Making amends for his lacklustre Spring Statement of 23 March 2022, Chancellor of the Exchequer Rishi Sunak came up with a much more ambitious plan to deal with Britain’s evolving cost-of-living crisis, marked by food and fuel price inflation, rising energy bills, and higher mortgage repayments. On 26 May 2022, Sunak thus introduced a £15 billion emergency support package of financial measures to ease the pain for struggling British households over the 12 months to follow.
Sunak’s package includes both universal measures, applicable to all household irrespective of financial means, and targeted (means-tested) measures, aimed ar the less affluent. All households will receive a £400 grant to cover their energy bills from October 2022 to March 2023, in place of a previous £200 loan, with wealthier recipients, who could manage without, being urged by the Chancellor to consider donating their grants to charity. All households on Universal Credit, Tax Credits, Pension Credits, and other legacy benefits, will receive a one-off payment of £650, in two instalments of £325 each. In addition, there are one-off cost-of-living payments of £300 for pensioners who receive Winter Fuel Payments in November and December and £150 for those on one of seven non-means-tested disability payments.
In what is without doubt a U-turn, but not admitted as such, £5 billion earmarked for this support package is expected to be raised over the following 12 months by a “Temporary Targeted Energy Profits Levy”, which is nothing but a windfall tax, masquerading under another, more impressive-sounding, name. The windfall tax was originally a Labour concoction, introduced by Chancellor Gordon Brown in 1997 as a one-off tax to raise money from privatised utilities that had been undersold, knowingly or otherwise. The tax targeted the financial “windfall” from the privatisation of undervalued public sector enterprises, whereby the market valuation of privatised firms considerably exceeded the actual costs of privatisation. A windfall tax on energy firms, reaping higher than usual profits in the midst of a crisis, had been advocated by Labour MPs, including the Shadow Chancellor Rachel Reeves, as early as January 2022, but was rejected by the Chancellor and his Cabinet colleagues as not in keeping with the Conservative ideology of low taxation of potential big investors.
The levy of 25 per cent on profits over the next 12 months adds a 40 per cent special rate already paid by North Sea oil and gas suppliers-made up of a 30 per cent corporation tax on profits and an extra 10 per cent on top. Simultaneously, there comes the offer of an 80 per cent investment allowance, as a sweetener, in a case of giving with one hand while taking with the other. It is widely accepted that higher taxes may deter further investment, and that energy firms need incentives to counter the negative message of increased taxation. The energy giants have inevitably claimed that the levy cuts into amounts earmarked for infrastructure development, as part of the transition to a greener economy, and that the investment allowance does not specifically provide for the development of renewable energy sources.
Rising energy bills and astronomical fuel prices reflect a supply-demand mismatch, originating during the Covid-19 pandemic and worsened by the unresolved conflict in Ukraine and by OPEC capacity issues, leading to high wholesale prices for gas and oil. They also draw attention to gaps in Britain’s energy security, which continues to depend on importing high-cost fossil fuels. France seems better prepared with its nuclear energy backup, allowing it to cap energy prices, just as Ofgem increases its price caps in an attempt to pass on to consumers the rising costs of energy suppliers The energy levy, welcomed by many, is at best a short-term fix and may not go far enough to address the economic shock of the energy crisis. If it doesn’t, it may prompt the government into another spree of dishing out large sums of money, never enough, and thereby pot worsening inflation already at record high levels.
Ashis Banerjee