A ‘polluter pays’ industry levy could help our food become healthier

Obesity and its related diseases are costing the NHS £6.5 billion a year. Moreover, a growing body of research links obesity to worklessness at national and international level.

We know that worker inactivity is holding the UK back; IPPR’s Commission on Health and Prosperity this month found that 900,000 workers may be missing from the labour force due to ill health, costing the Treasury £5 billion in lost tax revenues (Thomas et al 2024). The wider economic costs of obesity may be as high as £98 billion – around 4 per cent of GDP.

It's fair to conclude that no government will truly be able to tackle the UK’s productivity problems and secure the future of the NHS without addressing obesity - and the food we eat is a massive part of the equation. The new government has recognised this but does not yet have the bold policy toolkit needed.

Overconsumption of sugar is one of the main factors behind obesity and its related illnesses, alongside fat, and salt – which can raise blood pressure and cause cardiovascular problems. Often these ingredients come together, in a tasty and addictive cocktail; most of us would know these as ‘junk food’. But sometimes they’re lurking in hidden places too, like pasta sauces, breakfast cereals, or ready meals.

It’s been six years since the introduction of the UK’s ‘sugar tax’ (soft drinks industry levy or ‘SDIL’), and despite its success at driving soft drinks reformulation – ie reducing the sugar content – and relative popularity (taxes don’t tend to be popular….) the previous government did not do a serious assessment of whether the tax could be extended.

Instead, the UK has long had a policy of encouraging ‘voluntary reformulation’ of different foods through non-binding industry commitments, but this policy has sadly failed. The average level of voluntary reformulation in foods was 3.5 per cent between 2015 and 2022, compared to 46 per cent in taxed soft drinks.

Take what works

I must declare an interest here; I was one of the officials in the Treasury back in 2016–18 that developed the SDIL from a hazy two-page concept, through public consultations and into legislation. But that doesn’t mean I was a true believer; I was a sceptic about the tax when I was working on it. I was surprised to see the prime minister and chancellor at the time go for the measure, against the broader instincts of their party.

But since the SDIL was introduced, the evidence has mounted up, and the case has gotten stronger. It is worth looking at the merits of extending the approach. The main argument against the tax – that it would be regressive – hasn’t been borne out. Many manufacturers removed sugar to escape the charge, and consumers had a clearer choice between high sugar drinks and low sugar ones. The same principles could be applied to a wider charge on producers.

Extending the tax could provide useful revenues for investing in all manner of pro-health interventions that benefit poorer households, such as school meals, healthy food vouchers, or better NHS preventative services or treatments. Indeed, any tax of this kind needs to be situated in a much broader plan to help prevent and reduce obesity.

So here’s a quick primer on how an unhealthy food levy might work, and some of the key choices that need to be addressed.

Building on solid foundations

With the SDIL, designing the tax base was straightforward. We knew what a pre-packaged soft drink was, and could define it in law, and the existing food labelling regulations meant producers already had to declare the added sugars and the total sugar content. So, the charge was aimed at 1) soft drinks, 2) with added sugar, and 3) a given level of total sugars, roughly 5 per cent and upwards.

Setting the right ‘price’ incentives for the industry was the next step. The tax has 3 ‘tiers’ based on sugar content, a higher rate charge, a lower rate charge, and a ‘zero’ band. Manufacturers could reduce their tax bill by moving sugar content down the tiers, to pay nothing at all.

Although there is more complexity involved in designing an extended levy, a very similar approach can be taken.

Give me some base

Let’s look first at pre-packaged foods. Foods for ‘in home’ consumption, purchased at supermarkets and the like make up most of the calories we eat, and a lot of this is pre-packaged. In the UK these must carry nutritional information on the packaging. Although it’s not currently mandatory, many foods also carry the so-called ‘traffic light’ labelling on the front of the pack, telling the consumer something about the levels of sugar, salt and fat in the product.

An extended levy would work by translating those ‘traffic light’ signals into a tax charge. But first, those labelling conventions need to be made mandatory – for all packaged foods.

You now have a potential tax base: pre-packaged foods with higher levels of salt, sugar or fat. This is often shortened to HFSS (high in salt, sugar or fat). You can also potentially have three ‘tiers’ of tax for different nutrients – for red, amber and green respectively.

