Impact of UK Sugar Tax on the Economy: A Case Study

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SUGAR TAX CASE STUDY

Table of Contents
Introduction......................................................................................................................................2
1. Summary and impact of market imperfection on financial products, employment and
entrepreneurship activities...............................................................................................................2
1. 1 Summary of case study.........................................................................................................2
1.2 Effect of market failure on entrepreneurship activity............................................................4
1.3 Effect of market failure on labour..........................................................................................5
1.4 Effect of market failure on financial products.......................................................................5
2. Logical interpretation of way through which government policies are going to shape business
decisions and structure.....................................................................................................................6
2.1 Modulation of various tax approaches...................................................................................7
2.2 Distributional considerations.................................................................................................7
2.3 Reformulations and business responses.................................................................................7
Conclusion.......................................................................................................................................8
Reference list...................................................................................................................................9
1

Introduction
Companies that utilize sugar in a bulk mass are going to be affected severely by imposition of
sugar tax on food market of United Kingdom. The case scenario gives a brief view on a case
study of sugar tax. The purpose of this study is to determine impact of sugar tax levied by UK
government on labour market, financial products and entrepreneurship activities. This study will
focus on insights of UK government behind implicating sugar tax. In addition to that, this study
will also put light on future of business decisions and structure due to impact of sugar tax. The
business organisations that are mostly affected by this implication of sugar tax are soft drink
companies like Pepsi Coca Cola, Sprite and Fanta. The adverse effect will eventually cause the
price of products to be high in respective market of United Kingdom. This study also provides
some suggestions about how companies can deal with this type of dilemma.
1. Summary and impact of market imperfection on financial products, employment and
entrepreneurship activities
1. 1 Summary of case study
The case scenario mentioned some aversive as well as positive impact of sugar taxation on the
national economic market of United Kingdom. The rationale behind implication of sugar tax on
UK market can be truly justified with health beneficiaries. They have accounted long term and
negative externalities of consumption of excessive sugar on human health (Nakhimovsky et al.
2016). Hence George Gideon Oliver Osborne designated as Chancellor of Exchequer under PM
has decided to implement sugar taxes on beverage companies. The elementary market failure of
retail or food market is compared with long term health benefits of human and their working
efficiencies. The government has more focused on sustainable and overall health benefits and
consequent working efficacy of human.
The professional proficiency of human ultimately aids in growth of national economy. As per
recent reports by McKinsey Global Institute, annual economy has been challenged with a cost of
obesity in a number of £47 billion and £1.3 trillion alone in UK (Allcott et al. 2019: 35). It has
been also stated that, consumers often ignores and underestimates negative externalities and
social costs regarding consumption of soft drinks. As an immediate effect people of UK tend to
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over consume cold beverages which in turn give rise to serious illness. Resulting brutal diseases
such as diabetes, cardiac issues, childhood obesity and others enforces to reduce working
proficiency. Consequently, national economic growth of UK gets adversely affected. Backholer
et al. (2016: 3082) comment this is compared with immediate economic growth through taxes
from soft drink companies. Sugar tax charged an extra amount of 6p and 8p for 330ml can of
lower brand and upper brand respectively. Lower brands conclude Fanta and Sprite which
utilises sugar about 5g/ml in their products. On contrary to that, upper brands such as Coca-Cola
and Pepsi utilize more than 8g/ml of sugar in their products.
This case scenario also mentions benefits as well as limitations of UK sugar taxes. Major
benefits that the nation can have from this sugar taxation are discussed as follows. The principal
purpose behind implementation of sugar tax is to internalise potential negative externalities
regarding consumptions of sugar drinks Cornelsen & Carreido (2015: 8). As mentioned in case
study, due to implementation of additional tax on sugar, product price will be enhanced
deliberately. As a result to avoid paying high costs in buying such products consumption rate
will consequently decrease as well. Another effective rationale behind incorporation of this
policy in UK market is that larger brands need to pay incentives. In threadbare, in case a
beverage company decides to curtail product price through introducing incentives for producers
it will cost a high resource for that company. It will be better for that company to diminish
amount of sugar usage in their products in lieu of paying incentives. Bes Rastrollo et al. (2016:
1419) state ultimate benefit that this nation can get from this sugar taxation is use of collected tax
revenues in valuable and productive works like elementary school sports or others. It has been
estimated by George Osborne that, a minimum of £520 million tax can be accumulated through
this policies.
