In her first major act as prime minister, Liz Truss has announced that the energy prices will be frozen at £2,500, preventing them from rising to Ofgem’s new price cap of £3,549 in October. Controversially, the measure will be funded by £130 billion in government borrowing, rather than increasing the current windfall tax on oil producers’ excess profits. The current windfall tax is a paltry 25 percent, while UK energy firms are forecast to make excess profits of £170 billion over the next two years, according to Treasury estimates.
At face value, the measure appears to address the immediate issue of getting energy bills paid. However, it poses a number of risks and is emblematic of Truss’ broader economic agenda, which she has made no effort to conceal: tax cuts for the rich at the expense of all else.
Truss’ unwillingness to impose a higher windfall tax on the super profits of energy companies stems from a misplaced belief that it will deter investment in new oil production. But despite decades of generous tax reliefs for oil corporations, investment in oil production has been steadily declining.
The inherent volatility of wholesale oil as a commodity, which reached record lows of -$37 dollars a barrel during the first Covid lockdowns of 2020, makes the mechanisms of ‘price-signalling’, supposedly necessary to guide productive investment, completely ineffective. Why would oil companies invest in future production if the price could plummet next year due to another unforeseen shutdown of the global economy, or the emergence of new technology that makes gas obsolete?
As such, even after making $19 billion in global profits last year alone, Shell paid no tax, partly due to the record losses it made in 2020, which can be used to offset future tax liabilities. In fact, it actually received £132 million tax credits from HMRC for its North Sea business. Despite this, Truss is undeterred in her belief that light tax for big oil companies will go towards investment in new production—and not just add to the billions of pounds in profit already paid out shareholders this year alone.
The first point to note with the headline figure of £130 billion is that at least £30 billion of that will be replacing the tax revenue lost from the reversal of Rishi Sunak’s proposed increase to the rate of Corporation Tax. The rate for companies with profits over £250,000 was set to increase to 25 percent—due to take effect from 2023. A rate of 25 percent is modest by contemporary standards, remaining below the 30 percent rate in Germany and Japan. Had the measure remained in place, annual corporation tax receipts would have increased by nearly £40 billion annually by 2026/27.
For all her talk of tax cuts, Truss hasn’t proposed an increase in the rate of income tax brackets in line with inflation, which Sunak froze until 2026. The measure more than doubled expected income tax revenue and is bringing in tens of billions in additional revenue annually through ‘fiscal drag’, as lower earners get pushed into higher tax brackets. In her recent interview with Laura Kuenssberg, Truss claimed that it was wrong to view economic policy through the ‘lens of redistribution’—but her policies are clear as day in redistributing wealth from workers to the rich and corporations.
Truss’ believes that growth through corporate tax cuts will solve all these problems—but there is scant evidence to suggest that tax cuts stimulate growth. In all likelihood, these measures will exacerbate the problems we currently face, rather than fixing them.
Excessive borrowing, if used to fund tax cuts and not government-led investment in increasing supply-side capacity, runs the risk of debasing the currency. This would exacerbate inflation further by increasing the cost of imports. The pound is already approaching all-time lows and parity with the dollar—despite the Bank of England’s aggressive yet ineffective interest rate hikes, which are just adding more pain to households in the form of higher borrowing costs and mortgage rates domestically.
Truss’ print-money-and-leave-it-to-the-markets approach to economic strategy should come as no surprise given the announcement of her senior advisors, who are coming from right-wing think-tanks like the Taxpayers’ Alliance and the Institute for Economic Affairs. Head of the Number 10 economic unit is Matthew Sinclair, former Director of the Taxpayers’ Alliance and until his recent appointment a director at Deloitte.
In an article written in 2012, Sinclair proposed to scrap NIC and income tax by replacing them with a single tax on labour income of 30 percent. He also proposed the scrapping of corporation tax, capital gains, and others by merging them into one tax on ‘capital income’ at 30 percent. In a later article, Sinclair proposed reducing the rate of corporation tax to 10 percent in rebuttal to a policy proposal made at the ‘Margaret Thatcher Conference on Liberty’ that aimed weakening the cartel-like power that large corporations hold over the UK economy—using taxation. Throughout the article he reiterates his belief that depressing the returns for large corporations in the form of higher tax bands will lead to fewer high growth-generating firms.
