A higher windfall tax cannot pay for everything

It may be possible to squeeze more money out of the oil and gas companies, but the windfall tax is not a cost-free solution to the energy crisis.

The New Economics Foundation (NEF) claims that ending the tax relief for investment by the energy companies would raise an additional £22bn over the next six years, increasing the yield from the existing windfall tax by half as much again.

When Jeremy Hunt, the chancellor, raised the tax on energy profits to 75 per cent in the autumn statement, the Treasury predicted that it would bring in £42bn over that period. That is a large sum, which would go some way to meeting the vast cost of the energy price guarantee, so it is tempting to propose a further visit to the magic money tree to raise even more.

It would seem that this is the Labour Party’s policy. No matter the amount by which the government raises the windfall tax, Labour will demand that it should be a little higher still. By putting such an ambitious figure on the additional amount that could be raised, however, the NEF helps to make the obvious point that at some stage, the costs of a windfall tax will outweigh its yield.

Few economists disagree with the principle of a tax on unexpected and unearned profits. It was surprising that the government, under various chancellors and prime ministers, resisted the principle of a windfall tax for so long. But once the marginal rate of such a tax reaches 75 per cent, the scope for further increases is limited. Hence Labour and the NEF turning to the issue of investment allowances, which Rishi Sunak, Kwasi Kwarteng and Mr Hunt have allowed the companies to set against the tax.

Obviously, investment in renewable electricity generation should be offset against tax, but impatient environmentalists are entitled to ask why investment in new North Sea oil and gas production should be favoured at a time when we are moving towards net zero carbon. Mr Hunt restricted the proportion of such investment that could be set against tax, but it is worth asking whether the rules could be tightened still further. If, for example, the law on planning permission for onshore wind turbines could be relaxed, it is possible that this would be a better use of marginal resources.

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The question of how much more tax could be obtained by squeezing the oil and gas companies until the pips squeak ought to be a practical one: is there a genuine case for further extraction from the North Sea as part of the transition to net zero? We suspect that in any case the NEF estimate of the amount of additional tax that could be obtained by restricting allowances further is optimistic, but there is no harm in forcing the oil giants to make their case rather more persuasively than they have so far.

The more important point is that a modest increase in the windfall tax is not going to pay for everything that the NEF – or the Labour Party – wants. The NEF proposes an emergency insulation programme for the least energy-efficient homes in the UK. This probably overlaps with Labour’s idea of a green prosperity plan, ambitiously priced at £28bn a year. These are good ideas, but they will not be paid for just by tweaking the windfall tax, any more than Labour’s plans for the NHS can be funded by abolishing non-dom status, or its education policies by charging VAT on private school fees.

If the Labour Party is serious about its plans for government, it needs to be serious about the taxes needed to pay for them.