Macroeconomics: UK economy, IB Economics

With energy prices falling, it seems as though the government are on the point of suspending the recently introduced windfall tax. The higher rate windfall tax was introduced last year in response to higher energy prices as a result of the Ukraine war.

As things stand, the article makes it clear that "Oil and gas firms operating in the North Sea pay 30% corporation tax on their profits and a supplementary 10% rate on top of that. The windfall tax - or Energy Profits Levy - is set at 35%, taking the overall tax rate faced by oil and gas companies to 75%."

If energy prices are seen to normalise, that will return to a 40% tax rate. 

To what extent is Shell paying the right level of taxes? The company will categorically state that it is paying what it owes, but to what extent is this figure determined by the degree to which it engages in tax avoidance? 

And whilst this is legal, is it ethical? If we want to live in a world with less such activity are we prepared to pay a higher price for our energy? 

It might well be that Thursday's Autumn Statement is going to see a windfall tax - of up to 40% - on the excess profits of electricity generators. 

It's believed that this - and a higher rate of tax on North Sea profits - could bring in an extra £45bn of government revenue.

Economics is all about trade-offs, a little more of one thing at the expense of another. And in this case, its Britain's banking sector that is remarkably quiet about the prospects of a higher bank surcharge.

Why are they doing this you might ask? In the first place, there's an acceptance of the extent to which the current government desperately needs help repairing the public finances. Secondly, the banks are doing better than most people as the result of rising interest rates..

And,  can I be cynical? I suspect that the scrapping of the cap on bankers' bonuses will also play a role. Banking executives will recommend acquiescence to their shareholders, whilst at the same time pocketing larger pay packets. in the hope that there are higher profits in future. 

The Guardian editorial makes an interesting suggestion - a windfall tax on the banking sector. They argue that, since 2008, the sector has relied on state handouts to prop them up, and taken the opportunity to make big profits for much of that time too. 

So why should shareholders have benefitted at the taxpayers' expense? And if the state has committed to bail the sector out, to what extent does that perpetuate moral hazard issues in the sector, itself prompting ever greater risk-taking. 

I think that this is a particularly astute assessment of the energy bills freeze, or energy price cap. It's the right policy in that it's going to keep many out of poverty, but the justifications being offered for its introduction, and the absence of detail about its financing and, I think, the way it's being financed are a real worry.

However, it is what it is, and some think it will lower the likely rate of inflation by up to 5%.

Alex Lawson looks at the case for the government imposing a windfall tax on the UK energy companies, which seems increasingly likely, given the proposed freeze on energy bills that seems to be in the pipeline.

Certainly non-fossil fuel generators have done well out of the current energy crisis - not least the Chief Executive of Drax, Will Gardiner, who's seen a 30% increase in his total pay package. So are they going to effectively fund any prospective freeze in energy bills over the next 18 months.

It seems as though an unintended consequence of the Chancellor's recent decision to introduce a profits levy - not a windfall tax, you note - is that it might encourage more investment in the North Sea. 

You might think that this is a good thing, but it's difficult to square with the climate change targets set by the government. 

Has the Chancellor's attempt to claw back some of those profits from oil and gas companies fallen foul of various tax loopholes. If so, it is likely to see the government lose out on tax revenues, and this, of course has implications for the public finances, and well as macroeconomic objectives more generally. 

And here's the inevitable consequence of any windfall tax/profit levy; energy firms immediately announce a review of all investment, knowing full well that 70% of all investment is funded out of retained profit. 

The implications for the personal finances of UK households of the measures to tackle the cost of living crisis are laid bare in this BBC piece.  

A brief economic history of windfall taxes - used on banks in the 1980s and oil and gas producers since then. For all the talk about how damaging they can be, I haven't seen these companies leave Britain after such taxes have been imposed.

Today's economic news is going to revolve around the package of measures hastily cobbled together to offset the cost of living crisis. I'll reserve judgment but given that many members of the government have suggested that they weren't going to impose a windfall tax, it's seemingly certain to be part of the package. 

