Anti-business trip

The case for a windfall tax has not been made

The soft left faction Compass seems to have a slight obsession with finding new taxes to call for. Their latest campaign is the superficially attractive clarion for a windfall tax on energy company profits. I’m afraid that any kind of new tax gives ammo to the Tories. The public won’t necessarily clock that it is a tax on businesses, not them, when Cameron's PR people add it to the list of alleged stealth taxes. The presentation of the concept has been all wrong and reflects the prejudices of its originators.

They’ve consistently and consciously chosen to badge it up as a ‘windfall tax’, then added, almost as an afterthought, ‘for social and environmental justice’. A more politically savvy approach would have been to call loudly for a ‘fund to combat fuel poverty’ and then quietly added ‘funded by a one-off windfall tax on energy company profits’.

This leads me to suspect that Compass are motivated less by the thought of helping poorer energy consumers and more by the chance to burnish their radical anti-capitalist credentials by giving business a kicking.

Labour spent the best part of 20 years persuading the business community and, more importantly, voters – who own shares themselves or through their pension schemes, or work for private sector businesses and depend on their profitability to a) keep their jobs and b) fund public services through all the existing streams of taxation and c) fund their pensions – that Labour was not anti-business. This wasn’t just a Blairite campaign: John Smith and Margaret Beckett as Kinnock’s Treasury team went on the ‘prawn cocktail offensive’ to try to reassure the City. We throw away that hard-won credibility at our peril.

In Bernard Donoughue's fantastic memoir of his time as Harold Wilson’s head of policy at No 10, The Heat of the Kitchen, talking about Labour in the 1970s, he says:

’The activists were disenchanted with the polls because the polls showed the electorate was disenchanted with them. The left preferred to believe that they alone knew what the electorate wanted, and certainly what was good for the public – which they saw as a strengthened diet of state nationalisation, intervention and controls over industry and the lives of ordinary people, together with fiscal punishment for anyone who had the impertinence to pursue success in the private sector.’

I worry that Compass, like their 1970s antecedents, are primarily looking for ways to, as Donoughue puts it, administer ‘fiscal punishment for anyone who had the impertinence to pursue success in the private sector’. Quite apart from the misguided political thrust of it, the policy itself needs greater critical scrutiny than it is getting:

- Has there really been a profit ‘windfall’ or have energy prices gone up partly because of increased costs of extraction?
- How do you stop the companies passing the cost of the tax straight on to customers?
- Why would we want to decrease the capital reserves of energy companies at the exact moment we are begging them to make capital investment in very expensive new nuclear power stations, clean coal technology and wind, wave and whatever else? Won't they just walk away from the British market muttering that they are running businesses, not piggy banks for the government to raid?
- Why is profit incurred by energy companies especially worthy of a windfall tax as opposed to profit made by any other kind of company?
- With the economy teetering on the edge of a recession, do we want to take an axe to the profitability of any sector?

I hope that before Labour gets, to quote our own attacks on the Lib Dems in the 1990s, ‘high on taxes’, we'll allow Treasury boffins to take a good hard look at the economic impact of Compass’ windfall tax, and our best campaigning minds to take just as hard a look at whether it is actually a vote winner.

Luke Akehurst is a councillor and Labour chief whip in the London Borough of Hackney. He writes here in a personal capacity

Comments

Posted by Philip Hodge on 03 September 2008, 9:13:20 PM

Doesn't Stephen Twigg support the arguments for windfall tax? I thought he was chair of Progress! Very confused.

You ought to mention this to the Chair of Progress Stephen Twigg who is fully signed up and on board the campaign. No wonder the Labour party is so out of touch if pundits like Akehurst, who correct me if I am wrong, is a lobbyist for one of the worlds largest arms dealers/brokers/manufacturers and who recently called for a victim of the 7/7 bombings to stand in the Haltemprice and Howden by-election... callous beyond belief. That aside it seems as if the above article is written by the CBI... Why should ordinary working people always have to pick up the crumbs left by business, why should those dividends at a time when ordinary people are feeling the energy price pinch and see thier own prices treble for energy bills be more fairly shared out? At the same time as record profits announced by many of the energy companies - when the Daily Mail announced earlier this year how unfair this situation was, and that the trickle down wealth reditribution plan or 'reagonomics' had reached a point even they could not stomach... then its no wonder Labour is cruising its worst election defeat in half a century.

