How Johnson pushed through the windfall tax on energy companies

Meeting with economists gave PM the cover he needed to take Chancellor over the top with him

EVER since Rishi Sunak delivered his underwhelming Spring Statement in March, Boris Johnson has been searching for a way to make the Chancellor reopen his wallet.

On Monday he finally found it, when a group of leading economists privately gave their backing to a fresh spending splurge to ease the cost of living crisis.

Crucially, they argued against the Treasury’s view that any rise in public spending would increase inflation, giving the Prime Minister the covering fire he needed to take Mr Sunak over the top with him.

By Tuesday afternoon, when Mr Johnson sat down with Mr Sunak to thrash out the details of the spending package, the Chancellor needed little convincing: Ofgem had given them advance warning of an announcement that the energy price cap was likely to rise by a further £830 in the autumn.

“Once that news came through it was fairly clear what the solution had to be,” conceded a Treasury insider.

The decision to give households up to £1,200 each meant that the Prime Minister had, ultimately, been able to impose his will on a Chancellor whose ambition to reduce debt often put him at odds with his boss.

Monday’s meeting around the Cabinet table in Downing Street brought together the former Bank of England governor Lord King, the London School of Economics director Baroness Shafik, George Osborne’s former chief of staff Rupert Harrison and Gerard Lyons, Mr Johnson’s economic adviser when he was mayor of London.

Together with Mr Johnson, they were joined by Steve Barclay, the PM’S chief of staff, and several Treasury officials including Douglas Macneil, a special adviser to the Chancellor.

One source said Mr Johnson “wanted a range of views from outside” the Government coming from “four different people with four different viewpoints”.

The ultimate aim, however, was to provide ballast for the Prime Minister’s theory that a sizeable handout could be given to households without pushing inflation even higher.

The Treasury officials were adamant that “any relaxation of fiscal policy would be both inflationary and add to debt servicing costs”, according to a source with knowledge of the meeting. “We can’t be adding to the debt burden every five minutes,” argued another.

The Treasury’s nerves were understandable. The PM’S plan was based on a belief – backed by an Office for Budget Responsibility forecast – that inflation will rapidly fall after peaking at around 10 per cent at the end of this year, returning to around 2 per cent by the end of 2023. But the OBR’S recent forecasts have been wildly inaccurate; only a year ago it failed to foresee any increase in inflation above 2 per cent.

Some of the economists pushed back “aggressively” on the Treasury’s view.

One source said: “The economists generally agreed there was a growth problem and a cost of living problem and the Government should do something to protect the poorest and most vulnerable.” A second source added: “There was agreement about the targeted help.” Some of the economists pushed for a large fiscal intervention.

“The meeting gave the PM a lot of ammunition for his meeting with the Chancellor,” said the insider. “It was about not just where the money was going but how big the size should be. It was about the whole stance of the policy.”

After the Spring Statement, Mr Johnson told allies he had wanted to use the opportunity to guarantee cheaper bills for households this winter, but had failed to get the plan past Mr Sunak.

Neither man was enthusiastic about the idea of a windfall tax on energy companies, which they regarded as anti-conservative, and the Chancellor in particular was against the idea of borrowing yet more money – £16billion more as it turned out – to finance most of the proposed £21billion giveaway.

But when Shell boasted of its £12billion profits and BP posted its highest annual profit in eight years, public enthusiasm for a windfall tax grew and the arguments against it weakened.

Mr Johnson and Simon Clarke, the chief secretary to the Treasury, summoned representatives of the energy sector to meetings “to provide an opportunity for more ambitious action from them”, a source said, but they appear to have been unconvinced by what they heard.

Then on May 3, Bernard Looney, the chief executive of BP, undermined the main argument against a windfall tax by saying a levy would not affect the firm’s plans to spend £18billion on North Sea oil and gas, wind farms, carbon capture and car charging points.

One senior Government source said: “When you are the only person left on the field saying no, including people from the energy sector, it’s difficult to keep opposing it.”

Sources close to the Chancellor said he had never regarded windfall taxes as a “silver bullet” to solve a problem, but nor was he ideologically opposed to the idea. They pointed out that Margaret Thatcher and David Cameron had both used windfall taxes in times of crisis.

Last week, Mr Sunak met almost 100 Tory MPS to test the mood of the backbenches. There were some dissenting voices, but Government sources say the majority of MPS were “happy, because it provides an answer to what we’re doing about the cost of living, and they know it is popular with the public”.

‘The economists generally agreed there was a growth problem and a cost of living problem’

windfall tax and there’s a good reason for that, and that is because it would stop investment in new technology and in new green power that we need.”

May 12 2022 – Rishi Sunak, BBC interview:

“I’m not generally attracted to windfall taxes in general. I’m pragmatic about it, I’m not naturally attracted to the idea of them... What I want to see is significant investment back into the UK economy and I want to see that investment soon. And if that doesn’t happen no options are off the table.”

May 12 2022 – Boris Johnson, LBC:

“I don’t like them. I don’t think they’re the right way forward. I want those companies to make big, big investments.”

May 17 2022:

Tory MPS ordered to vote against a windfall tax. The Labour amendment was rejected in the House of Commons by 310 votes to 248, majority 62.

May 18 2022 – Boris Johnson, PMQS:

“This Government is not, in principle, in favour of higher taxation; of course not. Labour loves it. They love putting up taxes.”