Major drawbacks of these UK sugar policies can be mentioned as inelastic pricing policy.
Change in consumers’ behaviour of drinking may not correlate with elasticity of price. In
addition to that, UK government’s estimations regarding amount of tax may not be justified with
amount of sugar. The reason behind this is that it is difficult to measure exact fare of obesity due
to adverse effects of soft drinks (Borges et al. 2018: 30). Finally, lower income groups can be
severely affected through this. Even in some cases, unemployment can also occur. Some other
unintended effects can be predicted as short-term bulk buying and cross border shopping.
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1.2 Effect of market failure on entrepreneurship activity
Market failure can be defined as inefficient distribution of services and goods in free market. In
such a situation, cost of products is determined by demand and supply forces. Any kind of
alterations in any of these two forces results into modification of product price as well as other
forces. As opined by Grogger (2017: 488), market imperfection is a consequent result of market
failure. It occurs when buyers pay a low or high price without proper knowledge of actual
benefits from that product. There are some adverse effects of market failure that may fall upon
entrepreneurship activities.
Negative externalities: Externalities can be defined as an effect which is always levied on third
party caused by availing specialised services or products. In this case, producer of soft drink are
first party and consumers are supposed to second party. Third party may include the particular
organisation like Pepsi, Coca-Cola, Sprite or Fanta. These third parties are bound to pay extra
sugar taxes for their selling of products.
Loss in selling of products: Consumers of soft drinks not only belong from higher income
group. As per records by Long et al. (2015: 123), 56% of cold beverage consumers belong from
lower and middle income groups. Hence, hike in prices of soft drinks will directly affect their
finance. It will make them switch their choices of beverages towards substitute beverage
products. This will cause a major harm in the selling number of products. The direct effect will
be shown in the net annual sales. As per reports by Cawley & Frisvold (2015: 33) price
enhancement in a rate of 10% has decreased amount of consumption by rate of 6-8%. There are
already a certain amount of taxes are levied on such products. Additional increases in taxes may
keep customers aloof from those products. In this way, sales of soft drinks will be deducted to a
great extent.
Application of incentives or subsidies: Soft drink companies may also rely on some useful
strategies that may not include customers to pay extra taxes. Companies like Coca-Cola, Pepsi
and others may introduce subsidies or incentives in their products in terms of paying taxes to UK
government. This in one hand will retain customers but on the other hand it will drain
companies’ resources. It will appear as an extra burden to company to pay those extra taxes for
sake of sugar usage in their products.
Effect on Corporate social responsibility: CSR or corporate responsibility includes a type of
business approach which offers sustainable growth through providing environmental, social and
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economic benefits to every stakeholder. In this situation customers are one of major stakeholders
for soft drink companies. The health benefits of those consumers must be taken into account by
these companies (Lean & Te Morenga 2016: 51). Responsibilities of soft drink companies also
include contributing in social welfare. Hence, through selling sweetened drinks to national
communities, they are violating ethics of CSR. This may act as ill reputation for soft drink
companies.
1.3 Effect of market failure on labour
Market failure in respect to soft drinks may cause several major problems like unemployment to
employees engaged in soft drink companies.
Enhanced unemployment: Market failure due to sugar taxation on sugar sweetened beverages
may cause enhanced unemployment to a large extent. Soft Drink companies of United Kingdom
behold about 1.7 million jobs. Supply chain of soft drinks like Pepsi, Coca-Cola involves 168447
direct employees and additional 1546578 employees indirectly (Theguardian, 2019). Application
of sugar taxes will not only affect business sales of large sweetened beverages companies but
also on their human resources. An estimation by Acton & Hammond (2018: 135), showed that
UK labour market perhaps face a loss of 5624 jobs. Government of UK also need to pay for this
loss because it is expected that about £17 million treasury will be deducted due to this. Job
related taxes generate about 60% of government taxes. Hence, rendering unemployment will
cause a major section of UK government to fall as well.
Reduction in wages: Some companies may also take some challenges by reducing wages of
employees. Implementation of sugar tax may enforce soft drink companies to curtail extra
revenues from their employee wages. In this way, employees will be less interested in
cooperating and potential conflicts may also arise.
1.4 Effect of market failure on financial products
Financial products attract a lot of revenues to the economical market of United Kingdom.
Revenue generated by selling soft drinks in UK amount to about €185bn (Theguardian, 2019).