The question is going to be about the extent to which there's going to be targeted or more general assistance given with heating bills and so forth. Most people are calling for the former. It will also be interesting to see if the recent National Insurance increase is reversed. There's nothing to beat credible, coherent policymaking.

A snapshot of the public finances, with the numbers for February revealing that the amount of borrowing is a record for the month, largely driven by the Energy Price Guarantee, where extra spending was thought to be £9.3bn higher than the previous year. 

The £16.7bn borrowed includes a large chunk of debt interest, although falling inflation means that these costs have fallen to £6.9bn, £1.3bn lower than the previous year. 

There's also good news regarding tax receipts, with the BBC reporting that "the ONS said £5bn was raised through the new windfall tax on UK energy company profits. Tax income overall was also £5bn higher than a year ago at £77.8bn."

The government has extended its windfall tax to low carbon generators, in the hope of raising $14bn in tax revenues, but quite where this leaves Britain's commitment to reducing emissions and net zero is anyone's guess. 

Not much of a surprise here, but Phillip Inman argues that news of a doubling of Shell's profits makes an unequivocal case for a windfall tax on the sector. 

The trade-off is between imposing too harsh a tax and deterring investment - at the moment, because the UK tax system offers a 91% allowance for investment, current windfall taxes would only generate £5bn in tax revenues, and many are calling for that tax break to be scrapped to plug the hole in public finances. 

And this is why the Guardian carries its editorial - whereas previously the government was committed to removing the 8% banking surcharge levied on top of corporation tax, the new Chancellor has not commented on the matter.

As a result, bigger institutions could find themselves paying £4bn more in tax,  something that they wouldn't have expected to do under City-friendly Chancellor, Kwasi Kwarteng.  

If the CEO of Royal Dutch Shell is suggesting that windfall taxes are inevitable, then you'd have to say that it's likely to happen. 

And given that the current government has such a penchant for U-turns, and seems to need increased revenues to help fund tax cuts, I wouldn't be at all surprised to hear the screeching of brakes. Again.  

The government has introduced an energy bills cap on household energy bills for the next two years, until 2024, and an equivalent measure for business for six months, whilst it thinks about how to best target the measure. 

However, there's little in the way of detail - apart from the fact that it's to be funded by borrowing rather than a tax on the windfall profits of energy companies. 

Another look at the prospects for a windfall tax, and why it seems to be the case that the government are rowing back on the prospects of implementing such a scheme. Above all, it's far from an efficient form of intervention. 

Will Hutton's take on the government's volte face and apparent adoption of social democratic policies - in the context of what he perceives as a wider trend towards greater interventionism across the developed world. 

Has the zeitgeist changed? Are well all social democrats/Keynesians now?

This Phillip Inman piece skewers the Chancellor's view of himself as a low tax Chancellor noting that his period of office has been characterised by tax increases notably in income tax, corporation tax and National Insurance. 

And don't mention the windfall tax. Or Energy Profits Levy, or whatever linguistic ruse that has been adopted. 

It's not a windfall tax, it's an energy profits levy, stupid! The Chancellor's cost of living package revealed support for households, and it's relatively well-targeted too, something noted by Paul Johnson at the IFS. 

However, the fact that richer households are getting it too has suggested to some that it might stoke inflation.

So, after much ado, many denials that they were going to introduce a windfall tax and so on - here is the package of measures to tackle the cost of living crisis. 

£400 for each household off their energy bills, the poorest to get a lump sum of £650 to help with the cost of living and an extra £500m for the Household Support Fund, taking the total offered to £1.5bn. It will be funded by a 25% windfall tax on oil and gas firms' profits.

It's a mix of the targeted and the general - well, you wouldn't want to lose votes by only offering targeted support for the poor, not least from wealthy (and numerous) pensioners. But greatest burden will still fall on those least able to bear it. 

Above the sound of screeching brakes, as the government prepares to perform yet another U-turn, it seems that the Chancellor has decided that a windfall tax would be a good thing to help tackle the cost of living crisis. Expect to hear more about this later.