1981 has been on my mind for the last 24 hours or so. Having spent my afternoon yesterday seeing For Your Eyes Only in Leicester Square (a solid Bond, but not a patch on Moonraker), I then fell into conversation over dinner with a fellow cricket nut, where he related to me first-hand his experiences of Botham’s Ashes. But even this nostalgia-hit was topped when I checked today’s headlines, and saw the Chancellor floating a windfall tax on energy firms to the good ladies of Mumsnet.
For it was in the infamous 1981 budget (panned by 364 economists for raising taxes in a recession) that Geoffrey Howe added a windfall tax on banks to the one he had slapped on North Sea Oil the previous November. It seems that the Chancellor is imitating his predecessor in more ways than just wrestling with inflation, worrying about interest rates, and making comments that damaged his next-door neighbour’s position. And not just copying Labour’s latest gimmick.
But from the opprobrium Sunak’s floating of the idea has attracted, one would not have got the sense that he was aping our finest Chancellor since Gladstone. Kate Andrews has lambasted the anti-business ethos of the levy, whilst Ross Clark suggested the Chancellor is engaged in tub-thumping left-wing populism. Indeed, The Daily Telegraph’s editorial launched a full-throated assault on the idea, portraying it as directly contrary to any efforts to encourage energy independence.
The sense one gets is that these titans of Conservatism consider windfall taxes as unTory as their nineteenth century predecessors did Catholics voting or the Corn Laws being cut. And yet one is reminded that it was Sir Robert Peel, another great Conservative Prime Minister and Chancellor, who steered both these two measures through Parliament. In short, if Howe could budget with a windfall tax without having to defect to Labour, then so can Sunak – and so the idea deserves some analysis.
Having consulted my well-thumbed copies of Charles Moore’s Thatcher biographies and Just in Time (John Hoskyns’ definitive inside account of her early Downing Street years), I am led to believe that Howe was driven towards these two windfall taxes as a way of raising revenue. Fundamentally, he desired to get government borrowing down, so interest rates could fall, and growth could return to a country harrowed by recession. Both the banks and North Sea firms were doing well, and so were easy targets.
As the Iron Lady put it in her autobiography, the banks “had made their large profits as a result of our policy of high interest rates rather than because of increased efficiency or better service to the customer” – and so were a viable target for a desperate Treasury. And these were the days when North Sea Oil was such a source of national pride, that it formed a core of the SNP’s case for independence, kept the Prime Minister’s plans afloat, and was rewarded with its own board game.
Sunak finds himself in a similar situation. It has been a sorry fact of the last few weeks that the Chancellor has received far more flack over his and his wife’s private financial affairs than he has praise for his prescience in predicting the petrifying inflation perforating our politics. A year ago, he warned of his fear of having to raise taxes if debt servicing costs increased. Lo and behold, he announced at the Spring Statement that they had quadrupled – and taxes rose accordingly.
A windfall tax on energy firms would have the obvious political attraction of falling on companies doing very well for themselves right now. This may stink of exactly the left-wing eco-populism that Ross Clark may dislike, but the alternative is to squeeze more money out of over-burdened and over-taxed voters. A few billion from the oil and gas companies might mean a tax cut for the ‘Squeezed Middle’, ‘Alarm-Clock Britain’, the ‘Just About Managing’, ‘Quiet Batpeople’ – or whatever we’re calling normal folk today.
But Andrews, Clark, et al are right to point out the obvious flaws in a windfall tax. These taxes hit the pockets of shareholders – which through pensions schemes, savings, and insurance policies, means those same normal folk. They also reduce investment, by forcing capital expenditure to go into paying taxes, meaning any of those plans that leading energy firms have for transitioning from fossil fuels to renewables as to reach Net Zero will be disrupted.
Yet the Chancellor is a clever man and will know all this. Something else must lie behind his musings to Mumsnet. Unlike Howe’s push to cut borrowing, Sunak’s wondering about windfalls may have little to do with potential revenue – which, at £3-4 billion, would be a drop in the ocean compared to the costs he’s facing. Instead, as Andrews suggests, this may be a prod to the energy companies in line with the Chancellor’s Mais lecture earlier this year, which stressed the need for greater capital investment. Invest, chaps, or we’ll tax you more.
Nevertheless, since a windfall tax in practice would discourage exactly the investment the Chancellor might desire, this is hardly a fool-proof plan. I hope Sunak knows what he’s doing. There may well be a folder marked For Your Eyes Only somewhere in the Treasury that hold all the secrets to his tax-cutting, revenue-raising, productivity-boosting agenda. But if the Chancellor wants his fellow Conservatives to start having a bit more confidence in him, he should make his intentions a little less confusing.