A windfall tax shouldn’t be ruled out by the Conservatives

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As the government scrabbles to find policy solutions to cut bills ahead of whopping price increases this April, several things have become clear.

The first is that doing nothing is not an option. With the energy price cap set to rise to as much as £2,000, household budgets are about to be hammered. The Prime Minister has apparently persuaded the Chancellor to get his chequebook open, but the design of any suitable policies to reduce bills is unobvious, or at least contested. There are more leaks every day of where the Treasury is headed – no doubt we’ll hear more soon.

The second is that there is no “silver bullet”. Whilst Labour is joining forces with some Conservatives in calling for VAT cuts to energy bills, it would barely make an impact (cutting a bill at the current cap by £61).

As customer bills go through the roof, oil and gas companies are seeing record cashflow

The Warm Homes Discount could be extended, but the design of the policy means it adds cost to most bill payers. A loan system has been mooted by the retail energy sector, but the Treasury isn’t keen on anything being on their books, so banks are also in the mix.

Other options include removing social and environmental levies off electricity bills into general taxation and applying rebates to bills. The latter is the basic policy of choice in France and could be replicated in the UK (a central rebate system applies to South West Water customer bills, so there is precedent).

The elephant in the room is that, as customer bills go through the roof, oil and gas companies are seeing record cashflow. Industry cash flows for 2021 and 2022 are estimated at £17 billion and £18 billion respectively, with government revenues from the sector of £3 billion and £7 billion. BP chief executive, Bernard Looney, described soaring global commodity prices as a “cash machine”, as BP announced $1.25 billion of share buybacks in November. BP has paid no UK corporation tax on its upstream operations for the last three years, a result of the structure of decommissioning tax regime and generous capital allowances.

In September, Business Secretary Kwasi Kwarteng raised the prospect of a windfall tax to help ease the burden on households affected by soaring bills. He said: “I’m not a fan of windfall taxes…but of course [the energy system] is an entire system and we have to think about how we can get the energy system as a whole to help itself”.

While it might seem ideologically anti-Conservative and designing windfall taxes are hard, there is precedent for both Conservative (Howe 1981, Major in the 90s) and Labour (Brown, 1997) politicians to back windfall taxes.

Most infamously, George Osborne shocked oil and gas companies by raising the supplementary charge in the 2011 budget 20 per cent to 32 per cent to fund a “fair fuel stabiliser”.

The current crisis demands an equally pragmatic solution – and the politics are attractive too. It may seem a bit “robin hood”, but the government shouldn’t forget its political arithmetic. The government has so far poured cold water on the idea, but they should seriously reconsider. The poorest households, including many in newly Conservative seats, already spend a higher proportion of their incomes on energy bills. It’s only going to get worse.

The Liberal Democrats have this week called for a Windfall Tax and Labour quickly followed suit. Conservative backbenchers are now joining those calls too. Voters up and down the country will be watching closely as the government decides how to respond to this crisis.

 

Joe Tetlow is a senior political adviser at Green Alliance.

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