Two weeks ago, shortly after the publication of Sue Gray’s report into lockdown parties at Number 10, the government made a sudden announcement: £400 to every household in the UK – plus an additional £650 to those on means-tested benefits, £300 to pensioners and £150 to those receiving disability payments – to alleviate the pain of soaring energy bills.
The opposition was triumphant: shadow chancellor Rachel Reeves said the government had been “dragged kicking and screaming” to its new position. Labour, she said, was “winning the battle of ideas”.
Labour should be glad that the Tories have finally come round to the idea of a windfall tax. But the recent announcements also make clear the gulf in ambition between the two main parties.
Labour’s proposal was for a 10% surplus tax on North Sea oil; the Tories went for a 25% tax on all oil and gas producers. Labour suggested a £2bn reduction in bills; the Tories will spend £15bn on just these most recent announcements. Sir Keir Starmer has made fiscal moderation a key selling point, but at times of an exceptional crisis moderation isn’t always a virtue.
For Boris Johnson’s Tory party, this latest set of measures comes on top of existing income support policies worth £22bn and tax rises for energy firms and for the rest of us (in particular, the new health and social care levy plus the freeze to income tax thresholds). Surprisingly, the cumulative effect of these proposals is also fairly redistributive: analysis by the Institute for Fiscal Studies suggests that for people on the minimum wage or universal credit, the new measures will more than counteract the spike in inflation, leaving them £300 better off than they were last year.
Responding to these huge Tory programmes of taxation and spending, Labour has tried to have it both ways, calling for lower taxes and less spending while also accusing the government of not doing enough. In the last week, they’ve gone for broke on the small print, focussing on the fact that the £400 payments will be sent to households rather than families, meaning that those with two homes will be paid twice. Labour is right that this is an oversight, but so is the government, which has protested that they only have a few ways of getting money to people and that such double payments will constitute small change (about 1.3% of total spend) in the context of a genuinely progressive policy.
Meanwhile, Labour has been surprisingly quiet on the real problems with Sunak’s latest announcements.
First, headline-grabbing flat-rate payments are the same whether you have four children or none, receive the maximum disability payments or the minimum. The solution is obvious: instead of one-off payments, increase benefits in line with inflation. Labour has not mentioned this.
Second, Britain’s measures are significantly more modest than elsewhere: Italy’s unelected technocrat banker Mario Draghi and France’s centrist superhero Emmanuel Macron have both been much more generous. But Starmer has remained ambiguous on his desired scale of relief, while his shadow chancellor continues to automatically condemn every instance of borrowing.
More importantly, if energy prices remain high, then Labour will have to think beyond temporary handouts. One option would be to cut VAT for energy bills, something Labour is already demanding and which the Tories are probably keeping in their pockets for the winter. But all of these suggestions share a similar basic logic – give people extra cash to make up for skyrocketing prices – ignoring the most direct solution: toughening the energy price caps we already have in the UK.
Ofgem, the energy regulator which manages price caps, has justified its recent inaction by arguing that if it doesn’t let companies pass the massive increases in oil and gas prices onto consumers, they will go out of business (as Bulb did last year). But in the last few months, Ofgem’s attitude to these energy suppliers has been utterly craven.
The regulator now supposedly wants to limit the effects of competition by preventing firms from charging less than the price cap (yes, you read that right); wants to review prices every three months so that any wholesale price increases can be passed on to consumers more quickly; and has refused to consider cutting the standing charges that stop most people from saving on bills by reducing their energy use. Ofgem is ripe for reform, were Labour brave enough to demand it; even the normally mild-mannered Money Saving Expert Martin Lewis went as far as to say Ofgem was a “fucking disgrace that sells consumers down the river”.
It’s true that there’s a risk of energy suppliers going out of business if the price cap is kept low: Bulb did have to be nationalised when gas prices forced it into bankruptcy last year. The question is whether you think nationalisation is automatically a bad thing. Labour certainly seems to.
Last year, Starmer ruled out nationalisation for the energy sector (apparently his leadership pledge about “common ownership” meant something different). Shadow chancellor Rachel Reeves doubled down on that position in January.
Another way to protect these energy suppliers from swings in the wholesale market would be to control those prices, too. In a remarkably honest interview, Claudio Descalzi, CEO of Italian oil giant Eni, pointed out that despite the war in Ukraine, Russian energy exports were actually higher than ever, and argued that recent swings in prices had been driven by speculation. Deploying exemplary Keynesian logic, Descalzi explained that “a situation of exceptional speculation, requires exceptional interventions … Otherwise we risk destroying the market itself.”
It’s important to situate what’s happening in the longer-term context of the current energy price boom. Since the mid-2010s, we’ve lived through a period of extremely cheap energy. The fracking revolution so wholeheartedly embraced by Obama massively increased gas production, which drove down prices and gave politicians a cheap and easy way to make green-sounding pledges to reduce CO2 emissions by driving coal out of their energy networks. But those prices also disincentivised investment. Instead, as prices started to rise in early 2020, energy producers used those profits to buy back their own shares and drive up their stock prices. These buybacks, which were illegal until the 1980s, have now reached absurd proportions: Shell, BP and Total Energies have $14bn worth of buybacks planned for the first half of 2022 alone.
Events over the last few weeks suggest that the most reliable way of pushing these firms to make the investments we will need for the long run is through political pressure. Even rumours of a windfall tax produced immediate results: Eni suddenly announced plans to spend €2.5bn in the UK over the next four years; Shell has promised £20bn over the next decade; BP, £18bn by the end of 2030. Meanwhile, CEOs have been quietly admitting that a windfall tax won’t prevent them from investing.
Despite this, Sunak’s windfall tax contains an additional proviso that will allow energy providers to reduce their tax burden by committing to further investments. The business press worried that this would mean subsidising unprofitable investments, but Reeves was right to focus on the key issue: whether the money goes to renewable projects or back to fossil fuels.
In recent years, global capital had started to inch towards a more responsible set of climate policies – but even those small steps have proven too much for some. HSBC executive Stuart Kirk recently told a Financial Times conference: “Who cares if Miami is six metres underwater in 100 years? Amsterdam has been six metres underwater for ages, and that’s a really nice place. We will cope with it.” Unfortunately, these attitudes are widespread among the small group of executives whose decisions will shape the planet the rest of us live on. Ultimately, democratising those decisions may be the only solution.