The economics of a fizzy drink tax

It's worth briefly addressing the economic argument made in favour of a tax on sugary drinks. Campaigners will say that the cost to the taxpayer of dealing with obesity-related conditions demands higher taxation. The highest estimate I've seen of what these costs are in the UK is £5.1 billion. As usual with these estimates, it does not include savings from premature mortality nor does it account for the cost of the diseases the obese would otherwise die of. Neverthless, let's take the £5.1 billion as read.

The study in this week's BMJ estimated that a 20 per cent tax on sugary drinks would cost the British people £267 million per annum. If, as I suspect, the tax would reduce consumption by less than they anticipate, the cost would be higher, but let's go with the £267 million.

The study also estimated that the tax would reduce obesity by 1.3 per cent. The cost to the NHS of treating obesity related diseases would therefore also be reduced by approximately 1.3 per cent. 1.3 per cent of £5.1 billion is £66 million.

So we have a tax that costs £267 million achieving savings of £66 million. The intervention is clearly economically inefficient. Taxpayers will be left with a bill of £201 million (people who drink sugary drinks are, of course, taxpayers, and they are the overwhelming majority of the population).

Anyone who says that they want a tax on fizzy drinks because they are concerned about the cost to the public is either disingenuous or ignorant. It will place a further tax burden on the public that far outweighs any plausible savings.

Also remember that we already have a 20 per cent tax on fizzy drinks. It's caled VAT and it isn't levied on fruit juice, milk or water.