Government's planned sugar tax needs sweetening in the form of incentives
One of the largest health industry players in the country has added its voice to the debate about a tax on sugary drinks.
The head of Discovery’s Vitality Wellness programme said this week that it “strongly supports” any action to address the increasing overweight and obesity prevalence in children and adults in South Africa, but highlighted the importance of using incentives to get consumers to change their behaviour.
“Wellness intervention programmes, along with policy and tax initiatives, have an important role to play in changing population behaviour and health,” said Dr Craig Nossel.
Although negative financial incentives are applied in the form of taxes on cigarettes and alcohol, said Nossel, it is “less common” to use incentives to encourage positive behaviour such as increasing physical activity or buying healthy food.
Finance Minister Pravin Gordhan announced plans in February to introduce a tax on sugar-sweetened beverages in 2017, which has garnered criticism from the sugar and drinks manufacturing industry along with equal support from healthcare professionals and academics.
Research into Discovery’s Vitality programme, which rewards healthy food purchases, showed that subsidising such purchases by its members was a promising intervention to help people make healthier dietary choices, said Nossel.
Chronic disease burden
South Africa’s medically insured population, like the rest of the world, is experiencing a rapid increase in the chronic disease burden, which is driven by increases in diseases of lifestyle and cancer, he said.
These trends have been leading to the increases in the volume of healthcare services used each year.
Obesity also significantly increased spending on healthcare, said Nossel.
Rising obesity levels and the resultant increased risk of developing noncommunicable diseases, such as diabetes and hypertension, also weighs on South Africa’s already overextended public healthcare system, the department of health has warned.
Research into the relationship between levels of obesity and medical expenses among South Africans on a medical scheme showed that obesity was strongly associated with significantly increased healthcare expenditure and that costs doubled the more severe the obesity.
Severe obesity increased healthcare expenditure by R4 425 for each person, split between inpatient and outpatient care, research showed, along with a higher incidence of 70 chronic conditions that would not occur among similar individuals in the normal weight range.
“With chronic diseases continuing to increase sharply, the corresponding cost pressure on healthcare services will potentially become more unsustainable without the necessary countermeasures,” said Nossel.
The country’s obesity epidemic is mainly a result of factors relating to changes in diet, food, work and leisure. Excessive intake of sugary drinks has been linked to an increased risk of obesity, which is the top risk factor for noncommunicable diseases, according to Nossel.
Discovery’s comments follow the release of a recent report by business advisory firm KPMG. The report recommends a thorough investigation into the full economic effects of the proposed tax, through the socioeconomic impact assessment system. Following a decision in October last year, Cabinet intends government to use the assessment system when introducing any new policies or legislation.
According to KPMG’s report, the tax could, among other things, have negative effects for consumers and the sugar industry.
The industry employs 79 000 people directly and 350 000 indirectly, all of whom could be subject to reductions in wages or dismissals if the tax reduces profitability in the sector, said KPMG.
It warned that in places such as Mexico, which has become the poster child for taxing sugary drinks, a reported 1 700 jobs were lost after the country implemented the tax in 2014.
The report found that the tax could be regressive and burden poorer households more than rich ones.
It also found that even in the “most liberal scenario”, where price increases have no effect on the quantity of sugary drinks consumed, about R2-billion would be collected. While these funds could be channelled towards educating the public about healthier lifestyle options, for instance, the revenues did not come close to the levels collected through other sin taxes. Beer and cigarettes brought in about R10.7-billion and R12.8-billion respectively in the 2015 financial year.
Illegal import possibility
The report says that should bordering countries not adopt a similar tax, “it will become more attractive to purchase the beverages in these countries and illegally bring them into South Africa”.
This was seen in countries such as Denmark, where a tax on saturated fat in food products led to cross-border shopping.
The report did say that a 20% tax had the potential to save the healthcare system roughly R10-billion in the coming 20 years, through the reduced cost of treating type 2 diabetes. In a context where South Africa is expected to spend R2-billion a year by 2030 on diabetes through hospitalisation and medication, this was “no small number”.
It had to be noted, however, that even if the tax did reduce the consumption of sugary drinks, it was not clear to what extent this would affect the overall calorie intake of South Africans and if this would affect obesity rates, said KPMG economist Maura Feddersen. For example, a consumer may reduce their consumption of a particular beverage but may substitute it with another product that provides “the same satisfaction”, she said.
A proper regulatory assessment could help determine whether such a tax was the most cost-effective measure or whether there were alternatives that could be “even more impactful”, said Fedderson.
The department of health, in its national strategy on the prevention and control of obesity, which it released last year, found that fiscal measures, or taxes, were deemed to be the most cost-effective intervention to address obesity.
Array of measures
Fellow KPMG economist Cézanne Samuel said that although a lot of consideration is given to the ease of implementing such a policy, “if it does not have the intended effect, there [is] no point implementing it in the first place”.
The tax will need to be considered with an array of other measures specifically targeting people’s behaviour and their consumption of other goods, said Samuel.
In addition to the costs of implementation, the effects on the economy and the industry needed to be considered, said Feddersen.
It was possible that larger players in the market could absorb the tax, she said, but smaller players may not have this ability and it might introduce barriers to entry for small, medium and micro enterprises.
Health professionals and advocates for the introduction of a tax questioned some of these findings.
The intention of the tax is not only to raise money, it should be part of a wider initiative to increase consumer awareness and get people to substitute healthier alternatives, said Dr Sundeep Ruder, an endocrinologist at Life Fourways Hospital and associate lecturer at Wits University, and Riaz Gardee, a chartered account commenting in his personal capacity.
Risk of taxation
Concerns that a tax would lead to illegal imports suggested that any item that is taxed could “create a risk of illegal imports and was not unique to sugar”.
Sugar was included in a number of products and the economics of each product would need to be assessed to consider the likelihood of illegal imports, they said.
They also questioned the reports that Mexico shed 1 700 jobs owing to the tax on sugary drinks.
It was not clear if the jobs were lost directly as a result of the tax, they said. Nor was there evidence regarding other factors, such as what these losses represented as a share of the labour force, how many jobs were lost in prior years, or the extent to which jobs were gained in the sugar or other industries.
The qualitative benefit of improved health was not considered, including the effect of increased income owing to better health in the long term, said Ruder and Gardee.
In the case of Mexico, the effect of these interventions, caused by decades of exposure to sugar-sweetened drinks, would only be seen in time.
“What’s important is to keep an eye on the trajectory and that looks good,” they said.
Nick Stacey, an economist at Priceless SA, a research institute at the Wits school of public health, said that although the goal of the tax was not revenue-raising, the figures generated by the report were based on low estimates of national sales of taxable soft drinks of R10.8-billion.
The actual figure was more than R70-billion, based on data from market research firm Euromonitor.
In terms of the sales figures, KPMG chief economist and director Lullu Krugel said the firm used figures from Statistics South Africa and research firm Business Monitoring International in its research.
There was a growing perception that the national treasury was aiming to introduce the sugar tax as a revenue-raising measure. But Krugel said it was important to stress that, given the available data, the company’s research suggested it may not have this result.
She agreed that the figures relating to Mexico’s job losses did need further clarity and that it was too early to fully understand the full effect of Mexico’s tax. But it was one of the only countries with which South Africa could be compared because of its similar consumption profile.