Reject a windfall tax

There is speculation that, with inflation now at a 40-year high thanks in part to the rise in energy costs, the Government will seek to impose a windfall tax on companies in the sector: a course of action first advocated by Labour.

It is a superficially compelling proposal. There is a degree of public anger at the “excess” profits made by these firms. The Chancellor has previously expressed frustration that they have not been enthusiastic about increasing investment. The policy is also said to be “wildly popular” – and would have the added benefit of distracting attention from the failure of successive governments to do the hard work necessary to bring prices down sustainably in the medium term.

Yet surely we have been here before. The decision to increase National Insurance contributions to fund the NHS was similarly viewed by the Government as a popular move that would help neutralise a Labour attack line. Instead, the Tories have been pilloried for exacerbating the cost of living crisis with a tax increase that not only broke a manifesto promise but was a betrayal of Conservative principles.

That mistake would have been avoided had ministers done what they believed to be right, rather than what appeared to be popular in focus groups on any particular day. In the case of a windfall tax, the consequences are likely to include a further decline in the attractiveness of the UK as a place to invest as well as a hit to pension funds. The amount of revenue raised would also be dwarfed by the extra sums the public are paying in energy costs. The Government was right to whip against a Commons vote in favour of the policy on Tuesday. It should keep to that position.