Profits and penalties

Policies of the past

Advocates of a windfall tax on oil companies have invoked the spirit of the Iron Lady.

Jesse Norman, the former treasury secretary, said even Margaret Thatcher would take a cut of excess North Sea oil profits to ease living costs.

He said arguments against a windfall tax were “very weak”, as Rishi Sunak comes under growing pressure to raise extra funds to help households.

But what windfall taxes have been used in the past, did they work and what is different this time around?

Thatcher’s 1981 tax on bankers

In 1981, Mrs Thatcher levied a 2.5 per cent windfall tax on banks making vast profits on their loans after interest rates hit 17 per cent, while paying out little or no interest to savers.

It raised about £400 million, or £3 billion in today’s money, according to the Institute for Government think tank.

Mrs Thatcher was facing record levels of inflation and vast public debt, much like now, and the tax also levied a supplementary petroleum duty on oil companies which were seen to be profiting from higher commodity prices.

However, the argument in favour of the tax at the time was that banks’ excess profits were a direct result of the governmental decision to raise interest rates to record levels.

The money raised balanced public finances after recessions in the 1970s and early 1980s, and the economy soon rebounded.

Blair’s 1997 windfall tax on utilities

A similar justification was used when the then chancellor Gordon Brown levied a £5 billion windfall tax on private utilities companies in 1997.

Labour argued the previous Government had privatised national utility companies at too low a price, allowing newly private companies to make excess profits at the expense of the taxpayer.

The tax was calculated as 23 per cent of the value of the difference between the companies’ value at the time of privatisation and their worth four years on.

Critics of the tax said the policy hurt pensioners and shareholders invested in the firms.

However, the money raised provided support for the jobless via the “welfare to work programme” as well as offering extra funding for education, as the administration increased the size of the state.

Those who argue against a windfall tax have said the key difference now is companies are not making excess profits because of government policy, but because of global economic conditions and supply and demand issues.

George Osborne’s levy

There is a temptation for governments to make supposedly one-off windfall taxes permanent.

In 2011, George Osborne increased the “supplementary charge”, an additional tax levied on oil corporations introduced by Gordon Brown, from 20 per cent to 32 per cent, saying in his Budget that “when oil and gas prices’’ were high, it was “fair that companies should contribute more”.

The higher tax lasted until 2015 and a 10 per cent surcharge still exists today.

It could provide the blueprint for Boris Johnson and Mr Sunak to raise taxes.

Mr Osborne’s increase raised some £2 billion a year, according to the Economists Observatory research group.