Levying a larger amount of taxes for sake of health benefits generally observed as a burden for
soft drink consumers. In order to avoid paying of larger taxes or elimination of in taking
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sweetened beverages, consumers may choose alternative way to nourish their preferences. In this
way the viability of those financial products may be reduced.
Cross border shopping: This is an illegal strategy through which private individuals purchase
goods abroad due to lower rate of taxes and import those goods in own countries. The purpose
may include as own consumption or selling at a cheaper rate. In this type of shopping, import
duties are generally avoided paying. In case of sugar taxes there is an increased risk of cross
border shopping. This is a supplementary way to avoid giving surplus amount of taxes to
government or to sweetened beverage companies. As per recent reports by Acton & Hammond
(2018), due to the effect of unofficial grey market or cross-border shopping sales of sugar-
sweetened drinks has been reduced up to 11 per cent. It was also forecasted that a huge loss of
€30 million has been faced by economy of UK.
Short term bulk buying: Secondary economic impact is generated through bulk buying or
hoarding. It generally explained as purchasing of substantial amount of these sugary sweetened
drinks before implementation of sugar taxes. It is to ensure that there is no hindrance of sugar
consumption in its first phases. On the other hand, bulk buying causes these products to less
viable. These types of policies can never work after implication of Sugar tax in UK. This type of
bulk purchasing policy impacts adversely on economic growth of United Kingdom.
2. Logical interpretation of way through which government policies are going to shape
business decisions and structure.
Governmental policies like UK sugar taxes 2018 are imposed on the UK market so that
increasing number of obesity, and other related diseases can be controlled effectively. Market
failure has been caused by decreased efficiency of overall people leaving in UK (Quirmbach et
al. 2018). This not only reduced working proficiency of individuals but also introduced several
brutal diseases as well. In order to mitigate adverse effects of obesity and other diabetic health
issues, government of UK has imposed UK Sugar Tax, 2018 on sugar usages by soft drink or
beverage companies. The principal concern of government is to reduce obesity and increase
health credits of common people. The study focuses on whether sugar tax will meet its expected
goal or it would be a destructive policy for nation.
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2.1 Modulation of various tax approaches
Levying sugar tax can be considered as best action for curtailing consumption of sugar content
from soft drinks. As per modulations, there are six categories of sweetened drinks such as non
carbonated soft drinks with low medium and high content of sugar. This also includes energy
drinks, regular soda and zero calorie soft drinks. This type of drinks contains varied amount of
sugar in their content (Quirmbach et al. 2018). Hence the taxation must be specific for each of
these cases. Designing of sugar tax has followed minimization of economic burdens raising
revenues and discouraging sugar consumption. In addition to that, there are also some
individuals who in takes sugar sweetened beverages in very less amount. In reference to the
opinion of Borges et al. (2017: 14), they also have to face certain tax barriers while buying such
soft drinks. Policymakers need to focus on differential tax implementation if their main objective
is tax collection. In such cases, they can levy similar taxes on low calorie drinks as well. Except
these policies, they may also imply sugar gradient taxation for soft drinks.
2.2 Distributional considerations
There also pertain distributional gradients among lower, higher and middle income group people.
The result is inverse than usual considerations. It has been shown by Cawley & Frisvold (2015:
62) that adults of lower income group usually consume 40% more sweetened drinks rather than
higher income groups each day. This ratio is far worsened in case of children. It indicates that,
sugar tax policy tend to drain resources more from lower income groups rather than higher
income counterparts. Regarding distributional considerations, sugar tax must attack high sugar
content drinks rather than lower.
2.3 Reformulations and business responses
Business responses can be innovative and progressive. They may extend their hands with
government and help in reduction of sugar contents. This can be performed by selling low sugar
content beverages. They must formulate some strategies so that low sugar content not
compromise with particular taste of that product (Caro et al. 2017). On other hand soft drink
manufacturing organisations may design some new incentives so that product quality is not
reduced and customers are not affected by paying of high taxation. Those companies can face
severe problems regarding draining of resources because designing incentives will cause them to
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pay three times of their current revenue. It will be beneficial for them to invest in preparing low
sugar content drinks rather incentives. In simpler terms adopting a strategy of reformulating
products will not only give them benefit but also establish primary cause of tax levitation.
