UK Slaps 25% Windfall Tax on Profits of Oil and Gas Firms

Source: By Joe Mayes, Bloomberg • Posted: Thursday, May 26, 2022

Johnson’s government under pressure to help struggling Britons The tax will fund aid for families battling with inflation

Boris Johnson’s government will impose a windfall tax on the profits of oil and gas companies, bowing to mounting pressure to support Britons facing a record squeeze on living standards.

The 25% levy on energy firms will raise about £5 billion ($6.3 billion) to finance one-off grants of £650 to more than 8 million of the poorest households in the UK, Chancellor of the Exchequer Rishi Sunak said in the House of Commons on Thursday. Sunak did not rule out applying a similar levy to power generators, but said more work needs to be done on the idea.

Around 8 million pensioners will receive payments of £300 while energy bills will also be subsidized by £400 for every household in the UK, replacing a previous plan for £200 loans. The package is worth £15 billion overall, Sunak said, bringing total aid introduced so far to £37 billion.

“We know that households are being hit hard right now,” Sunak said. “Fiscal support should be timely, targeted and temporary.”

Read More: Stained by No. 10 Partying, Johnson Wrestles With Stagflation

What Bloomberg Economics Says …

“Sunak’s latest policy package has raised the odds that a UK recession is averted this year. The majority of the support, which was mainly targeted at more vulnerable households, will land in the final quarter, when energy bills are set to skyrocket again and potentially push the economy into reverse. For the Bank of England, expectations for more resilient demand in the second half of the year make it increasingly likely interest rates will continue to rise.”

–Dan Hanson, Bloomberg Economics. Click for the INSIGHT.

Senior ministers in the British government had long opposed a special levy on energy firms because they feared it would stymie investment. It’s especially sensitive now because it’s a key policy of the main opposition Labour Party, and undermines the core Conservative claim to be the party of business.

But the demands to intervene in the cost-of-living crisis have become overwhelming, with a windfall tax increasingly popular among Britons. The Tories have trailed Labour in YouGov polling since December, while Sunak’s move also comes as the government tries to shift the narrative from the scandal surrounding illegal parties in Downing Street during the pandemic.

‘Dither and Delay’

“For months it has been clear that more was necessary to help people bring their bills down,” Labour’s shadow chancellor Rachel Reeves said in Parliament. “This government’s dither and delay has cost our country dearly.”

Shares of oil firms Shell Plc and BP Plc trimmed gains following Sunak’s comments. Utilities SSE Plc and British Gas-owner Centrica Plc slipped ahead of the speech and were down 2.3% and 0.8%, respectively, as of 12:30 p.m. U.K. time. The declines followed a plunge Tuesday after reports of the levy plans.

Read More: UK Tax Raid on Oil Industry Also Breaks Historic Climate Pledge

Even as he announced the windfall tax, Sunak appeared to try to head off criticism that the measure is anti-business. He included a new 80% investment allowance, meaning energy companies can reduce the tax they pay if they commit to capital expenditure. Sunak said the tax would fall away when oil and gas prices return to “historically more normal levels.”

Tory Pushback

Still, some Conservative Members of Parliament were clearly annoyed about the U-turn. Richard Drax said the chancellor is “throwing red meat to socialists,” and that raising tax on businesses and telling them where to invest is “not the Conservative way.”

Former Tory cabinet minister David Davis warned that a windfall tax “will raise a small amount of money” and said “stability of tax and low tax both encourage investment and growth.”

Sunak said the economic pressure facing people had changed dramatically since his mini budget in March, which was widely criticized for not providing enough support for the most vulnerable. He cited Russia’s invasion of Ukraine and the prospect of higher energy bills in the fall as factors.

Since that intervention, the ruling Conservative Party shed hundreds of seats in local elections, with many voters citing the cost of living — as well as the so-called partygate scandal — as reasons for voting against the Tories.

Read more: Rishi Sunak Embraces Socialism Again With a Windfall Tax for UK

Soaring Bills

The need for cost-of-living support became more urgent this week when the UK’s energy regulator said Britons face another sharp jump in their power and gas bills just before the winter. The energy price cap is due to rise to a record £2,800 in October, a 42% increase on average bills that is estimated to send 12 million households into so-called fuel poverty.

The package of measures will drive government borrowing back above £100 billion this year but, given the support is temporary, it will not affect Sunak’s self-imposed fiscal constraints, which apply in 2024-25.

However, the chancellor is increasingly struggling to keep the public finances under control. Weaker than expected growth as the cost of living crisis bites will rob him of tax receipts, while higher inflation and interest rates will add billions of pounds to debt servicing.

The Office for Budget Responsibility forecast in March that the chancellor had £27.8 billion pounds of headroom against his rules, but higher inflation and rates are already estimated to have reduced the space by around a third.

Economic Hit

The UK is on track to be the advanced nation worst hit by a combination of soaring inflation and weak growth, with prices expected to rise 13% over this year and next, the most among the Group of Seven countries.

Distributional Impact

The poorest households gain £1,200 under plans announced since February Source: Bloomberg

Sunak has previously said he is worried about the risk of further stoking inflation with more fiscal stimulus, but told lawmakers the package Thursday would have a “manageable” impact on prices.

“While it is impossible for government to solve every problem, we can and will ease the burden,” Sunak said in the Commons. “I want to reassure everybody we will get through this.”

— With assistance by Emily Ashton, Joe Easton, Philip Aldrick, Todd Gillespie, and Isis Almeida

(Updates with shares, more details from eighth paragraph)

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