. In short, a tax is likely to have a range of impacts, and the precise effect is uncertain.

The Government stressed the re-formulation objective in its recent consultation on the SSB levy but acknowledged the potential for all three outcomes to occur to a lesser or greater extent. This will be influenced by how much producers expect demand to fall as a result of any increase in price. This is referred to as ‘price elasticity of demand’ (PEOD). If demand is relatively elastic, ie the more consumers are influenced by price, the greater the potential impact on consumption of a tax or levy and the more likely it is that producers will absorb a higher proportion of a tax or levy, rather than raise prices. Price elasticity of demand also depends, in part, on the availability and price of alternative products.

Figure 1 shows two different demand functions setting out how the quantity of a product demanded relates to the price charged. At a price of P1, for example, demand is Q1. The functions slope downward from left to right showing the traditional relationship between the price of a commodity and demand for it: as price goes up, quantity demanded for most products goes down.

The amount by which demand goes down depends on the PEOD. This is the percentage change in demand divided by the percentage change in price. This is typically negative because, as noted earlier, for most products, as price goes up, demand falls. Where the percentage fall in demand is greater than the percentage increase in price, PEOD would be less than -1, and demand would be considered to be elastic. Where the percentage fall in demand is smaller than the percentage increase in price, PEOD would be between -1 and 0, and demand would be considered to be inelastic.

This is indicated in Figure 1. The more elastic is demand, the more demand changes in response to a given change in price and the flatter is the demand curve. In the hypothetical example in Figure 1, as price rises from P1 to P2, quantity demanded according to the elastic demand function falls substantially from Q1 to Q2e. Conversely, where demand is inelastic, the same price increase leads to a much smaller fall in demand from Q1 to Q2i.

PEOD is influenced by things like the availability of alternative products, the amount of money spent on the product in the first place, and the economic circumstances of the consumers, which determines how well placed they are to afford the potential increase in spending arising from the price increase.

PEOD also affects the impact of a price increase on the value of sales. Elastic demand leads to a fall in revenues when prices rise because the proportionate fall in demand exceeds the proportionate price increase. In contrast, inelastic demand leads to an increase in revenues even if demand falls, because the size of the price increase, in proportionate terms, is greater than the fall in demand. For example, demand for most alcohol products is estimated to lie between 0 and -1 so the anticipated effect of the increase in prices of cheap alcohol caused by the implementation of minimum unit pricing in Scotland is both a fall in demand for such alcohol but also an increase in revenues to retailers.^20,21

It is important to note that whether the levy itself leads to a price change in the first place depends on whether producers choose to pay the levy, reformulate products to avoid it, or pass it on to consumers in higher prices. This decision will partly be influenced by what they believe PEOD to be: the more elastic is demand, the less likely they will be to try and pass it on to consumers.

On the basis of the available evidence, the WHO report suggests that demand for SSBs is generally elastic, with price elasticities around -0.9 to -1.3, ie a rise in price of 1% will lead to a fall in demand of between 0.9% and 1.3%. SSBs are also a targeted measure because individuals who are high consumers of SSBs are also likely to be more price responsive.²²

The health effects of these expected falls in consumption depend on what consumers substitute for sugar-sweetened beverages and whether these products have harmful effects. The alternative products consumed will depend in part on relative prices, which will themselves reflect differences in the taxes or levies imposed on potential substitutes. Taxing equally sugary alternatives to a lesser degree may simply shift consumption to equally harmful products.

Evidence around the effect of SSB tax on consumption comes from modelling studies of some country case studies where such a tax has been implemented and has shown some effect. In Mexico, and other countries, there is evidence that an excise tax on sugar-sweetened beverages reduces demand.²² A SSB tax increasing prices by 10% to 20% and above can reduce SSB consumption.^23,24

More recent evidence from modelling studies predicts that a considerable reduction in SSB consumption is more likely if the levy is set at 20%, a level emphasized in the recent WHO report and an Institute of Economic affairs (IEA) report that illustrates how any lower level tax (<20%) hasn't been successful enough to reduce consumption.^22,25,26,27

Effect of SSB levy on general and/or dental health outcomes

Almost all evidence to support the health benefits of the SSB tax comes from modelling studies which need to be interpreted with caution. One of the key reasons for this is either lack of robust evaluations assessing health impacts of such policies or, in most cases, a general failure to achieve significant SSB reduction successfully, mainly due to setting an inadequate tax level (<20%) and/or not supplementing it with other relevant food policies (tax, subsidies, marketing regulations, etc).^22,28

Existing evidence suggests that to reduce obesity and diet-related diseases caused by high sugar intake, a more comprehensive, structured and multi-action approach (subsidies, ring-fencing revenue, nutrient profiling, etc) is needed, of which SSB tax could be the starting point. So, although the evidence is limited with respect to the effect of the SSB tax on health outcomes, it is robust in pointing out the health harming effects of existing levels of sugar intake in the UK via SSBs in the form of obesity and dental caries, especially in children and adolescents.

