The economic impact of a sugar-sweetened beverages tax in South Africa.
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Date
2021
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Abstract
The newly implemented Health Promotion Levy (HPL) in South Africa (SA) imposes a tax on
Sugar-Sweetened Beverages (SSBs) containing more than four grams of sugar per 100ml. The
HPL is legislated in terms of Chapter VB of the Custom and Excise Act No. 91 of 1964, on SSBs
manufactured in SA or imported into South Africa. There is a disagreement between the
proponents of the tax (government) and opponents of the tax (beverage and sugar industry). The
proponents of the tax contend that the SSBs tax will reduce obesity and boost SA’s economic
growth by reducing government spending on prevention and treatment of obesity-related non
communicable diseases (NCDs). The opponents of the tax, on the other hand, contend that the tax
will be detrimental to the growth of the SA’s economy by reducing the beverage and sugar industry
returns, which will, in turn, lead to labour disemployment.
There are relatively fewer published empirical studies to date in South Africa that have examined
the economic impact of the SSB tax. Most of the published empirical literature to date has focused
more on the health impact of the SSB tax. Furthermore, there’s no empirical study that has
examined the impact of the SSBs tax on the South African sugar industry.
Given this background, this study aims to investigate the economic impact of the SSBs on the
South African sugar industry. This is achieved by (1) assessing the impact of the SSB tax on the
quantity of sugar demanded in the domestic sugar market, and (2) determining the impact of the
SSBs tax on the revenue earned by the South African sugar industry from local sugar sales and
Recoverable Value (RV) price received by sugarcane growers’.
The analysis used time-series data for the period 1977-2019 and involved the use of the
simultaneous equations regression method (Three Stage Least Square regression (3SLS)) and the
Vector Error Correction Model (VECM). To deal with challenges associated with time-series data,
several diagnostic tests were employed. In addition, the direction of causality between domestic
sugar demand and supply variables was examined using a Wald test for Granger’s causality.
Furthermore, a Johansen’s Cointegration test was used to check the presence of long-run
relationships between domestic sugar demand and supply variables.
The static demand and supply model (3SLS regression) results revealed that variables such as the
real domestic price of sugar, previous period sugar consumption, and consumers’ real disposable
income influence the domestic sugar demand in South Africa. Whereas variables such as the real
domestic price of sugar, technological changes, and the real price of sugarcane in the previous
period influence the domestic sugar supply in South Africa.
From the 3SLS regression model, the own-price elasticity estimates of domestic demand and
supply for sugar in South Africa were estimated to be -2.652, and 0.838, respectively. Implying
that the domestic demand for sugar in South Africa is relatively more responsive to own-price
changes, whereas the domestic supply of sugar is relatively less responsive to own-price changes.
From the VECM, the short-run own-price elasticity estimates of domestic sugar demand and
supply were estimated to be -0.301 and 0.762, respectively. Implying that in the short run both
domestic sugar demand and supply are relatively less responsive to domestic sugar price changes.
In addition, the long-run own-price elasticity estimates were estimated to be -2.243 and 1.809,
respectively for the domestic sugar demand and supply equations. This implies that in the long run
both domestic demand and supply for sugar in South Africa are relatively more responsive to
domestic sugar price changes. This is because over time the South African sugar producers are
likely to discover more alternative products to produce or develop close substitute in consumption
that contains less sucrose sugar. Similarly, domestic sugar consumers are likely to discover more
sugar substitutes in the long run.
Based on the 3SLS model's own-price elasticity estimate of domestic sugar demand (-2.265), the
quantity of sugar demanded by domestic consumers of sugar was estimated to have decreased by
184 169 tons, causing a revenue loss of about R1.68 billion in the domestic sugar market. Based
on the VECM short-run own-price elasticity estimate of domestic sugar demand (-0.301), the
quantity of sugar demanded in the domestic sugar market was estimated to have decreased by 209
01 tons, leading to a domestic sugar revenue loss of about R190 million. Lastly, using the longrun
own-price elasticity estimates of the domestic sugar demand (-2.243), the quantity of sugar
demanded in the domestic sugar market was estimated to have decreased by 154 917 tons, leading
to a domestic sugar revenue loss of about R1.41 billion. Furthermore, by applying the sugar
industry division of proceeds formula, the RV price received by sugarcane growers’ during the
2019/20 season was estimated to be lower by 9.167% when compared to the RV price that growers
could have received if there was no SSBs tax.
Given the negative impact of the SSBs tax on the South African sugar industry’s financial position,
the study recommended the South African sugar industry to invest more on other alternative
income streams, i.e., expand the production of biofuels using sugarcane as a feedstock. In this
regard the study recommended the South African government to support the South African sugar
industry stakeholders with legislation that will allow them to generate revenue from expanding the
production of biofuels, electricity co-generation, and biochemical feedstock, amongst others. For
instance, provides legislations that are necessary to promote the use of ethanol-blended petroleum
and legislations necessary to enable sugar mills to sell electricity from co-generation.
Keywords: Health Promotion Levy (HPL), South African Sugar Industry, Three-Stage Least
Square (3SLS), Two-Stage Least Squares (2SLS), Vector Error Correction Model (VECM), Sugar
tax.
Description
Masters Degree. University of KwaZulu-Natal, Pietermaritzburg.