Conclusion
On basis of above discussion it can be concluded that there has been a huge two dimensional
effect of sugar tax of United Kingdom. In one dimension it can be observed that sugar tax
implication possess positive effect on human health. It helps in combating potential diseases such
as diabetes, heart diseases childhood obesity, cholesterol and several others. On other dimension,
immediate effect is distinctly observed in case of soft drinks companies. The major soft drink
companies of United Kingdom are confronting a serious issue regarding their stability in UK
market. Due to levitation of sugar taxes, price of financial soft drink beverages have been
exponentially hiked to a great extent. This has appeared as a serious issue regarding future of this
type of business organisations labour markets of UK involved with those companies and sales.
One simple solution for soft drink companies is to switch for artificial sweeteners in their soft
drink beverages. Thus, beverage companies can thrive on UK market without disrupting
governmental policies regarding reduction of sugar consumption.
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Reference list
Journals:
Acton, R. B., & Hammond, D. (2018) The impact of price and nutrition labelling on sugary
drink purchases: results from an experimental marketplace study. Appetite, 121, 129-137.
Allcott, H., Lockwood, B. B., & Taubinsky, D. (2019) Should We Tax Soda? An Overview of
Theory and Evidence. Journal of Economic Perspectives, 33(2)
Backholer, K., Sarink, D., Beauchamp, A., Keating, C., Loh, V., Ball, K., ... & Peeters, A. (2016)
The impact of a tax on sugar-sweetened beverages according to socio-economic position: a
systematic review of the evidence. Public health nutrition, 19(17), 3070-3084.
Bes‐Rastrollo, M., Sayon‐Orea, C., Ruiz‐Canela, M., & Martinez‐Gonzalez, M. A. (2016)
Impact of sugars and sugar taxation on body weight control: A comprehensive literature review.
Obesity, 24(7), 1410-1426.
Borges, M. C., Louzada, M. L., de Sá, T. H., Laverty, A. A., Parra, D. C., Garzillo, J. M. F., ... &
Millett, C. (2017) Artificially sweetened beverages and the response to the global obesity crisis.
PLoS medicine, 14(1), e1002195.
Cawley, J., & Frisvold, D. (2015) The incidence of taxes on sugar-sweetened beverages: the
case of Berkeley, California(No. w21465) National Bureau of Economic Research.
Cornelsen, L., & Carreido, A. (2015) Health-related taxes on foods and beverages. Food
Research Collaboration, 8.
Grogger, J. (2017) Soda taxes and the prices of sodas and other drinks: evidence from Mexico.
American Journal of Agricultural Economics, 99(2), 481-498.
Lean, M. E., & Te Morenga, L. (2016) Sugar and Type 2 diabetes. British medical bulletin,
120(1), 43-53.
Long, M. W., Gortmaker, S. L., Ward, Z. J., Resch, S. C., Moodie, M. L., Sacks, G., ... & Wang,
Y. C. (2015) Cost effectiveness of a sugar-sweetened beverage excise tax in the US. American
journal of preventive medicine, 49(1), 112-123.
Online articles:
Caro, J. C., Ng, S. W., Bonilla, R., Tovar, J., & Popkin, B. M. (2017) Sugary drinks taxation,
projected consumption and fiscal revenues in Colombia: Evidence from a QUAIDS model. PloS
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one, 12(12), e0189026. (Online) Available from: https://journals.plos.org/plosone/article?
id=10.1371/journal.pone.0189026 [Accessed on: 13 April, 2019]
Nakhimovsky, S. S., Feigl, A. B., Avila, C., O’Sullivan, G., Macgregor-Skinner, E., & Spranca,
M. (2016) Taxes on sugar-sweetened beverages to reduce overweight and obesity in middle-
income countries: a systematic review. PloS one, 11(9), e0163358. (Online) Available from:
https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0163358 [Accessed on: 12
April 2019]
Quirmbach, D., Cornelsen, L., Jebb, S. A., Marteau, T., & Smith, R. (2018) Effect of increasing
the price of sugar-sweetened beverages on alcoholic beverage purchases: an economic analysis
of sales data. J Epidemiol Community Health, 72(4), 324-330. (Online) Available from:
https://jech.bmj.com/content/72/4/324?
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Website:
Theguardian.com (Online) Support the Guardian (2019)
https://www.theguardian.com/news/datablog/2016/mar/16/will-a-sugar-tax-actually-work-budget
[Accessed on: 10 April 2019]
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