In an angry world, it doesn’t matter much whether a moment of tactlessness is genuine crassness, or just an unfortunate accident. So while BP and Shell never intended to rub consumers’ noses in their bumper profits and big payouts to investors, they got a lot of flak for it in a week when the focus has been firmly on soaring consumer energy bills and the hardship this creates.
Almost everyone is worried by rising prices and the pressure on their finances. It’s hard not to be when inflation is outstripping wage growth, we are all braced for National Insurance tax hikes in April and the energy price cap, which shields consumers from runaway standard tariffs, is about to be raised. Think tank the Resolution Foundation says that what is currently a cost-of-living crunch will then become a “catastrophe for many households”.
Faced with an inflation rate well on its way to 7-plus per cent, and claims that lower income groups endure a higher rate of inflation than other groups (something the ONS rejects), the chancellor has intervened with a special measure to slice £200 off energy bills.
Energy price rises are different, however. There is evidence to show that their impact on different income groups is unequally distributed, with lower income households spending proportionately more of their income on energy. Even though the biggest rises are expected to fall out of the inflation calculation later in the year, energy rates could stay at higher levels for some time.
None of this combination of higher bills and shrinking income levels augurs well for economic growth, and the BP chief executive’s 2021 description of the company as “a cash machine when markets are strong” won’t help douse calls for windfall taxes.
Shadow chancellor Rachel Reeve has already spelt out the Labour party’s plans for grabbing a share of bumper energy profits and that was before the announcement that profits at BP had come in at almost $13bn, their highest level in eight years.
Windfall taxes have been applied before in the UK, most recently by then chancellor Gordon Brown in 1997 when he introduced a one-off tax on the privatised utility companies to fund a programme of helping the unemployed into work. The tax was designed to raise £5.2bn, and the grounds for imposing it were that the privatised companies had been given too many advantages such as light regulation and had therefore been nicely set up to make excessive profits. Tory chancellor Geoffrey Howe also raided the profits of sectors thought to be raking it in, starting with North Sea oil producers and then the banks in the early 1980s.
Companies always argue that such taxes are unjustified, that exceptionally good years should be cancelled out by exceptionally bad years (true enough, BP made a loss last year of $5.7bn) and that windfall profits are better spent on special projects. In BP and Shell’s cases, these include decommissioning of old wells and funding green and renewable energy projects. BP insists that a windfall tax would deter investment and delay Britain's net zero ambitions, and it seems Rishi Sunak agrees. Still when you are increasing the dividend and buying back your own shares, the shouts of 'obscene' are not going to go away.
I don’t dispute there is a case to be made for one-off taxes but somehow I am never quite convinced. The same arguments have been made before in relation to one-off wealth taxes on individuals. Those with the broadest shoulders and so on… But wealth and one-off taxes are inordinately difficult to get right. Recent proposals in the UK for a one-off wealth tax were very much asset-, not income-, based and proposed including the value of people’s homes and pension pots when assessing wealth, an approach that could impose an immense burden on cash-poor individuals. And there is always the fear that what is labelled as exceptional or extraordinary will soon become nothing of the sort – as investors will know from their regular reading of reports and accounts.
