Industry bosses are drawing up plans for a legal challenge after the chancellor announced a charge on sugary drinks such as Coke, Red Bull and Irn-Bru. The tax will be levied from 2018.
The proposal puts Osborne on a collision course with some of the world’s most powerful companies, reports the Sunday Times and adds to the disarray engulfing the government in the aftermath of the budget.
Several leading economists questioned whether the chancellor can achieve his aim of a budget surplus by the end of this parliament.
The new tax will add 24p a litre to products with the highest sugar content. Osborne said it would raise £520m a year.
The measure may not see the light of day. It is expected that a legal challenge would be made through the European courts. Soft-drink makers will claim the tax is discriminatory because it will not hit other beverages with a high sugar content, such as fruit juices and milkshakes.
“It’s fair to say we are more than just considering legal action. This has been rushed through without warning,” said a senior industry source
There have been successful challenges to similar taxes in Finland and Denmark. In December the European Court of Justice blocked Scotland’s plans to enforce minimum alcohol pricing.
Conversations between the industry and government officials are continuing in an attempt to avoid a costly legal battle. If there is a challenge, giants such as Coca-Cola, AG Barr and Britvic are likely to be involved.
Osborne faces pressure on other fronts, with a number of economists warning that a budget surplus is unlikely in this parliament.
Fathom Consulting said the Office for Budget Responsibility (OBR) had not changed its view that Britain’s flagging productivity rate is poised to rebound. “If that recovery fails to materialise, then on current plans, future deficits will be larger still,” said Fathom.
Capital Economics said that the pre-election squeeze implied by the budget looked implausible, but that Osborne could be helped out if the economy does better than predicted.
“We do not worry greatly about whether the government balances the books in 2019-20, 2020-21 or 2021-22,” said David Owen, an economist with the investment bank Jefferies International. “It is the direction of travel that matters more and whether the economy continues recovering.”
An analysis by the Centre for Economics and Business Research (CEBR), published today, shows that poor public sector productivity is partly to blame for the weakness of Britain’s public finances. Had public sector productivity grown in line with the average for the rest of the economy since 1997, it says, we would now be spending £150bn a year less on the same level of public services.
“The chancellor paid a lot of attention to private sector productivity in his budget speech. But at the heart of the stealth taxes and spend- ing cuts is the amazingly slack performance of public sector productivity, which has risen by only 1.2% since 1997,” said Doug McWilliams, CEBR president.
This week, figures are set to show inflation remaining close to zero, reinforcing expectations that the Bank of England will keep interest rates on hold for a considerable time to come.
Higher oil prices will push up inflation eventually, economists say, but probably not above 1% this year.