Sunak’s windfall tax comes with added complexity

When the Chancellor of the Exchequer sat down after what was apparently not an emergency budget, announcing what was not called a windfall tax, the main story on the Treasury website was still about his spring statement two months ago.

It is appropriate. It was clear then that Rishi Sunak would need to offer more help, with energy prices expected to push typical bills to £2,800 this autumn, more than double the regulatory cap a year earlier.

Much of the time since then has been spent explaining why what the UK government announced on Thursday was a bad idea. Sunak has repeatedly said that a windfall tax on North Sea oil and gas profits, while “superficially attractive”, would hurt investment.

Instead, the government created what it calls a new energy profit tax, adding complexity to address concerns that it was not “conservative”. It aims to raise £5 billion from oil and gas producers. There may be decent ways to collect taxes on genuine windfall gains, but that’s not it.

Sunak has a poor track record with policy complexity. Who remembers the convoluted and controversial furlough succession plan announced in 2020, which never materialized as another wave of Covid-19 necessitated an extension of the original?

See also Thursday’s statement. Canceled is the February Energy Bill Rebate, which was expressly 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 reduction of £400 on household bills and significant help in direct social assistance payments to low-income households, pensioners and disabled people. . The £15billion package is rightly aimed at supporting those who need it most: three-quarters will go to what the Treasury defines as vulnerable households.

The oil and gas sector has had complexity instead. It is perfectly possible to say that in fact the North Sea oil and gas tax has historically been at quite low levels. At 40 percent, including the additional 10 percentage point tax, it was double the normal corporate tax rate. But over the past decade, the tax rate on fields approved before 1993 has doubled again.

It’s also possible that, as Stuart Adam of the Institute for Fiscal Studies argues, North Sea oil and gas is slightly different from other outstanding tax candidates. You cannot pack up your oil rig and move it somewhere else. The fact that the additional load has risen and fallen over time – it was reduced in 2015 after the oil price crashed – suggests that an element of this should be factored into the thinking of a cyclical industry.

But the government did not make this case. Instead, he created a 25% levy, with initial investment incentives (beyond what is already offered in the additional charge) to circumvent his own criticisms of towards the idea. The levy – unlike Labour’s ‘brutal’ proposal, Sunak said – appeared to have been put in place to show fiscal responsibility, despite raising perhaps £5billion against spending of £15billion. pounds, and dressed to encourage more investment, which it probably won’t.

Short-term investing has always been a red herring. As BP chief executive Bernard Looney has said, a windfall tax would not change plans, which are already agreed and committed. Similarly, an industry working long lead times is unlikely to delay much spending to take advantage of a short-term doubling of tax relief.

The question was whether the government could tax the extraordinary gains made by oil and gas companies, without dampening their longer-term inclination to invest in renewable energy and green infrastructure which the UK (and all other countries ) desperately needs.

Meanwhile, the Treasury has just started working on a longer-term plan to boost investment by struggling businesses across the economy, after its two-year super deduction dropped slightly. In March, the Office of Budget Responsibility halved its estimate of the investment announced under the policy.

The problem with windfall taxes has always been how to convince people that it’s a one-time tax (and it hasn’t been in the oil and gas industry at least) which is targeted at a very particular set of gains. Difficult to hold this semblance, given the speeches of the government on the producers of electricity, another sector where enormous investments are necessary in the energy transition.

It seems the only reason that didn’t come Thursday was that the task of separating out true excess profits in an industry that hedges prices and operates on a bewildering array of contracts was too obvious a task even for Sunak.

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Sharon D. Cole