Putting to one side the fact that the government whipped its MPs only a few weeks ago to vote against a windfall tax, the UK government today u-turned on that by announcing a plan to raise up to £5bn over the next year, which will go towards funding new measures to help 8 million people on means-tested benefits with a one-off payment of £650. The government will also be implementing other measures to help, bringing the total cost of today’s measures to the exchequer to £15bn.
The new 25% tax will be imposed on top of the 40% headline rate that the main oil and gas companies already pay on their UK profits. The chancellor has sought to sweeten the pill by also announcing a new 80% investment allowance within the new “levy”, which will allow businesses to get a 91p in the pound saving for every £1 they invest in new output capacity.
While welcome, it’s a pity the chancellor or the government weren’t so forthcoming when the likes of Shell were pushing for permission to allow it to develop the Cambo field in the Shetland islands last summer, which it eventually decided to pull the plug on at the end of last year, thus wasting months of valuable development time. Hopefully, today’s measures will encourage Shell to press on with the project after they said they would reconsider it in March this year. Shell has resubmitted an application to develop the Jackdaw North Sea gas field off the east coast of Scotland, after it was rejected in October by regulators.
Today’s announcement hasn’t had a noticeable effect on the share prices of BP, Shell, or Harbour Energy, apart from a modest dip in the aftermath of the announcement. The new tax will take effect immediately with a sunset clause of December 2025.
The chancellor appears to have decided not to include the electricity generating sector in today’s announcement, however in today’s statement the door has been left open to them being included later in the year, when new measures to alleviate the impact of higher energy prices are likely to be needed, as we look towards 2023. Consequently, SSE and Centrica shares have slipped back lower, reversing their gains from yesterday.
The government said that it has been clear that it wants to see the oil and gas sector reinvest its profits to support the UK economy, jobs as well as the UK’s energy security. While that may be true today, that wasn’t the case a year ago, otherwise investment in Cambo and the Jackdaw field would have been approved already. The reality is that government energy policy is a shambles and shifts more often than the direction of the wind.
While today’s windfall tax raises money to fund some much-needed fiscal help with the cost of living for the most vulnerable households, it doesn’t do anything to address the longer-term issues for UK energy security. The measures also don’t help struggling business with the rising costs of their own energy requirements, as well as the surging cost of petrol and diesel at the pump, which they could have addressed in the form of cuts in VAT, or tweaks to the fuel duty escalator.
Today’s announcement, while a welcome relief to millions of people, appears to be yet another example of a government reacting to events rather than shaping them.