After months of resisting calls for a windfall tax on oil and gas companies amid surging energy prices and soaring profits, Sunak has announced a major U-turn. The policy will raise the effective rate of tax on oil and gas profits from 40% to 65%, generating an estimated £5 billion in twelve months.
The revenue will contribute towards Sunak’s £21 billion ‘cost of living emergency package’, which will see payments of between £150-£650 made to low-income households on Universal Credit, pensioners entitled to the winter fuel payment, and people on disability benefits. But these payments are woefully inadequate to compensate for the rise in energy bills, which will increase by a further £800 in October—bringing the price cap up to £2800.
Rather than calling on the government to go further with the support package, however, Labour is voicing concerns over the sources of funding. In response to the announcement of £10 billion in new borrowing by the government, Shadow Treasury Secretary Pat Macfadden is crassly attempting to present Labour as the party of financial prudence by asking the Office for Budget Responsibility (OBR) for a full analysis of the budget’s impact.
The Labour leadership wants to brand itself as fiscally responsible, claiming it would give the OBR oversight of any emergency package they would introduce while in government. This rhetoric of divulging control for policy setting to unelected technocrats is reminiscent of New Labour’s attempt to woo financial markets when they came to power in 1997—by granting independence to the Bank of England.
By giving up control over interest rates, Gordon Brown was able to shore-up the pound, keep the rate of interest on government bonds low, and cause a surge in British stocks. Rising share prices and a stronger pound won New Labour the trust of banks, enabling their light-touch approach. But that approach was predicated upon low interest rates, public-private ‘partnerships’, and distributing a small portion of the huge financial profits generated in the City of London through an intricate system of tax credits. These policies were lauded by financial and business elites at the time, but today ordinary people are still dealing with the repercussions of central bank independence.
BoE rate hikes are increasing debt financing costs for the government. According to KPMG, interest repayments on government debt could reach £16 billion in June, largely counteracting the additional £10 billion in revenues generated from recent NIC rate hikes.
Raising interest rates in response to inflation is not a necessity. Rate hikes are a reaction by the BoE to maintain its 2% target inflation, which is more about protecting the returns of the financial sector than it is about protecting the purchasing power of consumers—as made clear by the governor’s recent comments urging restraint for wage increases. If wages are rising in line with inflation there is no net impact on worker’s purchasing power. However, higher rates of wage and consumer price growth do reduce the real value of income earned from interest on debt0—such as the profits generated by bank lending.
Interest rates, government borrowing, and the rate of inflation are all political choices and decisions about them should not be divulged to unelected technocrats who often operate on behalf of the wealthy. New Labour’s hands-off approach, which pandered to the financial sector, is unsuited to the emerging conditions of persistently low growth and rising prices. The current leadership’s attempt to recreate the sentiment of this approach by proposing to give the OBR oversight of future budgets indicates a lack of awareness.
What is needed from Labour now is a holistic vision for a fairer economy predicated on stronger collective bargaining rights for workers so that wages can keep up with inflation, the utilisation of monetary policy for state lead investments in productive capacity, and a redistribution the massive profits and wealth accumulated by large corporations and the rich during the past four decades.
Tax and Class
Scrutiny over government spending is, of course, important—particularly when it comes to government contracts with big business. Serco’s 21% increase in profits to £216 million on the back of Covid-19 contracts should certainly raise questions over companies profiteering from the crisis and the power they hold over the state apparatus. Amazon Web Services won over £600 million in UK government contracts between 2018-2021, and yet transparency over Amazon’s historically controversial tax position in the UK remains opaque to the public.
However, pulling hairs over the minutia of who is receiving benefits during a cost of living emergency, as Labour are proposing to do, could slow down the process of distributing funds to those who need it most. Instead of deciding who should or should not receive funds for a given budget (and trying to regulate that) the government could counteract any benefit received by the wealthy through emergency measures by raising the rate of income tax for higher earners and implementing taxes on wealth.
An approach like this would open the door for a broader discussion on reforming the tax system—shifting focus onto higher earners, dividend income, and unearned income such as capital gains. According to Deloitte, the median pay for FTSE100 executives in 2022 was £3.6 million, and a recent study by the Resolution Foundation estimated that the top 1% own 25% of UK wealth. There is also a strong case to be made for higher rates of tax for large corporations, with new research from the Economic Policy Institute showing that corporate profits are disproportionately contributing towards higher inflation. In the first quarter of 2022 corporate profits in the UK reached £139,210,000,000 according to ONS data—well above pre-pandemic trends.
And, at a time when house prices have risen rapidly relative to wages, contributing to higher wealth inequality, landlords continue to be allowed to deduct mortgage interest from their taxable income and are now even eligible for super deductions in their capital allowances. Sunak has plans to extend the super-deduction for businesses beyond 2023 in an attempt to ‘stimulate investment’, but it is unclear exactly how this approach will help address the cost of living crisis. The Treasury’s own research has shown that the government pays far more in R&D tax reliefs than businesses spend on investment.
Rather than trying to signal fiscal prudence to business interests, Labour should be making the case that trying to encourage investment through tax cuts is a flawed strategy. Instead, the government should be raising taxes on corporations and using this revenue to implement measures that directly address the cost of living crisis such as nationalising the energy companies, providing a living income, and upgrading the insulation of homes in preparation for winter. Tony Danker, director general of the Confederation of British Industry (CBI), has called for the government to ‘help the hardest hit now’, saying that he believes ‘Helping people with heating and eating bills will not fuel inflation’. In fact, ensuring people have adequate funds to cover food and energy bills will help to strengthen the demand base for UK businesses goods and services—besides its obvious merits on a human basis.
Political decisions like these are too important to be delegated to unelected, unaccountable institutions. Labour needs to take responsibility for envisioning a new economic model for the country—instead of trying to relive the past.