August 16/Business Monitor International Ltd. -- A report in France, carried out by two state agencies, has recommended that VAT on unhealthy foods be increased from 5.5% to 19.6% to combat obesity. The proposals were put forward by the Inspection Générale des Finances and the Inspection Générale des Affaires Sociales (Igas) but were promptly rejected by the France's budget minister, Eric Woerth.

With consumers facing rising inflation, particularly in the food sector, Woerth claims that an increase in VAT is out of the question, and it certainly seems unlikely that such a controversial measure would be introduced at the same time as consumer's purchasing power is being eroded. However, the report will now be debated by the country's national assembly and could conceivably find favor, given France's rising levels of obesity and associated burgeoning health budget. In 2006, 5.6 million people in France where classified as obese -- an increase of over 150% from the level in 1997.

The report proposes that foods with high levels of fat, sugar or salt are hit by the additional tax and that snack foods, such as pizza and hamburgers, are also targeted. Such a tax would certainly represent a challenge for France's food industry, and it is interesting to consider how manufacturers might respond.

For some manufacturers, the additional tax might prompt them to lower the level of fat, sugar and salt in their products so that they are not hit by the tax. It is difficult to see how a manufacturer that did not respond could compete, given that their products would not only be less healthy but would also probably be more expensive given that they are taxed at a higher rate. With manufacturers reformulating their products to meet the new healthy guidelines, the market for some ingredients, such as artificial sweeteners, is also likely to benefit.

Although the tax change is unlikely to find favor given the current economic circumstances, the report has started a debate in France that is unlikely to just go away. The prospect of higher taxes on unhealthy food items would surely be an effective way to change consumer choices and to encourage manufacturers to make their products healthier. Given these benefits, the policy could re-emerge in the future, particularly if inflation falls and consumers become less sensitive about the rising costs of living

From the August 18, 2008, Prepared Foods e-Flash