by David Taylor, Councillor for St Edward's, Havering
On 26th May, chancellor Rishi Sunak announced a new windfall tax on energy companies. Well, he didn’t call it a windfall tax, because that was Labour’s plan. Instead he called it a ‘temporary targeted energy profits levy’.
The fact that he must do the dance of semantics tells us all we need to know. We have a Conservative chancellor implementing a Labour tax policy. While politicos may find this U-turn amusing, the outcomes will be no laughing matter. His new tax has the potential to make things worse, not cheaper.
Few will deny the cost of living is an issue right now. Inflation is approaching 10 per cent, with energy costs being a large driver of these. However, there is no record, that I know of, of higher taxes and increased spending tackling inflation. In its simplest economic terms, inflation is a consequence of increasing demand or decreasing supply.
The energy price spike fits into both camps: surging demand due to the end of the pandemic and restricted supply due to Vladimir Putin’s invasion of Ukraine.
But a windfall tax is not the right policy solution.
The wrong fix
What is the problem Rishi is trying to fix? Quite simply, it’s that people can’t afford their bills.
No one is going to disagree with him on that point. But he has not taken any real steps to reduce energy costs; such as scrapping green levies. Under the system he has created, energy providers have no incentive to reduce what they charge, but instead have reduced incentive to invest in alternative and more efficient forms of energy. Prices will only drop if people don’t pay or production increases.
With no incentive to lower prices, energy companies will continue to keep prices high. Rishi could end up writing us all another cheque in 2023!
An expensive fix
According to the House of Commons Library, the ‘package of support’ is going to cost the UK government £15.3 billion in 2022-23. This new tax is going to raise £5 billion in its first year, meaning that, in year one the government has already spent another £10 billion that it doesn’t have.
So, more borrowing for UK PLC. Which with rising interest rates, means more interest to be paid and more taxes to come. It’s a never-ending cycle of tax, tax, tax.
Contrary to the assurances of the chancellor, energy companies, such as BP, are now lining up to warn that they will have to reduce their investments. At a time when we need to be urgently exploring energy diversity, we’re forcing the industry to look again at investments. This will continue to leave us reliant on importing energy and volatile global markets.
Don’t meet costs, reduce costs
While there is little the government can do about global supply issues, much of the strain on energy bills comes from government itself. The TaxPayers’ Alliance has explained that 15 per cent of the standard dual fuel energy bill goes towards green levies, and a further portion is taken in VAT.
The government’s closure of UK fracking sites has also severely hampered the possibility of a robust domestic energy supply. It’s estimated that just 10 per cent of the Bowland Shale gas formation would meet the UK’s gas needs for the next 50 years. Trillions of cubic feet of cheap gas sit beneath our feet. Gas that could fuel a new industrial revolution across the UK; creating jobs, driving down the cost of production and ultimately the cost of living.
There are more options on the table than the chancellor might have you believe. This government can, quite easily, reduce taxes and increase production. Energy companies could be incentivised to invest their profits into long term, renewable, solutions.
Instead of increasing production - the only known long-term cure to inflation - Rishi has picked the one fix proven to fail: Tax, borrow, spend.