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Opinion – Windfall Tax: Why has it taken this long?

Cost of Living

Thank goodness for Sue Gray’s report!

At least the Government’s pasting in the national media today over “booze laden parties” has finally got the Government to react.

Their strategy this week was clear – announce something big enough to replace partygate headline recounting red wine spattered up walls, attacks on cleaners and someone chundering at 3am in Downing Street. To an extent this has worked with at least 50% of the nationals covering Rishi Sunak’s conveniently timed help for hard working people on their front pages.

The announcement of a windfall tax u-turn was expected after the Jubilee weekend; however, Number 10 has decided to bring forwards the announcement to today. An excellent PR strategy, some may say. Most importantly however, this PR tactic is going to have the helpful benefit of getting support to those struggling with the cost of living.

Sadly, it has taken 126 fines to get the Government to finally act. This is clearly playing politics when people are having to turn off the fridge to save on energy costs. So, the big question is why has it taken this long?

Help on energy bills

Ahead of his statement to the House of Commons, last night the Chancellor pre-briefed the press that households in England, Scotland and Wales are set to have hundreds of pounds knocked off energy bills this winter as part of a £15 billion package to help people cope with soaring prices.

The Government had previously committed to giving people £200 off bills from October and repaid over five years. This brings the total cost of living support offered by the Government this year to £37 billion.

At the Dispatch Box this lunchtime, the Chancellor announced that this amount will double to £400 and will not need to be paid back.

To pay for this, the Chancellor outlines a new 25% “temporary targeted energy profits levy” that could raise around £5 billion.

The Chancellor has therefore ensured that most households will receive £550, pensioners £850 and almost all the eight million most vulnerable households will receive support of at least £1,200.

The Confederation of British Industry (CBI) welcomed the Government’s plan to tackle cost-of-living pressures – but raised concern about the Chancellor’s new tax.

The CBI’s Chief Economist, Rain Newton-Smith said that while the Chancellor’s plans were the right thing to do, she warned that the “open-ended nature” of the tax on fuel company profits could prove damaging to investment. Highlighting that this is necessary for energy security as well as reducing carbon emissions to tackle climate change.

She said the measures “sends the wrong signal to the whole sector, against a backdrop of rising business taxation elsewhere.”

Windfall tax Cost of living Rishi Sunak
Chancellor, Rishi Sunak addresses MPs

Labour’s Windfall Tax

The Chancellor announced that the levy on the profits of oil and gas companies will be “temporary” and at a rate of 25%. The levy will be phased out when prices return to more normal levels and the more a company invests the less tax they will pay.

Sunak admitted that oil and gas companies were making “extraordinary profits” because of surging global commodity prices driven in part by the war in Ukraine.

The chancellor said these profits must be taxed fairly and investment incentivised.

For five months, most commentators have expected the Government to u-turn. Responding to the Chancellor, Shadow Chancellor, Rachel Reeves said: “Let there be no doubt about who is winning the battle of ideas in Britain, it is the Labour party,” she said.

“Today it feels like the chancellor has finally realised the problems the country are facing.”

However, commenting on the new complex terminology i.e., not a windfall tax, Reeves said, “he can’t dare say the words” and it is “the policy that dare not speak its name”.

However, IFS analysis has shown the Chancellor’s proposal to be much larger than those proposed by Labour and for three years.

Final Thought – Embarrassing

This was an embarrassing u-turn, the day after an embarrassing report, with an embarrassingly small number of MPs in the House of Commons there to support the Chancellor.

It is true to say that this was not a good day for the Government, and (however unlikely) Richard Draw was correct to say this Conservative Government has just thrown “red meat to socialists.”

Whichever metaphor you would like to choose, Grand old Duke of York etc, the Chancellor and Prime Minister are not going to be popular with their MPs – including many members of the Government – sent out over the last few weeks in front of the media to say why a windfall tax is such a bad idea.

Why not equalise capital gains tax thresholds for example? Something that would have raised or bring it in line with income tax. According to the IPPR think tank, this could bring in as much as £90 billion over five years. Instead, the Conservatives obvious reluctance to tax any form of wealth has left them looking defeated in the face of a strong and effective Labour campaign.

The saving grace is that the Chancellor has finally done something to help people who are desperately in need of support.

Sometimes in politics the right thing overcomes the cost. To paraphrase Winston Churchill, this Chancellor can be trusted to do the right thing, once all other possibilities have been exhausted.

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