With eleven percent inflation on the horizon, the cost of filling a family car exceeding £100, and Ofgem’s price cap set to rise again in October to £2,800, former Chancellor Rishi Sunak insisted the Treasury was ‘using all the tools at [its] disposal to bring inflation down’. But as tax cuts languished untouched on his conceptual workbench, the government reversed its aversion to Labour’s proposed windfall tax on oil and gas profits. Sunak insisted his windfall tax would collect £5bn in revenue for £400 in compensatory measures for consumers. Labour lauded the then-Chancellor’s change of heart, but said their £6.6 bn plan would do more to reduce average household bills by £200.
But as last Monday’s Parliamentary debate on the bill demonstrated, the windfall tax is regarded as a plaster for internal hemorrhaging in our energy sector — and that wound was self-inflicted.
A windfall tax is a one-off tax imposed by governments on business profits, designed to take additional income from disproportionate profits earned from unprecedented events. Critics have condemned the policy as punishing success, for circumstances created by generations of poor government energy policy. Britain has been a net oil and gas importer since 2005; sourcing most imports from Norway and the United States. Russia provided a fraction of our annual supply, before sanctions severed ties. However, the reliance of our European neighbours on Nordstream 2, and our dereliction of duty to use reserves both beneath the North Sea and our feet, leaves us vulnerable to global gas market price hikes. Hence, the Treasury’s interest in pursing measures to lower fuel costs.
But a windfall tax is not the fix-all the government hopes for. Even with an investment allowance and sunset provision, Offshore Energy UK chief executive Deirdre Michie warned that unexpected taxes cause businesses to recalculate the size and safety of their investments in emerging technologies. Even those best equipped to absorb the costs, BP and Shell, have stated that intention to review the impact of the tax on their £18bn investment plan, and expressed concerns over it introducing ‘uncertainty’ in the energy sector. As with Joe Biden axing Keystone XL Pipeline construction, a hostile regulatory market deters fossil fuel companies from investing in the supposedly sustainable technologies that the Energy Security Strategy purports to care about. Prices will also increase due to speculation of scarcity, meaning consumers experience escalating costs for longer periods. Sunak’s proposed £400 energy rebate will be a drop in the ocean compared to the ongoing impact of inflation.
The policy also impairs market competition; something already lacking thanks to the Ofgem price cap. In an open letter in May, Harbour Energy chief executive Linda Cook warned the windfall tax disproportionately impacts the UK’s four largest independent producers, responsible for delivering over 440,000 barrels of oil daily. Harbour estimated Sunak’s windfall tax will cost the four more than £2.5bn by 2025, and asked the policy be brought forward to 2023 in order that ‘tax relief can be confidently factored into investment decisions’. Other firms, like EnQuest Plc, which produces over ninety percent of its oil and gas in the UK, expressed it is ‘disappointed with the implementation mechanics’ of the tax. The fastest way to deter long-term energy security is to penalise the profits that could have been invested in an attractive low-tax market. How can that low tax market be created for producers and consumers?
As for petrol: almost half the prices paid at pumps are tax. Fuel duty was lowered by five pence per litre in the recent Chancellor’s budget. But inflation means the Treasury were earning a tax increase of seven pence per litre in VAT preceding the cut. This means consumers are still paying two pence per litre more than pre-pandemic levels. The Treasury are taking in £3.7 million of extra VAT than accounted for every day; with fuel duty earning £77m daily, and VAT £35m.
With twenty-nine percent fuel duty, and seventeen percent VAT, tax revenue currently eclipses the forty-five percent of costs paid to the supplier for each litre of petrol. That obscene profit could be cut instantly, but government remain unwilling to do so.
Even the Labour Party are prepared to execute on Boris’ Brexit promise to cut VAT on energy. All bar one, Conservatives voted against Labour’s motion — only for the Chancellor to enact the windfall tax, without the VAT cut, months later anyways. Why is a self-professed low tax Tory choosing the worst aspects of the opposition’s plan?
It raises suspicions that eco-zealots influencing policy are attempting to price people out of owning cars entirely — immiserating us into cutting carbon emissions involuntarily. If the government wishes to allay the electorate’s concerns that the government are sabotaging their quality of life for a utopian green dream, he must slash the taxes placed on the fuels we need. The Treasury cannot tax and spend its way out of a crisis. Government must reduce the revenue it pilfers from the pay-checks of working families, and not scare off investment in the sector that will solve supply shortages.