There are a lot of problems with this.

• Expensive to implement: It would inevitably result in more administration, more systems and more work to do. I'm personally very doubtful that there will be a benefit to this. I don't know if you have any studies to back up the amount of money 'lost' (i.e money spent on drinking/smoking) under the current system because I can't imagine it's much more than even a conservative estimate for implementing a system such as this. Then you of course have to factor in the cost of enforcement - The comparable systems in the US are abused a lot (i.e sell someone cigarettes but scan in some food)

• There is a lot of personal rights and freedom implications from this policy. Of course you start out with the best of intentions by stopping people from smoking and drinking but who's to say what is and isn't damaging. Should the government be able to say what kind of food you can buy? Should you not be able to buy things that aren't necessities like books or dvds? There's a lot of overbearing authoritarianism (which the right usually get angry about!) from these kind of policies

• Complete lack of respect for human dignity - the state is something that we all pay into at some point under the assumption that when we have trouble we can get healthcare, or disability allowances or help when we're out of work. It's rather insulting and demeaning to be told that because you're temporarily out of work you're no longer responsible enough to be able to budget for yourself and need the tory state to tell you what you can and can't buy. It won't solve the demonisation problem because if anything people on Food Stamps in the US are more demonised than the UK and is just a further erosion of the safety net so that the richest can earn more money. (Because the prime benefactors of this kind of policy would be the supermarket owners - Kind of how Walmart earns a shit ton from food stamps in the US)