When the chancellor of the exchequer sat down after what wasn’t apparently an emergency Budget, announcing what wasn’t called a windfall tax, the top item on the Treasury website was still about his Spring Statement two months ago.
That’s fitting. It was obvious then that Rishi Sunak would need to offer more help, with energy prices set to push typical bills to £2,800 this autumn, more than double the regulatory price cap a year before.
Much of the time since has been spent explaining why what the UK government announced on Thursday was a bad idea. Sunak repeatedly said a windfall tax on oil and gas profits from the North Sea, while “superficially appealing”, would hurt investment.
Instead, the government has created what it terms a new energy profits levy, adding complexity to address worries that this was “unconservative”. It aims to raise £5bn from oil and gas producers. There may be decent ways to gather taxes on genuine windfall gains, but this isn’t it.
Sunak has a poor record with policy complexity. Who remembers the convoluted and contentious successor scheme to furlough announced in 2020, which never became a reality because another Covid-19 wave required an extension of the original?
See also Thursday’s statement. Out goes February’s energy bills rebate, which expressly was not a loan and offered households £200 off their energy bills to be repaid over five years.
Instead, the support will be bigger and simpler, with a universal £400 off household bills and significant help in direct welfare payments to low-income households, pensioners and the disabled. The £15bn package rightly aims support at those that most need it: three-quarters will go to what the Treasury defines as households in vulnerable circumstances.
The oil and gas sector got the complexity instead. It is perfectly possible to argue that, actually, tax on North Sea oil and gas had been at quite low levels historically. At 40 per cent, including the 10 percentage point supplementary charge, it was double the standard rate of corporation tax. But within the past decade, the tax rate on fields approved before 1993 has been double that again.
It’s also possible that, as Stuart Adam from the Institute for Fiscal Studies argues, North Sea oil and gas is slightly different from other windfall tax candidates. You can’t pack up your oil rig and move it elsewhere. The fact that the supplementary charge has gone up and down over time — it was cut in 2015 after the oil price plummeted — suggests that an element of this should be baked into a cyclical industry’s thinking.
But the government didn’t make that case. Instead, it created a 25 per cent levy, with upfront investment incentives (beyond what’s already on offer in the supplementary charge) to circumvent criticisms it had itself been making of the idea. The levy — unlike Labour’s “blunt” proposal, said Sunak — seemed to have been drummed up to show fiscal responsibility, despite raising perhaps £5bn against spending of £15bn, and dressed up to encourage more investment, which it probably won’t.
Near-term investment has always been a bit of red herring. As BP’s chief executive Bernard Looney said, a windfall tax wouldn’t change plans, which are already agreed and committed. Similarly, an industry that works on long-lead times probably won’t drag forward much spending to take advantage of a short-term doubling in tax-relief.
The question was whether the government could tax the extraordinary gains being made by the oil and gas companies, without damping their longer-term inclination to invest in renewable energy and green infrastructure that the UK (and every other country) desperately needs.
Meanwhile, the Treasury has just started work on a longer-term plan to boost ailing business investment across the economy, after its two-year super deduction fell slightly flat. The Office for Budget Responsibility in March halved its estimate for the investment brought forward under the policy.
The problem with windfall taxes has always been how you convince people this is a one-off (and it hasn’t been in oil and gas at least) that is targeted on a very particular set of gains. It’s hard to maintain that pretence, given the government’s talk about hitting electricity generators, another sector where huge investment is needed in the energy transition.
It seems the only reason that didn’t come on Thursday was that the task of prising apart the genuinely excess profits in a sector that hedges pricing and operates on a bewildering array of contracts was a task too obviously fraught even for Sunak.