The Economic Effects of a Fat Tax in the UK

The NHS defines a person as obese if they have a body mass index (BMI) of 30 or over. Using this, the Health Survey for England, published by the Department of Health since 1993, shows how obesity rates have increased. Due to this, there has been fierce debate whether the UK government should introduce a fat tax. A ‘fat tax’ is a specific tax placed on foods which are considered to be unhealthy and contribute towards obesity and I will be discussing the potential economic effects of a fat tax.

The first economic effect will be that fast food, sugary food, soft drink and various snack manufacturers will have decreased revenue. As a result of the introduction of such a tax, there will be an increase in cost of production for these manufacturers. This will cause the supply of such food and drink to decreases, causing quantity supplied to be reduced from Q1 to Q2, thus increasing the price from P1 to P2, which means demand contracts for such items. As a result, there will be a reduction in revenue from P1,B,Q1,0 to P3,C,Q2,0, which will mean that producer surplus decreases from P1,B,0 to P3,C,0. This will most likely result in profits decreasing, which will lead to share prices decreasing. Due to this, there will be less investment in these industries, which may result in an increase in redundancies in these industries, thus resulting in greater unemployment.

Despite this, another economic effect may be that obesity will be reduced. We can see in the negative externality of consumption diagram that the free market equilibrium is C, as the marginal private cost is equal to marginal private benefit, which means are externalities are not accounted for. We can also see that A is the socially optimum, as the marginal social cost is equal to the marginal social benefit, which means all private and external costs are accounted for. The aim is that the fat tax will correct market failure by decreasing the consumption of fatty foods (and increase the consumption of healthier food and drink), which will internalise the external costs. As a result of the tax, the deadweight welfare loss area diminishes from the area ABC to no area. Due to this, obesity is likely to be reduced and people are likely to be healthier. This will have positive benefits, such as reducing the strain on the NHS, as the NHS can spend less time and resources on tackling obesity-related illnesses and shift their focus onto more life-threatening illnesses such as pancreatic cancer and the flu (thus displaying greater allocative efficiency), which is particularly useful as are projected to reach £9.7 billion by 2050, with wider costs to society estimated to reach £49.9 billion per year (the fat tax could potentially reduce these costs).

From a macroeconomic perspective, this will mean more people are working consistently and less people will be missing work due to illness. This will mean these people are likely to earn greater real incomes, which will mean consumer confidence is likely to be higher, thus increasing consumer spending (a factor of aggregate demand). In turn, business confidence will increase, as more people will be buying their goods and services, which results in increased revenue for other industries' businesses, thus causing increased investment, which may cause unemployment in these industries to decrease. This process will repeat, thus causing a cause positive multiplier effect, which will result in a greater increase in aggregate demand (based on the equation), which will increase National Income, which will then cause actual economic growth to increase, which will finally cause real GDP to increase too.

Despite the potential benefits and costs of a fat tax, it is impossible to say whether it will work in the UK, as no such tax has ever been placed in this country. However, looking at other countries for inspiration, we may be able to form a rough idea about the impacts of such a tax. For example, Denmark introduced a fat tax on butter, milk, cheese, pizza, meat, oil and processed food if the item contains more than 2.3% saturated fat, which has resulted in the fat consumption in Denmark dropped by about 10% following the taxation in 2011. If the UK wanted to drastically reduce obesity, a systematic review conducted in 2013 by Powell et al reported that a 20% taxation on sugar sweetened drinks might reduce its consumption among younger adults by about 24%. Taking all of this into account, an additional subsidy on healthier foods (such as vegetables and fruits) using the revenue from the fat tax could make this whole process more effective and may be what the UK needs to drastically reduce obesity and further increase economic growth.