When all politicians agree on something, it is probably a bad idea. A windfall tax on energy companies is currently in populist vogue and is superficially plausible. Thanks partly to reckless sanctions policies against Russia, British energy users have seen their bills rocket by 70% in the past year, with further hikes promised in October when the official price cap on a bill is forecast to rise to £2,600 a year – or even higher. This is the dominant element in pushing UK inflation to 9%. There is no evidence of energy sanctions altering Russian policy or benefiting Ukraine. There is overwhelming evidence they have hurt poorer Britons – and deeply.
Oil and gas companies such as BP, Exxon and Shell have seen their profits soar, Shell’s tripling to £7.3bn. The reason is simply profiting on the back of sanctions. During Covid, many private firms benefited from government loans and grants to stave off collapse. If taxpayers should come to the aid of private companies in hard times, common equity entitles that aid to be recouped if and when times turn good. YouGov even has seven out of 10 Tory voters saying yes to a windfall tax.
Such one-off taxes are political gimmicks. They were previously adopted only in 1981, 1997 and 2011, when chancellors found themselves in budgetary difficulties and a particular sector seemed a soft target, such as banks and utilities. Introducing his 2011 windfall tax on oil companies, the then chancellor, George Osborne, declared simply that “when oil prices are high … it is fair that companies should contribute more”. Labour is now pressing for a rise in the energy sector’s corporation tax from 40% to 50%. It estimates this would raise just under £2bn. Others want a tax on profiteering care-home owners.
These are blunt instruments. Labour’s £2bn would go to the Treasury, where the question would be what to do with it. That money would buy less than 10 miles of Rishi Sunak’s HS2 out of Euston. Adding it to existing benefits would aid both those worst hit by energy bills and those hardly affected. Fusing a windfall tax into relieving the cost of living surge would become a mere blip.
Like the banks during the 2008 crisis, energy companies are oligopolies that cannot expect to escape public regulation, least of all when blessed with a political bonanza. The answer must be to slash the price cap and demand the companies spend their profits directly on cutting bills. The wimps of Ofgem, the industry regulator, must become tigers. They know that these companies – and their executives – are now wealthy. They know investment is not at issue: they are distributing massive profits and buying back shares. Unless the west goes collectively mad, energy supplies, and profits with them, will return to normal.
For now, the priority is simply to bring the price of energy down, and at the government’s command. Yes, all consumers, rich and poor, would benefit; but it would not cost the exchequer a penny, and it would instantly relieve the cost of living at source.