Windfall taxes and the cost of living crisis

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Rishi Sunak recently announced that the government will be imposing a windfall tax in the form of a 25% Energy Profits Levy. Over the past few months, oil and gas companies have benefited from increased demand following the end of the coronavirus pandemic and from panic over limited supplies due to reducing trade with Russia since its invasion of Ukraine. The financial benefits these companies have made is colossal – yet they have not paid a fraction of the tax to correlate. The government intends to tax an additional 25% of oil and gas company profits (on top of existing 40% rate of tax, thus becoming 65%). The aim is to raise around £5 billion of revenue to help fund the government’s energy support package which will help the most vulnerable households struggling with increasing household bills this year.

Whilst this seems to be an obvious idea to help tackle the current cost of living crisis, current politicians in Government have objected to the idea. The measure seems to only have come around as a last resort, as the government realises the extent of the crisis as most people’s wages have not increased at the same rate home energy bills have. Boris Johnson commented that they are a deterrent from company investments: “I don’t like them…I want these companies to make big, big investments”. The main proponent of the tax and Chancellor of the Exchequer, Rishi Sunak, has commented that he is not attracted to them, but is ‘pragmatic’ about introducing this measure. Windfall taxes are not traditionally seen as aligned with Tory political philosophy, so their use today is of note.

Of course, windfall taxes have been used in the United Kingdom before and here are some recent examples of them being used:

Geoffrey Howe introduced a 2.5% special budgets levy in 1981 for banks who seemed to escape the effects of the hard-hitting recession, which raised £400 million or nearly £3 billion in today’s currency. This was then redistributed to help those most effected by the recession to get the public financially back on track and in support of the new Thatcherite government.

Only sixteen years later in 1997, Gordon Brown’s windfall tax raised £4.8 billion to invest in a ‘welfare to work’ programme. This came at the start of New Labour after the previous Conservative government’s wave of privatisation. It aimed to help the public who had been negatively affected by this, helping to tackle unemployment, and investing in the improvement of the school system.

Both of these taxes faced criticism within Government. Brown’s tax was resented by companies as the strain it placed on them was greater than anticipated, leading to job and investments loss by companies such as Anglian Water, meaning that there was less money available to invest in service improvement and environmental protection. Howe’s tax was seen as risky, weakening the power of banks and their ability to lend.

The main concern with this windfall tax is the risk of a fall in investments. The oil company Shell has spoken out against the tax, saying that it will create uncertainty for the supply of oil and gas in the UK, especially following the conflict in Ukraine.

It seems as though the dilemma caused by windfall taxes is the weighing up of benefits to the people and of benefits to companies. In times like these, when the price of living has increased beyond the inflation of minimum wage, it can be argued the government has a duty to protect people against the burden of inflation, rather than to defend corporations. However, whilst there clearly ought to be government intervention to help families who are struggling, raising the funds to do so by taxing large companies can also hurt them. There can be a knock-on effect on the public, such as a shortage of oil crisis. The question we must ask is whether there is a better way to raise the finances to help those in need in these trying times.

Image: Pippa Fowles via Flickr

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