The Chancellor’s new windfall tax reportedly faced pushback among Cabinet colleagues before being signed-off.
26 May 2022
Rishi Sunak has insisted he did not time handing out £21 billion worth of cost-of-living support to deflect from the controversy over Downing Street lockdown parties.
The Chancellor bowed to demands for the UK Government to step in and help households to deal with ballooning energy bills and rising shop prices, which are being fuelled by 40-year-high inflation, by revealing an emergency package of extra cash for millions of people.
Every household will receive a £400 energy bill discount while extra support was also unveiled for the lowest paid, pensioners and those with disabilities.
Under the plans, almost all of the eight million most vulnerable households could receive at least £1,200 of support, including a previously-announced £150 council tax rebate.
Mr Sunak confronted criticism that the measures were announced as part of a plan to move the focus on from rule-breaking in No 10 following the publication of senior civil servant Sue Gray’s report on Wednesday.
The report contained a photograph of Mr Sunak attending Boris Johnson’s surprise birthday bash in the Cabinet room in June 2020, for which the Chancellor and the Prime Minister were both fined £50 by the Metropolitan Police.
In an interview with Martin Lewis, founder of the Money Saving Expert website, the Chancellor was asked whether the fiscal measures had been quickly unveiled to act as a “fig leaf” after embarrassing details of the late-night raucous parties in Downing Street were laid bare.
He replied: “I can categorically assure you that that had no bearing on the timing for us announcing this support, and I can give you my absolute assurance on that and my word.
“The reason we acted today was because we had more certainty about what will happen to energy prices in the autumn.”
Industry regulator Ofgem said this week that the typical annual household energy bill is forecast to rise by more than £800 in October when the price cap goes up, having already risen by more than 50% in April.
Measures announced by the Chancellor in the Commons included a one-off £650 payment to low-income households on benefits, paid in two instalments in July and the autumn at a cost of £5.4 billion.
Pensioners will also receive a £300 payment in November/December alongside the winter fuel payment in a move costing £2.5 billion, while £150 will be paid by September to individuals receiving disability benefits.
Mr Sunak announced that £5 billion of the package would be paid for by a levy on the profits of oil and gas giants, and around £10 billion will be covered by extra borrowing.
The Chancellor attempted to avoid calling his plan for a 25% energy profits levy a “windfall tax”, as he was accused by Labour of having been dragged “kicking and screaming” into a U-turn on the policy the Opposition has spent months calling for.
But Simon Clarke, chief secretary to the Treasury, conceded it was a windfall tax, although one he said included a “carefully calibrated offer” due to its tax break incentives for companies to invest in North Sea oil and gas production.
Conservative MPs, including Richard Drax, publicly voiced concerns about the windfall tax in the Commons, suggesting it amounted to “throwing red meat to socialists”.
Mr Clarke defended his boss’ approach, however, pointing to where windfall taxes had been used in the past by Tory administrations, including by former chancellor George Osborne and ex-prime minister Margaret Thatcher.
He told BBC Radio 4’s PM programme: “The point is that when you initiate it you need to be really careful for it not to have perverse effects and perverse consequences as a result, and that is something we have done.”
The Times and The Telegraph reported that Jacob Rees-Mogg, minister for Brexit opportunities and government efficiency, warned during Thursday’s Cabinet meeting that the tax could hurt investment.
Mr Rees-Mogg later told Sky News that all taxation has an “economic consequence”.
He said: “Whether it’s a pasty tax, or it’s an excess profits tax, there is an economic consequence.
“There isn’t a honeypot of free tax that governments can just pop into.”
When announcing his fiscal package in the Commons, Mr Sunak told MPs it was worth £15 billion.
But officials later conceded that there was a hidden £6 billion cost to the announcement, taking it to £21 billion.
That is because over the next five years the original £200 rebate for energy bills, which was announced in February and doubled and turned into a grant by the Chancellor on Thursday, will no longer be paid back by consumers as originally planned.