You ought to mention this to the Chair of Progress Stephen Twigg who is fully signed up and on board the campaign. No wonder the Labour party is so out of touch if pundits like Akehurst, who correct me if I am wrong, is a lobbyist for one of the worlds largest arms dealers/brokers/manufacturers and who recently called for a victim of the 7/7 bombings to stand in the Haltemprice and Howden by-election... callous beyond belief. That aside it seems as if the above article is written by the CBI... Why should ordinary working people always have to pick up the crumbs left by business, why should those dividends at a time when ordinary people are feeling the energy price pinch and see thier own prices treble for energy bills be more fairly shared out? At the same time as record profits announced by many of the energy companies - when the Daily Mail announced earlier this year how unfair this situation was, and that the trickle down wealth reditribution plan or 'reagonomics' had reached a point even they could not stomach... then its no wonder Labour is cruising its worst election defeat in half a century.

Who's administering the punishment, Compass who wants the money to tackle fuel poverty and help people save energy or the companies who are increasing fuel prices despite filling their pockets with windfall profits? “I’ll make oil companies like Exxon pay a tax on their windfall profits, and we’ll use the money to help families pay for their skyrocketing energy costs and other bills.” These aren’t Compass’ words, so who’s can they be? I’ll let you guess. It amazes me how many of you criticising the tax that oil companies have to pay when a company like BP makes £6.75 billion a year, a 23% increase on last year. Wait a minute, what BP makes in an hour, someone on the minimum wage would need to work over two years to make the same amount. Yes, you may argue that BP investment goes into our pension funds, but so what if many pensioners can't afford the fuel that BP are increasing all the time? The windfall tax will fall mostly on the petrol companies because demand for oil is more elastic than supply. The proceeds for the tax will make energy cheaper (i.e. investment in better insulation) and more sustainable (i.e. investment in renewables) for people. The cost of insulation and renewable energy is much more elastic than the cost of petrol (unless you think the UK can buy off OPEP and at the same time prevent any externalities affecting the cost?), so with greater investment to make sustainable energy solutions cheaper, people will see which energies are the most cost-effective for them. Unless the cost of oil goes down, private investors will be more likely to put their money in these solutions too, especially if they aren’t as affected by externalities that petrol is impacted by. I forgot, this also creates jobs in that sector… It would be great if you were less dogmatic about Compass as I'm sure you have a lot to contribute to the debate

I think the case for a windfall tax is pretty straightforward. The energy suppliers are in effect retailers, when input costs go up, you would expect margins to tighten and see profits squeezed. In fact the opposite has happened, profits are up sixfold over the last couple of years. This profit has been made from upstream assets, that counterbalance any slowdown in profits from the retail side. As vertically integrated companies, they are to an extent immune from price changes in the wholesale market, yet are able to pass on any increase to cover losses on their retail books. If there was sufficient competition in the market, this would be impossible, but quite clearly this is not the case. It is for these two reasons - retail books making profits from rising prices (rises that have pushed people into fuel poverty) and the lack of competition in the market that justifies any windfall tax

East Londoner, I do need to correct you, as you are partly wrong in your description of my day job. I do give government relations advice to some defence industry companies and fair play to you if you want to make an issue of that (though you will also find the loudest lobbyists for the arms industry going are Derek Simpson and Tony Woodley, who represent the people who work in it). However, you also use the words "arms dealers/brokers" which is something quite different and is the terminology used to describe the morally repugnant and usually illegal trafficking of small arms to fuel conflicts in the third world. Conflating the two is like describing someone who gives PR advice to pharmaceutical companies as advising drug smugglers and dealers. I'm also not quite sure why you think my job is relevant to this article. If I advised energy companies that obviously would affect my judgement on a windfall tax, but I don't and never have, so my views on this are those of an individual Labour activist trying to think through an important policy question.

There is a gratuitous self indulgence about the call for a windfall tax. It's more about the desire to deprive the companies of money, than the actuality of what the money will achieve in practical terms. It makes a certain brand of activist feel warm inside. But that's about it. It's not a tactic that can be repeated, for obvious reasons. I would rather the fiscal system be used to drive the energy companies towards more investment.

Luke is right. The campaign for a windfall tax is shallow in the extreme, lacking any analysis of where and how the companies in question are making profits, and looking at meaningless absolute numbers rather than profits as a percentage return on capital. It's impossible to take this kind of stuff seriously as anything other than posturing.

i agree with dan

On balance I think Luke has got this one right. One the face of it a 'windfall tax' is quite an attractive cost free option to help those struggling with rising fuel bills. But, it isn't a cost free option. Companies would pass on the additional costs and how would companies fund investment in new, cleaner power generation we need? This doesn't mean that these companies don't have a social responsibility, but simply imposing a windfall tax isn’t the way to express this.