D. Parliamentary Budget Office costing: 20% tax on sugar sweetened beverages
1.1Person/party requesting the costing: Dr Mike Freelander MP, Australian Labor Party.
1.2Date costing completed: 3 April 2024.
1.3Expiry date of the costing: Release of the next economic and fiscal outlook report.
1.4Status at time of request: Submitted outside the caretaker period.
1.5Not confidential.
Summary of proposal
1.6The proposal would apply a 20% tax on all sugar-sweetened beverages (SSB).
1.7Sugar-sweetened beverages include all non-alcoholic water-based beverages with added sugar and include soft drinks, cordial, energy drinks, sports drinks, fruit drinks and flavoured mineral waters.
1.8The request also sought distributional analysis of the impact.
1.9The proposal would commence from 1 July 2025.
Costing overview
1.10The proposal would be expected to increase the fiscal and underlying cash balances by around $1.4 billion over the 2023-24 Budget forward estimates period (see Table 1). This reflects an increase in tax revenue partially offset by departmental costs to administer the tax.
1.11The proposal would have an impact beyond the 2023-24 Budget forward estimates period. A breakdown of the financial implications (including separate public debt interest (PDI) tables) over the period to 2033-34 is provided at Attachment A.
1.12Distributional analysis relating to expenditure on sugar-sweetened beverages (SSBs) is included in Attachment B.
1.13The financial implications are uncertain and sensitive to forecast SSB sales, and the behavioural response of customers and manufacturers to the price increase.
Figure D.120% tax on sugar sweetened beverages – Financial implications ($m)(a)(b)
(a) A positive number represents an increase in the relevant budget balance; a negative number represents a decrease.
(b) PDI impacts are not included in the totals.
- Indicates nil.
Key assumptions
1.14The Parliamentary Budget Office (PBO) has made the following assumptions in costing this proposal.
- The tax is levied on the Goods and Services Tax (GST)-inclusive price of SSBs at the point of retail sale.
- SSB sales would be approximately $4.4 billion in 2025-26 and grow by 2% annually.
- This is informed by a 2023 IBISWorld analysis that estimates a small decline in real sales of SSBs of around -0.5% per annum, which is more than offset by price inflation resulting in an estimated nominal growth of 2%.
- Consumers are assumed to respond to the tax by lowering their demand. The PBO has assumed that a 20% increase in price (due to the tax) would reduce demand by approximately 20%.
- This is informed by weighting the price elasticities for different beverages by available data on the volume of the respective beverage types.
- Due to the decrease in demand, the proposal is expected to have an impact on the amount of GST collected. This is included as a separate line item in Attachment A.
- Departmental costs are based on policies with a similar degree of administrative complexity.
- Flow on impacts to the Consumer Price Index (CPI) or consequential CPI-related impacts on transfer payments are not considered.
Methodology
1.15The PBO used the following methodology to estimate the financial impacts of the tax:
- Total baseline SSB sales were estimated as per Key Assumptions.
- The reduction in consumption due to the tax was estimated based on price elasticities.
- The decline in GST revenue was estimated by multiplying the decline in sales by the GST rate.
- The revenue from the SSB tax was estimated by multiplying total sales (adjusted for the reduction in consumption) by the SSB tax rate.
- Financial implications were rounded consistent with the PBO’s rounding rules as outlined on the PBO Costings and budget information webpage.
Data sources
- Australian Medical Association (2021) A tax on sugar sweetened beverages, accessed 13 March 2024.
- Capps and Hanselman (2012), ‘A Pilot Study of the Market for Energy Drinks’, Journal of Food Distribution Research
- Cawley and Frisvold (2015), ‘The Incidence of Taxes on Sugar-Sweetened Beverages: The Case of Berkeley, California’, National Bureau of Economic Research Working Paper
- IBISWorld (2023) Australian soft drink market valuation, accessed 13 March 2024.
- Sharma et al (2014), ‘The Effects of Taxing Sugar-Sweetened Beverages Across Different Income Groups’, Health Economics
Note: The PBO's attachments have not been provided in this appendix. The full costings document, including the attachments, will be available on the PBO's website.