After months of laxity, Britain has finally pledged to tax the energy giant’s profits to finance new measures in the face of rising cost of living. While inflation could exceed 10% in the coming months, British Finance Minister Rishi Sunak has unveiled a £15 billion aid plan, mainly targeted at low-income households.
To finance the plan, he made a new departure from the principle of low taxation – a historic hallmark of the Tories – by announcing an extraordinary £5 billion tax on the energy giant. Oil and gas producers will see their profits cut by 25%. In return, they would benefit from an investment support mechanism that would allow them to recover the 90 cents, £1 invested in tax credits. It is the third European country to commit to taxation of energy producers after Italy and Hungary.
risk of an inflationary spiral
In an address to the House of Commons, Rishi Sunak defended the “timely, targeted and temporary” intervention, seeking to dispel the idea that this fiscal support could increase the risk of an inflationary spiral. The announcement seems like the reversal of someone who had so far rejected the idea of taxing the energy giant, arguing it would penalize investments. Its first aid plan announced in February, which amounted to £9 billion, was deemed largely inadequate. Since then, he has been under pressure to align the budget expansion.
In Labor opposition, the shadow chancellor, Rachel Reeves, did not shy away from her delight at the prospect of adopting this tax on the oil giant. “There is no doubt who wins the battle of ideas in Britain. There is Labour!”, he launched. It’s been five months that she defends the tool tirelessly because of the massive gains generated by the giants of the sector, such as the $5 billion profit announced by BP in the first quarter, unheard of for ten years. Its owner, Bernard Looney, compared the rise in energy prices to a “cash machine” for his group.
Another difficult pass for Boris Johnson
Another angle of attack from the opposition: this announcement follows a new difficult path for Boris Johnson, following damaging reports on the holidays in Downing Street. It has been criticized as yet another diversionary tactic from a prime minister whose position has once again been weakened. “Conservatives are doing this now because they need new headlines,” said Rachel Reeves.
On the terms of the aid, this new scheme also appears to be reversed compared to the February announcements. The government specifically reversed the £200 aid set for October, which should have been reimbursed gradually. A mechanism that was somewhat like interest-free consumer loans, but riskier if families are unable to repay. In the end, this idea of reimbursement of the latter was abandoned and the assistance received by all families would be increased to £400.
Other aid is targeted at the most vulnerable populations. Thus the 8 million poorest families would receive an additional £650. For retirees, the poorest 8 million will receive a subsidy of £300. In all, the most vulnerable families will be able to get around 1,200 books. This equates to the average increase in energy bills expected for UK households this year.
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