This belief is more ideological than evidence-based, and derives from a common Conservative adherence to the now thoroughly de-bunked Laffer Curve. According to Laffer’s theory, lower taxes mean corporations have more money to invest in producing goods and services, creating more growth and therefore greater tax revenues in the long run as a result. But this ‘back of a napkin’ theory doesn’t stand up to scrutiny. One study published in the European Economic Review that carried out a meta-analysis from 42 primary studies found that different rates of corporation tax had no effect on growth.
Businesses don’t need tax cuts to invest: they are already given generous deductions from their tax liabilities for investments in the form of capital allowances. Amazon enjoyed a £75 million discount on its tax bill in 2021 following Sunak’s 130 percent super deduction, as a result of their investment in new fulfilment centres. Broader macroeconomic conditions, such as worker pay and disposable income, play a far greater role in determining how much and in what companies invest.
Against the backdrop of global uncertainty, rapidly falling real wages and rising living costs, tax cuts for corporations just mean more profits paid to shareholders as dividends or buybacks. Far from stimulating growth, it simply exacerbates wealth inequality and gives more disposable income to the wealthy for the consumption of luxury goods.
Soaring stock markets, rising house prices, and huge pay-outs by corporations to shareholders have led to record wealth inequality in Britain, where the top one percent have 230 times more wealth than the bottom 10 percent. According to data from the ONS the top quintile of the household income distribution spend nearly 200 percent more on energy for housing than the bottom quintile, 500 percent more on household goods and services, 150 percent more on recreation and leisure, and nearly 100 percent more on eating out.
Despite Truss’ aversion to statistics of this nature these disparities in consumption must surely raise questions over the use of energy and the distribution of resources across society. In 1899 economic sociologist Thorstein Veblen coined the term ‘conspicuous consumption’ to describe the consumer practice of buying luxury commodities as a means of displaying social status. Truss’ proposed cuts, like a reduction in VAT on energy bills, encourages this kind of conspicuous consumption. It makes energy bills disproportionately cheaper for the wealthy who own large houses, incentivising their excessive consumption, while simultaneously contributing to higher prices for poorer people by using up a greater amount of the limited total supply.
An Alternative Vision
The New Economics Foundation have put forward an alternative strategy that would less than one third of Truss’ proposal, while providing targeted support to the hardest hit households. Counter to the prime minister’s plan, NEF say the windfall tax could be expanded to raise £22 billion. The proceeds of a higher windfall tax could be used to pay for a free ‘basic energy’ allowance for all household that would include 8000KWh of gas and 2000KWh of electricity—with usage above that amount being charged at a higher rate.
Under NEF’s proposal, 70 percent of households would be better off than under the government’s price freeze, while 80 percent of families would see an increase in disposable incomes. The bottom 10 percent of households would receive almost 90 percent of their energy for free, while the bottom 50 percent would have their income restored to April 2021 levels.
The new prime minister’s backwards-looking economic plan will increase wealth inequality, hand billions over to profiteering corporations, and while limiting the energy price increase, still see most households experiencing a significant increase to their energy bills next month. Truss’ ‘low tax, high growth’ strategy runs the risk of increasing demand for luxury goods by the wealthy, incentivising production for those items, and increasing demand for wholesale oil. This in turn would drive up the cost of basic goods like food for ordinary consumers by increasing the cost of inputs.
Workers could be dealt yet another blow in their battle again rising living costs if Truss gets her way in bringing in even more draconian anti-trade union legislation. Real pay for workers has already had the biggest fall for 100 years, weakening collective bargaining rights will only widen the gap between rising prices and lagging wages. This dystopian present doesn’t have to be a realty. Another world is possible—but only if we fight for it.