A striking U-turn to alleviate the UK cost of living crisis


For an avowed fiscal conservative, Britain’s chancellor of the exchequer is capable of some sizeable contortions. This week, Rishi Sunak unveiled some changes of direction of surprising size — unveiling huge new tax and spending commitments.

The most striking U-turn was a £5bn windfall tax on energy companies. When unveiling his last budget in March, Sunak had assailed this idea, then being pushed by the opposition Labour party. “We want more domestic energy and more jobs for the UK. A windfall tax would put that off,” he said. How things change.

The tax is intended to fund, in part, a £15bn support package for households with cost of living problems. This was not a change in direction: this is the third time the Conservative government has improvised help for households. But it was a sudden acceleration — doubling the amount of support.

The temporary help for households should be broadly welcomed. Consumer price inflation is expected to break double figures imminently. The energy price cap, which limits how much households can be charged, stood at £1,277 last October. It is expected to rise to £2,800 in October this year.

It is good policy to guard the poorest from these shocks. It is also important to maintain support for Ukraine by cushioning the effects of the war at home. Waiting for the automatic annual process by which benefits creep up to match price rises was not enough.

One troubling question for Sunak was why this money took so long to arrive: these price rises have been evident for months. The answer is politics. The windfall tax and new measures were designed to outflank Labour, who now hold a firm polling lead over the Tories.

That is also why, while most of the spending is targeted, every household is getting a £400 discount on their bills — an unnecessary splurge for many households that can bear the burden, which should have been avoided. In the context of high inflation and a tight labour market, this demand boost will have to be offset by the Bank of England. It would have been better to put some more resources into uprating welfare benefits for the most vulnerable. That, too, would have been inflationary — but to a better end.

The windfall tax has been driven by the same politics. The Tories needed a reply to Labour’s call for a levy on energy providers, so used the tax law to get one. Sunak bragged: “The official Labour party view is that the windfall tax would raise £2bn. The way we have structured ours means it will in fact raise £5bn.” He is considering similar steps to tax the electricity generators’ “extraordinary profits”, too.

These windfall taxes are bad policy. Britain needs huge investment in this sector as part of its transition to a cleaner energy economy. That means clear and predictable future taxation. Ministers can write regulations to limit profits in specific sectors — as they have in the past. But they should do so upfront, not post-hoc.

Indeed, the best thing about these windfall taxes is that they draw attention to the inadequacy of the UK’s energy policy. Layers of complex regulation and tax decisions have been deposited, one on top of the other, over many decades. The price spike is a good moment to rationalise this mess.

This is unlikely to be the last time the UK government returns to this problem; the package this week is for one-off patches which it may be obliged — morally or politically — to renew when they expire. Indeed, the disconcerting theme that runs through this mini-budget is that short-term political fixes are what matter to this government — and effective, long-term policy can wait.

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