The National Treasury is now proposing a tax on sugar-sweetened beverages (SSBs), singling out added sugar in SSBs as a significant contributor to the obesity problem in South Africa. Here KPMG provides some options which National Treasury can consider to guide consumers towards reduced sugar consumption.
Nudges, or small behavioural cues, can be designed and introduced in the retail space where consumers are guided to choose portion sizes depending on the image displayed on the packaging. The intuition behind this policy proposal is to leverage off the connection between the portion size displayed on the packaging and the portion size eventually consumed. For example, if a consumer sees a smaller slice of cake displayed on the packaging, she will automatically match her behaviour to this cue, opting to consume an equally smaller slice. As part of this nudge, we suggest incentivising industry to align the product’s nutritional information and how the product is displayed to influence the consumer’s purchasing and consumption decisions.
Another option for industry to help mitigate mindless eating is to rethink packaged portion sizes. Studies show when consumers are presented with two different portion sizes, one smaller and one larger, they consume different amounts. However, when asked about their levels of satisfaction, their responses are the same. Industry can take a decision to reduce portion sizes and market itself accordingly in order to empower consumers to curb their own consumption.
In addition to the size of packaged portions, the designs thereof are relevant too. Research shows that taller, thinner glasses tend to provide consumers with greater insight on the volumes poured and consumed, and thus help to regulate consumption. The opposite, however, is true for wider glasses, which can lead to both over-pouring and over-consumption. A simple nudge could therefore entail that industry shifts to the use of taller, thinner bottles to enable consumers to regulate their own consumption. Additionally, markers for every 250ml or 500ml on a bottle could help consumers keep track of consumption and kilojoules consumed. Such segmentation introduces decision points that allow consumers to reconsider whether to continue their consumption, or to pause.
Furthermore, labelling can help alert consumers to additional calories. To help consumers consider the nutritional content information on beverage labels, the use of front-of-pack labelling, as opposed to back-of-pack labelling can prove effective. Evidence suggests that front-of-pack labelling incentivises producers to reformulate, with front-of-pack labelling producing successes in salt reduction strategies.
In households, the choice of crockery can play a large role in curbing excessive consumption. If consumers drink or eat from a glass or bowl, where it is easy to gauge the quantity consumed, consumers are more mindful about their consumption and tend to consume less. The size of crockery also presents an environmental aid, with research showing a smaller bowl allows consumers to rethink whether or not to continue eating once reaching the bottom of the bowl. One study showed that a group given larger plates, bowls or packages consumed an average of 31% more food than the control group, with 73% in the experimental group not believing they had consumed more than they generally do. This points to a general unawareness of how environmental cues influence consumption choices.
If National Treasury is seeking a tax-based solution, we advise that they consider the following proposals. These proposals are designed to mitigate the risk of unintended consequences to both the beverage industry and the consumer.
According to the National Treasury, the proposed sugar tax of 2.29 cents per gram of sugar has been designed to alter consumer behaviour to shift away from beverages with a high added sugar content. However, consumers face very limited alternative choices to SSBs. In the absence of immediate alternative beverage options, there is a risk that consumers might be structurally inelastic or face very weak cross price elasticities. As a result, consumers are not as responsive to price changes as expected, which means the proposed tax could generate excise revenue without changing consumer behaviour as policymakers desire.
The SSB industry is more likely to reduce its tax liability than consumers are to reduce their sugar consumption. This is because the excise tax may have a tangible impact on industry, while only having a negligible impact on consumers’ buying power. Hence, this proposed structure of the tax can help, at least partially, shift the heavy responsibility of making consistently health-oriented decisions away from consumers. They, for various reasons, may not be in a position to react as intended by policymakers by reducing their consumption. Instead, the tax will incentivise producers to take responsibility, for example through the reformulation of existing SSBs and the development of lower sugar alternatives.
Arguably, the prevalence of very sweet tasting beverages entrenches consumers’ desire for a high-sugar diet – a trend, which the beverage industry could help reverse over time.
Alternatively, the National Treasury can design this tax to meet the externality of the cost of diabetes currently facing South Africa. This revenue neutral tax design is rooted in the understanding that the market for SSBs operates best at a socially optimal equilibrium, where prices reflect their true costs and benefits to society. When there are external costs, as arguably SSBs may have depending on their role in contributing to the obesity problem in South Africa, a tax can help internalise the external costs of SSBs by raising prices, reducing consumer demand and thus moving the market back to its socially optimal outcome.
Hence, if diabetes-driven medical costs incurred by South African households amount to R1.1 billion in 2017 and the current proposed tax regime generates approximately R8.2bn, then the tax would generate more than 7 times the diabetes-driven medical costs. In addition, we must take account of the risks to industry performance and the possibility of little consumer change.
KPMG’s revenue neutral option proposes a reduced tax rate and if correctly earmarked, this proposal may be less costly to industry and can still meet the external cost of diabetes.
According to KPMG calculations, an effective tax rate of 3%, compared to the current proposed tax rate of 20%, could be sufficient to recoup the external cost of diabetes to the South African economy.
Click below to download the full article and our source references.