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By Michael Holden and Sarah Young
LONDON, March 16 (Reuters) - Britain will introduce a sugar levy on soft drinks in two years' time to tackle a growing obesity crisis, finance minister George Osborne said in a surprise announcement on Wednesday, delighting health campaigners and angering drink makers.
Just months after the government ruled out a sugar tax, Osborne said the levy, which would be imposed on companies and based on the sugar content in drinks, would raise about 500 million pounds ($704 million) annually.
"I am not prepared to look back at my time here in this parliament, doing this job and say to my children's generation: I'm sorry, we knew there was a problem with sugary drinks," Osborne told parliament.
"We knew it caused disease. But we ducked the difficult decisions and we did nothing," he said.
Britain joins France, Belgium, Hungary and Mexico which have imposed some form of tax on drinks with added sugar, while Scandinavian countries have levied similar taxes, with varying degrees of success, for many years.
Shares in drinks' groups fell on the news, with Britvic and AG Barr, which makes Irn Bru, down between 3 percent and 5 percent. Sweetener group Tate & Lyle was down 2 percent. Coca-Cola Co fell 1.3 percent in New York.
Britain's Food and Drink Federation said Osborne's tax was "a piece of political theatre" that would make no difference to obesity and cost jobs.
Osborne said obesity fuelled rates of heart disease, diabetes and other illnesses which cost the economy 27 billion pounds a year and were a huge burden on the state-funded National Health Service (NHS).
"Five-year-old children are consuming their body weight in sugar every year," he said. "Experts predict that within a generation over half of all boys, and 70 percent of girls could be overweight or obese."
The tax would apply to drinks with a total sugar content above 5 grams per 100 ml, with a higher band for even more sugary drinks. Osborne said a can of cola typically had nine teaspoons of sugar, with some containing 13.
The Office for Budget Responsibility, the government's budget watchdog, said the figures implied a levy of 18 pence per litre, or 24 pence for those in the higher band. A two litre bottle of Pepsi currently retails for about 2 pounds.
Osborne acknowledged the price rise might be passed on to consumers but said the money raised would be spent on funding school sport.
Last November, a call by British lawmakers for a sugar tax was rejected by the government, leading to accusations it was giving in to lobbying by food giants.
Supporters say it will raise the cost of high-calorie products and reduce consumption, in the same way that tobacco taxes have helped reduce smoking.
A scientific study published in January found a 40 percent reduction in free sugars added to drinks over five years could result in some 500,0000 fewer adults being overweight and a million fewer being obese.
That in turn would prevent between 274,000 and 309,000 obesity-related type 2 diabetes cases over the next two decades.
The study's author, Graham MacGregor, a professor of cardiovascular medicine and chairman of the Action on Sugar campaign group, said that to be effective, the levy had to be at least 20 percent on all sugar-sweetened soft drinks and escalate if companies did not comply to reformulation targets.
News of tax was welcomed by health campaigners.
"We did it guys!! We did it !!! A profound move that will ripple around the world," tweeted celebrity chef Jamie Oliver, who has led a high-profile campaign for action.
"This will help us shed pounds off our waistlines, and save pounds on future NHS costs," said Simon Stevens, NHS England chief executive, saying soft drinks were children's largest single source of excess sugar.
Gavin Partington, Director General of the British Soft Drinks Association, said the sector had cutting sugar levels.
"By contrast sugar and calorie intake from all other major take home food categories is increasing - which makes the targeting of soft drinks simply absurd," Partington said. ($1 = 0.7101 pounds) (Additional reporting by Kate Kelland and Martinne Geller; editing by Guy Faulconbridge)