Like the Voldemort of Government announcements, the windfall tax is the policy that must not be named. Standing at the despatch box, Rishi Sunak described a plan to tackle the cost of living as a ‘temporary targeted energy profits levy’. The Labour benches erupted with derision at his delicate language and delight that he’d copied their idea.
Saying one thing and doing another isn’t unusual in politics, but this Government is making a habit of it. It claims to be the party of low taxes while presiding over the highest tax burden since the heyday of state socialism, and insists it is a friend to businesses while deducting from their profits.
That said, you can see why the Chancellor felt compelled to reach for his magic wand. On Tuesday, Ofgem announced that the energy price cap will increase by another £800 in October. As it happens, ability to afford an unexpected but necessary expense of £850 is one of the benchmarks the ONS uses to measure financial resilience, and at present 29% of adults just don’t have that kind of money. The support the Government has announced will offset 82% of the rise in energy bills, and 90% for the poorest households.
But it comes at a cost. As Andy Mayer wrote on these pages, you can’t make things cheaper by increasing taxes on them. Whatever Sunak calls it, this is a move that will take cash from the very businesses we’re depending on to end our reliance on Russian gas. And, as new research from our parent organisation the Centre for Policy Studies highlights, pro-business signalling is almost as important for investment as a favourable fiscal environment. Windfall taxes help with neither of those things.
For proof that arbitrary levies like this are bad for growth, the Chancellor need only ask one of his predecessors. In 2011, George Osborne hiked taxes on North Sea oil producers only to cut them back again a few years later when productivity and investor confidence collapsed. A repeat of that cycle is the last thing we need.
While supporters of the tax have trumpeted claims by BP boss Bernard Looney that it would not affect his plans to invest up to £18bn in the North Sea, they ignore the warnings of other industry insiders. The argument is also somewhat undermined by the fact that BP announced it was reviewing its investment strategy almost as soon as the Chancellor sat down.
To be fair to Sunak, it’s an improvement on Labour’s original proposal, and is predicted to raise more than twice as much, at £5bn. He has structured the levy in the most pro-growth way he could, offering relief to companies that invest in oil and gas extraction. The disadvantage of that, of course, is that it may mean more meagre returns to the Exchequer.
What was the alternative? Despite inflation, interest rates are still extremely low, and there is an argument for borrowing to get through the crisis. The danger is, as Paul Johnson of the IFS warns, we can’t go on like this. The coming price spike will hurt, but many of the factors driving it, like snarled up supply chains, and Chinese lockdowns, are temporary.
So there was certainly a case for helping people cope with the short-term pain. But the idea that tax grabs on businesses and writing cheques to people on middle incomes is the solution to every problem must not become permanent. If that happens, the Chancellor may find his wizard wheeze has backfired.
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