Time for a windfall tax?

Something has to give soon. British Gas are now set to increase fuel prices by 9.2%, and as a consequence bills for millions of customers are set to reach an average of more than £1,400 per annum. No politician is denying that this is a serious concern, but it seems that few politicians are devising suitable strategies to solve the problem. David Cameron’s call for people to switch from British Gas isn’t exactly the most inspiring move. Likewise, you wouldn’t be totally satisfied with advice to simply switch banks if your current bank is ripping you off. Is it time for (a return of) the windfall tax?

There’s no doubt that Ed Miliband’s 20 month price freeze plan is intuitively attractive, and fears of blackouts and a return to the 1970s are gross exaggerations. However, the plan does not account for ‘The Big Six’ energy companies simply hiking their prices before the freeze would occur, effectively making the aims of the freeze redundant. Furthermore, the Labour Party have conveniently ignored the fact that Miliband was the Secretary of State for the Department of Energy and Climate Change in the last Labour Government, so we shouldn’t be led to believe that he will offer something wholly new and alternative. Nevertheless, energy companies are hiking prices now, so it’s no good for the Government to simply sit on their hands and protest that stronger action on the issue will simply lead to higher prices again; to sum up more succinctly, the choice between either higher prices or higher prices two-fold is not an enthralling one. That’s why I think a windfall tax on the privatised utilities is a good idea.

It’s not often that I give praise to New Labour, but in the context of the windfall tax they got it right. In a rare move of attacking vested interests (they were quite happy to leave the banking sector untethered), the tax was levied by the means of a 9 times price-earnings ratio. It was designed as a response to the perception that the privatisation of utilities in the 1980s had yielded low returns alongside excessive profits; the tax raised around £5 billion, and financed a welfare-to-work programme (a ‘New Deal’) for the long term unemployed. I think a repeat of this tax would be both a populist and a pragmatic move. The money raised could be used for various purposes such as reducing the costs of energy bills, providing another ‘New Deal’ for the unemployed, reducing the deficit, or ideally a combination of all three. Although it would have support from the Left, this need not be the construct of a radical agenda; if the Coalition Government were happy to initiate a banking levy in 2010, why would a windfall tax on privatised utilities be such a bold departure?

This tax has intuitive appeal, and inevitably it will have its drawbacks. Whilst raising considerable finance, it doesn’t necessarily address the issue of escalating energy prices. Collusion could be another factor; any Government adopting the policy would not wish to rock the boat too much, perhaps leading to a murky compromise where energy firms agree to the tax provided they can substantially increase their prices again without Government objections. Furthermore, if all of the proceeds are ploughed into paying off the deficit, an economically sound move would be negated by customers being back to square one in terms of coping with escalating costs. However, this shouldn’t put us off clamouring for the tax, provided the tax is part of a wider package of reform. In The Independent, the director of ‘Energy Bill Revolution’ Ed Matthew is quoted as saying “We call on the Government to use carbon tax to super-insulate homes. We could make half a million homes super energy-efficient every year, saving an everyday family £400.” Potential policies like this in tandem with a windfall tax could provide a potent solution.

Ed Miliband’s price freeze plan is seriously flawed and I don’t support it, but at least it is a bold attempt to cope with the serious issue at hand. Simply telling the country that the price hike is “very disappointing”, and that people should simply switch company and “wear jumpers” is not enough. Strong intervention and reform needs to be made. The windfall tax is a good start.