LETTER: Sugar tax attempt to dodge bullet - Business Day, 29 August 2016

By Frans Cronje

THE debate in our media over the proposed sugar tax refers. A discussion about the purported health benefits of the proposed sugar tax is a distraction from the real issue. The tax seems, at least in part, an attempt to dodge the political bullet that would accompany an increase in the VAT rate.

A number of economists have argued that a short-term solution to SA’s growing budget deficit crisis is to increase VAT — to increase tax on expenditure by consumers. Politically, however, such a proposal is simply too unpalatable, especially with voters already beginning to turn their backs on the governing party.

Accounting for what we expect to be subdued consumer spending, the Institute for Race Relations estimates that the sugar tax, as it is proposed, would raise about R10.5bn a year, roughly half of the revenue that would result from a one percentage point increase in VAT.

Once the tax on sugar-sweetened beverages has been accepted, we expect a similar tax to be extended to other sugary products and eventually to cover other food groups, such as fast foods and those high in salt.

The net result could be to bring in the equivalent of at least a one percentage point increase in the VAT rate, probably more. The risk is that SA will fall into a negative spiral, in which the pursuit of all manner of backdoor taxes worsens economic conditions, while distracting attention from the real problems facing the economy.

SA’s revenue crisis is a result of the low growth rates brought about by investment-unfriendly policies. Hence, it can be addressed only through policy reforms that promote much higher levels of investment and encourage growth. SA cannot tax itself out of economic and political trouble. The country could, however, tax itself into all manner of economic and political trouble. Consumer spending contributes about 60% to GDP, but the consumer confidence index has hit decade-deep lows twice in the past 18 months.

Placing more pressure on consumers will further hobble the economy, which will deepen the deficit.

The first-generation black middle class and consumers in lower living standards brackets are especially stressed. Our research shows a near-perfect correlation between the real after-tax incomes of households and their confidence in the government and the country’s future.

Not enough is being said about the relationship between financial stress on households and instability in society.

Other countries have resorted to sugar taxes in the purported interests of bringing down obesity, but there is little evidence these taxes have succeeded in meeting this objective. With consumers already so hardpressed, and the country facing so much volatility, increasing the taxes paid by the many to change the buying habits of a far smaller group cannot be justified. The proposed sugar tax is the wrong way to reduce the budget deficit.

Frans Cronje
CEO, IRR 

Read the letter on Business Day here