Overall, theory and evidence suggest that a sugary drinks levy will help reduce consumption of a major source of sugar and calories in children's diets. In addition, the move will hopefully have a positive ripple effect here in the UK and across the world, helping to strengthen resolve to enact other measures which further protect children's health and improve the environment in which they grow up.

Effect of SSB levy/tax on health inequalities in UK

Price increases on food items usually have a greater impact on purchasing decisions of low-income or vulnerable parts of the population since they have to spend a larger proportion of their income on food. However, given the higher consumption levels among low-income populations, it may be that an SSB levy will be regressive, ie lower income groups pay more in tax as a proportion of their income than higher income groups. But this depends on relative price elasticities. A price elasticity of -1 suggests an increase in price of, say, 5% will be matched by a fall in demand of 5% such that the amount spent on the taxed product would hardly change, especially if, as the WHO report suggests, demand would fall more in lower income groups, because their price elasticity of demand is larger. Overall, elasticities of this magnitude suggest that the real effect in cash terms of any regressivity would be modest.

This touches on another concern sometimes expressed about taxes: so-called ‘income effects’ where taxes increase expenditure on the taxed product and reduce disposable income to spend on other items. For lower income groups, these may be necessities such as food, heating, etc. But the extent of this effect depends on whether and how much behaviour changes to offset increases in prices. As noted above, evidence suggests that demand for SSBs responds to price, with elasticities of around -1, and demand may become lower in lower income groups, such that income effects are minimal.

In addition, the levy could benefit more vulnerable groups in health terms as their increased responsiveness to price could lead to a larger reduction in SSB consumption. As such an SSB has the potential to help reduce health inequalities. The WHO concluded that ‘vulnerable populations, including low-income consumers, are most price-responsive and, in terms of health, benefit most from changes in the relative prices of foods and beverages.’

Elasticities of this magnitude also have implications for the argument that taxes will reduce employment in the soft drinks industry. The WHO suggests that any net effects on employment will be modest. Their impact can be reinforced with subsidies on beneficial products. Some evidence suggests that additional subsidies or more choices of low priced substitutes can help minimize the regressive impact of such taxes.^22,28,29 In addition, if they are hypothecated, the revenues they produce can be used to fund other complementary measures to tackle sugar-related ill-health, although the revenues collected will depend on how much demand falls in response to the tax- or levy-induced price change.

Overall, therefore, levies, taxes and other instruments that affect price are potentially very effective. The devil, however, in terms of their overall impacts on consumption patterns and health, is in the detail: detail regarding consumer and producer behaviour, the scope and level of the levy or tax and the price and availability of close substitutes. The WHO conclude that ‘there is reasonable and increasing evidence that appropriately designed taxes on sugar-sweetened beverages would result in proportional reductions in consumption, especially if aimed at raising the retail price by 20% or more’. ²²

Perhaps the most challenging argument that is sometimes put forward is about the ‘nanny-state’, ie the widely reported antipathy to state interference in consumers' freedom of choice. This is both a political argument and an economic issue. The politics is for readers to decide where they stand, although it is worth posing the question about how ‘free’ choices really are, given the extent of marketing compared to the availability of clearly understandable information on the sugar-content and related harms of sugary drinks. This leads into the economic argument. Economic theory suggests freedom of choice is efficient because it is the mechanism by which productive resources are aligned with what we, as consumers, value most, as expressed through our purchasing decisions. But this is predicated on the idea of fully informed consumers having complete knowledge of both the benefits and the costs their decisions impose on themselves and others. Where there is reason to doubt this, taxes and subsidies have been advocated in theory and used in many contexts, to ensure that consumer choices achieve an efficient allocation of resources from a societal perspective.^30,31

One other factor within Europe is that the price of sugar is predicted to drop in 2017 as regulation of sugar markets changes and production quotas within the EU are abolished. The EU Common Agricultural Policy (CAP) has been influencing the diets of consumers by determining to a large extent the price and availability of most foods. This includes European produced sugar, almost entirely from sugar beet. The 2013 CAP reforms liberalize the EU sugar market, quotas will be abolished and this will lower EU sugar prices. The liberalization could also mean that high-fructose corn syrup (HFCS), the industrial liquid sweetener manufactured from maize or corn, commonly used outside Europe to sweeten beverages, will replace sucrose from sugar beet. The result may be that the sugar levy will have little financial impact on the soft drinks industry as falling sugar prices allow it to absorb the price rise of the levy.¹⁶

Conclusions

The sugar levy is a welcome structural intervention. It is not a silver bullet but, as part of a comprehensive approach, it is a potentially effective government measure to reduce the consumption of sugar-sweetened carbonated soft drinks, and to improve the health of the population.³²

Food and water are essential for life, whereas carbonated drinks, alcohol and tobacco are not. There is no place for carbonated drinks, either sugared or sugar-free, in a healthy diet.