The Chancellor has announced a £15 billion support package to help people struggling with the cost of the living crisis. This will be part-funded by a £5 billion windfall tax on energy companies. Rishi Sunak commented, “The oil and gas sector is making extraordinary profits, not as the result of recent changes to risk-taking or innovation or efficiency, but as the result of surging global commodity prices driven in part by Russia’s war.”
The £15 billion package of measures will help households with the cost of living crisis. Ofgem have recently announced it would be increasing the price cap of energy bills by over £800 to £2,800. New measures will ensure oil and has companies will pick up part of this increase with a temporary windfall tax.
Summary Of Changes
Sunak has announced a temporary, targeted energy profits levy of 25%. He has included a 90% tax relief for firms that invest in oil and gas extraction in the UK. Labour pushed for a windfall tax five months ago. The Shadow Chancellor, Rachel Reeves stated, “We called for a windfall tax on oil and gas producers five months ago to help struggling families and pensioners. Today Sunak has announced the policy but he cant’ dare say the words. It’s a policy that dare not speak its name.”
Sunak top the House of Commons that high inflation is causing acute distress to the people of this country. Inflation hit 9% in April, the highest in 40 years. He confirmed the following contributions:
- 8 million of the lowest-income households will receive a one-off cost of living payment of £650 (worth over £5 million)
- More than 8 million pensioner households who receive the winter fuel payment would receive an extra £300
- 6 million disabled people would receive a one-off payment of £150
- All households would receive an extra £200 discount on their fuel bills in October. This is in addition to the £200 already promised. Households would now not need to repay this.
What Is Windfall Tax?
A windfall tax is one that is levied by governments against certain industries or companies. It occurs when conditions within the economy allow certain industries to reap large profits. This is normally due to favourable market factors affecting that industry. They are utilised by governments as a way of increasing their tax in a given tax year by retrospectively increasing taxes on sectors or companies. They are targeted specifically at companies that have experienced the unexpected windfall. A full definition can be found here https://www.investopedia.com/terms/w/windfalltax.asp.
When Has A Windfall Tax Been Used Previously?
The Tories introduced a one-off levy on banks in 1981. The Chancellor at the time, Geoffrey Howe introduced a levy of 2.5% of the bank’s non-interest-bearing current account deposit accounts. The Windfall Tax generated approximately £400 million. This is the equivalent of around £3 billion in today’s money. The same Chancellor also imposed a special tax on North Sea Oil and Gas firms.
Labour Chancellor Gordon Brown introduced a windfall tax on companies formed under the privatisation of nationalised companies in 1997. This included companies such as BT, Scottish Power and United Utilities. The tax raised over £5 billion in two years. This is the equivalent of almost £9 billion today.
How Much Money Have Energy Companies Been Making
BP reported underlying profits of £4.9 billion in the first quarter of 2022. This is more than double the profit experienced the year before. This profit was written off due to its decision to pull out of investments in Russian firms following their Russia’s invasion of Ukraine.
Shell reported its biggest-ever quarterly profit of £7.3 billion, almost triple that of 2021. Shell said pulling out of Russia has cost them £3.1 billion.
Both companies have spent billions of pounds on share buybacks. This happens when companies can afford to buy back shares to boost their share prices. They have also paid high dividends allowing them to distribute some of the profit to shareholders.
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