Behind the sugar tax: the budget, the sugar levy and the cuts

The Chancellor’s budget had an instant result this week. Immediately after his budget statement on Wednesday, Scottish soft drinks company A.G. Barr’s share price dropped by five per cent. George Osborne’s surprise announcement of a sugar levy on soft drinks provoked a somewhat premature reaction from investors – the tax won’t actually be implemented for another two years – knocking value off the company and putting the Irn-Bru producer in the media spotlight.

Barr’s share price had bounced back somewhat by the end of the day, but the sugar tax still captured the main headlines. Jamie Oliver, who had been campaigning for just such a tax, called it “a profound move that will ripple around the world”.

It even drew the unprecedented agreement and praise of Labour leader Jeremy Corbyn in his budget response: “He [George Osborne] spoke at some length on the issue of ill health amongst young children and the way in which sugar is consumed at such grotesque levels in our society and I agree with him about that, I agree with what he said.” Such endorsement from the opposition is news in itself.

The unexpected new tax on sweetened drinks was a turnaround on the Government’s previous position, which as recently as September had been that it had “no plans to introduce a tax on sugar-sweetened beverages”, and the timing of this about-turn can hardly have been an accident. Rather like a magician’s sleight of hand, Osborne threw something sweet down and had us all looking the wrong way.

This budget should not only be memorable for the tax on sugary drinks and Barr’s share price was not the only notable drop. With GDP lower than predicted, the Chancellor was left with various serious shortfalls in targets to address, including debt, deficit, borrowing, growth and exports, as he delivered his eighth budget to the House of Commons. Corbyn called it “a recovery built on sand and a budget of failure”.

Last year UK GDP grew by 2.2 per cent. At the time of the Chancellor’s autumn statement in November, the Office of Budget Responsibility (OBR) had projected it would grow by 2.4 per cent in 2016. The OBR now forecasts it will grow by only two per cent this year, then 2.2 per cent in 2017 and 2.1 per cent in each of the subsequent three years. This means lower tax receipts than predicted and, therefore, a deficit.

The OBR makes clear in its March 2016 ‘Economic and Fiscal Outlook’ report that the Government was on track to break its public pledges by missing its two key targets of reaching a budget surplus by 2020 and debt falling as a percentage of GDP every year in ‘normal times’ unless he took some action in this budget.

“On the basis of our new pre-Budget-measures forecasts, the Government would have been on course to miss both its legislated fiscal targets – for the Budget to be in surplus from 2019-20 and for debt to fall in relation to GDP every year until then,” the OBR reports.

“As regards the surplus target, we would have forecast small deficits in both 2019-20 (£3.2 billion) and 2020-21 (£2.0 billion). Given our GDP forecast, these would occur in ‘normal times’ on the Government’s definition and the ‘fiscal mandate’ would therefore be breached.

“As regards the debt target, we have revised down the cash level of public sector net debt in 2015-16, but the weakness of recent nominal GDP growth – largely reflecting a much wider trade deficit and weaker private sector investment – means that it is now expected to rise as a percentage of GDP, having been expected to fall in November. We expect the ratio of debt to GDP to fall each year thereafter, as the deficit shrinks, just as we did in November.”

When elected in 2010, the Chancellor had promised we would be running a surplus now. He is currently £72.2bn off that figure. So in order to meet government targets, more cuts to spending have been necessary. Cuts to Personal Independence Payment (PIP) for the sick and disabled of £30 per week had already been announced before the budget, saving an estimated £4.4bn over the course of the parliament but hitting some of the most vulnerable in society.

Given that this is not a benefits cut for the unemployed but a cut in support to help disabled people employ assistance and get around, this has drawn criticism from even his own side, with rumblings of a rebellion in the backbench ranks.

David Kirkby of Conservative think tank Bright Blue said in a budget response on the ConservativeHome website: “The cuts to disability benefit and the Personal Independence Payment (PIP) are, however, a mistake. PIP covers the extra costs of disability and is received by those in work as well as those out of work. It is unclear what justifies these changes – worth over £1.2 billion – and similarly unclear how they square with pre-election promises to protect the disabled from welfare cuts.”

And this cut appears entirely due to a budget shortfall rather than welfare policy, as the OBR notes that it has revised up its disability benefits spending forecast “as the introduction of the Personal Independence Payment (PIP) is generating much smaller savings than the Government was aiming for.”

In addition, the OBR has expressed scepticism about the likelihood of reaching Osborne’s budget surplus targets, even with the measures taken in this year’s budget. It says: “Given the size and distribution of past forecasting errors, that still puts the probability of meeting the surplus target in 2019-20 only slightly above 50 per cent.” That means a likelihood of further cuts to come.

Others are also sceptical. “The really big thing is the large swing in the fiscal balance in the final year of this Parliament — £31 billion in tax rises and spending cuts just before the General Election. Does anyone believe that? Of course, the chances are that Osborne won’t be Chancellor by then, so it won’t be his problem,” writes Dr Andrew Lilico of consultancy firm Europe Economics on ConservativeHome.

It might be tempting, from a Scottish point of view, to think that the budget is not that bad, given that the other key headline announcements were good news: help for the oil industry, albeit not all that had been requested, plus fuel duty and duty on beer, cider and whisky frozen.

A number of the other announcements that affect Scotland also look quite positive: raising the tax-free personal limit to £11,500, raising the tax-free savings limit to £20,000, new youth ISAs to help under-40s save, a city deal for Edinburgh and the south of Scotland, more money for the V&A in Dundee and new leisure facilities for Helensburgh.

Changes to schools and the upper tax threshold won’t apply. And with more fiscal powers over taxes and welfare, Scotland will be making more of its own budget decisions next year. Not too much to worry about at first glance.

But hidden beneath this is a different story. Even with income tax devolved, much Scottish funding will still come via Westminster. Yes, Scotland is in line to get an estimated £52m from its share of the sugar tax, but with a £3.5bn cut to the UK budget as a whole, that means around a £1bn cut to Scotland’s budget. This will make it difficult to offset any welfare cuts within the new powers, leaving Scotland’s poor, sick and children still vulnerable. The Chancellor may have called it a “budget for the next generation”, but there’s a generation living now that may be hamstrung by government cutbacks.

In the same way that you cannot make a child healthy simply by cutting down on sugary drinks, as the UK Government itself previously argued, so the 2016 budget is evidence that simply cutting the deficit does not a healthier economy make. To use a calorie-cutting analogy, there’s a limit as to how long you can go on a crash diet before it starts to damage your health. Likewise, we may or may not achieve a surplus by 2020, but evidence suggests that either way, the body politic is not, in fact, all that healthy.