The Office for Budget Responsibility estimates that George Osborne's tax on fizzy drinks will increase inflation by a quarter of a per cent. This will have a more profound effect that you might think because it affects index-linked government debt.
The Guardian recently reported that the inflationary impact of the tax will require an additional £1 billion in debt interest payments. This sounds hard to believe and yet it is true. The OBR made precisely that forecast in its assessment of the Budget and yesterday confirmed it to Brook Whelan (from People Against Sugar Tax, for whom I am an unpaid advisor) by e-mail. This is what they said:
...the soft drinks industry levy feeds through to a price increase in 2018-19 in our forecast. This in turn increases the growth rate of the retail prices index (RPI) and this in turn is used as the measure by which index linked government debt.
So the increase in the RPI adds to the cost of debt interest. This is set out in para 1.34 bullet 5 in our Economic and fiscal outlook.
This is not the cost of implementation to firms and you are correct that this is solely the effect on the public finances.
Osborne must have known about this massive dead-weight cost when he was contemplating the sugar tax and yet he proceeded with it anyway in an attempt to distract from other parts of the Budget (that went well!).
It beggars belief. Not only will the British public have to pay half a billion pounds a year for a regressive tax that campaigners now admit is largely 'symbolic', we also have to pay a billion pound set up charge! And inflation will rise, leading to increases in other index-linked payments.
Jamie Oliver should be tarred and feathered.