Go nuts

The next question is how to exclude ‘good’ foods that happen to be pre-packaged. We all know, for instance, that fresh fruits can be high in sugars – but they’re very much part of a healthy, balanced diet, and core to the ‘five a day’ message. Similarly, grains and nuts can be high in natural oils – a type of fat. Some vegetables (eg olives) are high in salt. How do we avoid taxing these ‘goods’?

Most simply, the tax should explicitly exclude fruits, nuts and veg that are fresh, dried, frozen or unprocessed. In this example, roasted salted peanuts might be liable for the tax, whereas a packet of unprocessed cashew or walnuts would be exempt. The same could go for processed and unprocessed meat (eg a chicken breast fillet vs a chicken burger).

Inevitably there would be a lot of special pleading for exemptions from the food industry but the exemptions from the tax should be limited, and clearly match up to public understandings of what is healthy and unhealthy. People tend to ‘get’ that many of these HFSS foods are unhealthy – even when some of them pretend not to be. But do expect a wrangle over cheese, and some terrible memes about a ‘cheese tax’…

Eat out to duck out

So now we have a tax base, and some exclusions. What about some of the wider issues with introducing a tax like this?

One of the biggest ones is that an HFSS levy focusesd on packaged foods leaves out a huge part of the food sector: restaurants, takeaways and food stalls – aka the ‘out of home’ sector.

This could be seen as a problem; what is the justification for allowing unhealthy food of this kind to escape the taxman’s reach? Well, there are quite a few.

Many restaurants and takeaways are small businesses, serving a limited local market. They don’t wield influence over nationwide dietary outcomes in the same way that mass consumed packaged food sold in supermarkets and convenience stores do.

Consumers and producers are also less likely to be directly influenced by small price signals in the out of home sector; the direct comparability of products is harder. They are not placed side by side on a shelf like in a supermarket, and the overall price tends to be higher, hiding the effect the tax.

But perhaps the best argument against including the OOH sector is a political one; the hospitality industry in general has been whacked in recent years by the triple whammy of rising rents, rising labour costs, and rising energy costs – and all this at a time when consumer incomes have been squeezed. Introducing a tax that hits the hospitality industry now is probably a political misstep and could undermine public support.

A clear signal

While polling seems to show widespread support for acting on food manufacturers, this theoretical support can fall away in the face of price rises at the shopping tills – especially during a cost-of-living crisis.

The key point here is that the food manufacturing industry should be given the time to reformulate their products and minimise their tax liability. Under the SDIL, they were given two years.

Consumers also want signals. Food manufacturers who want to maintain their current recipes and brands could introduce alternative, lower HFSS options alongside their core brand. Shoppers would then be left with a clear price signal between the two. This signal could be enhanced using a simple label that shows the product is liable for the HFSS levy. This will make healthier choices easier for busy people.

Revenues

A new tax like this would need to command public support. The best way to solidify public support for this approach is to clearly earmark (or ‘hypothecate’) the revenues from the tax for spending on complementary interventions.

If seeing some price rises at the till is the main concern, then using the revenues to fund healthy food vouchers or free school meals could help people whose budgets are stretched. Better funding for NHS services could draw a direct link between the NHS costs of obesity associated with the HFSS foods, and the tax revenues from the industry.

Given the size of the UK HFSS food market, a tax of this kind could reasonably be expected to raise in the low billions-per-year alongside driving product reformulation. IPPR’s own estimates suggest a basic 10 per cent levy on non-essential HFSS foods could raise over £3 billion.

The government could make a start on this by launching a call for evidence at the forthcoming budget on the use of fiscal levers to drive food reformulation. A policy like this needs input from nutritional experts and others. This would put minsters in a good position to make firmer decisions in time for the spending review in 2025, including how they want to spend any revenues.

We have heard that there will be tough choices on taxation and spending. There are no perfect taxes, and no painless ones either. But a well-targeted levy on unhealthy foods – building on an approach that’s already been shown to work – could be worth looking at more closely, and be more or palatable to the public than some of the alternatives.

Mark Lloyd worked in UK government for over a decade, specialising in fiscal and growth policy and HM Treasury and No 10. During that time he led policy development on the UK's 'sugar tax', environmental tax issues, and industrial strategy. He is currently working in international development, supporting national leaders and local governments on policy development, strategy and implementation. He previously held roles at The Work Foundation and CBI.