What next after UK PM’s U-turn?

Windfall tax on energy producers might be an option says LBS’ Richard Portes

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London Business School’s Richard Portes appeared on CNN International’s 'The Global Brief' with Bianca Nobilo to discuss the economic and political fallout from recent events in Westminster.

"First there will be the report from the Office of Budget Responsibility, which the government sidelined when they introduced the mini-budget. That will reveal a very dim picture. Then they will need to find new sources of revenue and cutbacks. When one looks at the possibilities the options are politically painful,” says Professor Portes.

One such area of revenue might be a windfall tax on the profits made by energy companies.

British Prime Minister Liz Truss has previously ruled out using a further windfall tax on energy companies to fund measures to help people with their gas and electricity bills. A windfall tax is a one-off tax imposed by a government on a company. The idea is to target firms that were lucky enough to benefit from something they were not responsible for - in other words, a windfall.

Energy firms are getting much more money for their oil and gas than they were last year, partly because demand has increased as the world emerges from the pandemic, but more recently because of supply concerns due to Russia's invasion of Ukraine.

“I think a big windfall tax on the profit of the energy producers, or oil and gas companies. That could be a major source of revenue. [In the past] the government has been steadfastly set against that,” says Portes.

Addressing the issue of the government’s credibility following its major U-turn on the government’s mini-budget and the sacking of the chancellor Kwasi Kwarteng, Professor Portes says that there is a “big credibility issue”.

“I can't predict which way the market will receive [what comes next] and how much turmoil there will be. The Prime Minister can’t continue for very long. She can continue if [the Conservative Party] fails to find a credible successor, then she can limp along because no one will challenge her, but her authority is gone. Her ability to govern is gone. If you watch her press conference [following the sacking of the government’s chancellor], that was appalling, and it just shows how completely out of touch she is, how unable she is to communicate and how badly she has run the story."

In more recent news, the new UK chancellor Jeremy Hunt told BBC journalist Laura Kuenssberg (Sunday, 161022) that “nothing was off the table on tax cuts and spending”. And in the Financial Times, the UK’s new chancellor Jeremy Hunt has admitted that Liz Truss’s government went “too far, too fast” in last month’s “mini” Budget and that in the near future taxes will have to rise and spending will have to be cut in order to regain economic credibility.