One-off windfall tax expected to help fund cost of living relief package
Chancellor Rishi Sunak is due to make a statement in the Commons on Thursday morning
Last updated 26th May 2022
We will find out later what extra steps the Government are going to introduce to help us deal with the cost of living crisis.
The Chancellor is due to make a statement in the House of Commons at around lunchtime on Thursday 26th May, on a relief package for households struggling with rising bills.
Rishi Sunak looks set to cave in to pressure to impose a windfall tax on the soaring profits of oil and gas firms to help fund that.
Labour said the Chancellor had been “dragged kicking and screaming” into backing its call for a levy on fossil fuel giants which have benefited from high global prices.
Mr Sunak is expected to tell MPs he will scrap a requirement to repay the previously announced £200 discount on energy bills, and could increase the level of the grant.
Other measures which could form part of a package worth around £10 billion are expected to be targeted at the poorest households.
Shadow chancellor Rachel Reeves welcomed the Chancellor’s U-turn on a windfall tax, after months of Tory opposition to Labour’s calls for a levy.
She asked: "Why has it taken so long? Why have families had to struggle and worry while he dragged his feet?"
Windfall tax expected to help fund cost of living relief package
The timing of the Chancellor’s announcement, the day after the publication of the embarrassing Sue Gray report on the partygate scandal, has led to claims that ministers were seeking to avoid further damaging headlines about Boris Johnson’s No 10 operation.
But the Prime Minister’s chief of staff Stephen Barclay insisted the decision to announce the package was in response to Ofgem’s indication that the energy price cap would rise by more than £800 in October.
He told Sky News: "In terms of the timing, firstly we don’t control the timing of the Sue Gray report. The timing of that is shaped by the Met Police investigation.
"What we’ve always said is, in terms of the fiscal response, we wanted to see from the Ofgem guidance what the full impact would be in the autumn on families so that we can get the design of that package right.
"We’ve had that guidance this week from Ofgem. That is why the Chancellor is coming forward today".
With MPs away from Westminster on a half-term break next week, Mr Barclay said the "parliamentary timetable" was also a factor.
Ofgem’s chief executive Jonathan Brearley indicated this week that the energy price cap will increase to £2,800 in October.
The Times reported the previously announced £200 loan on energy bills will be replaced with a grant that will not have to be paid back, with the discount possibly increasing to as much as £400.
Ministers have spent months criticising the idea of a windfall tax because of its potential impact on investment.
But on Wednesday a Tory source said the arguments had been “tested rigorously” within both the Treasury and wider government.
"There’s a high threshold that any package that we bring forward delivers more gain than pain, that the gain is worth the pain, that it does not jeopardise the investment," he said.
"You don’t introduce random taxes that make the economic environment unpredictable".
Offshore Energies UK, which represents the offshore oil and gas industry, has warned a one-off tax on North Sea firms would see higher prices and do long-term damage to the sector.
Warnings a one-off windfall tax would see higher prices
The Chancellor will need to be careful that any extra help he puts in to the economy does not add further to inflation, which is running at a 40-year high.
As well as the possible impact on inflation, the Chancellor’s ability to help beyond the £22 billion package already announced will also be restricted by the state of the nation’s finances.
A Treasury spokesman said: “The Chancellor was clear that as the situation evolves, so will our response, with the most vulnerable being his number one priority.”
The Prime Minister said the hundreds of billions poured in to dealing with the Covid pandemic had left a “very difficult fiscal position”.
At a Downing Street press conference, he acknowledged households “are going to see pressures for a while to come” as a result of the spike in global energy prices and supply chain problems following the pandemic.
But he said: “We will continue to respond, just as we responded throughout the pandemic.
“It won’t be easy, we won’t be able to fix everything.
“But what I would also say is we will get through it and we will get through it well.”
Mr Johnson has previously said a windfall tax would “deter investment”, would be “totally ridiculous” and would “raise prices for consumers”.
The Chancellor also voiced opposition but began laying the grounds for a change of policy in recent weeks, saying he was “pragmatic” about the possibility.
Some of the most vehement criticism has come from Brexit opportunities minister Jacob Rees-Mogg, who has argued it is wrong to raid the “honey pot of business” and the measure would ultimately see the public pay more tax.
But Labour leader Sir Keir Starmer had argued a Government U-turn was “inevitable” as the tax on North Sea firms would “raise billions of pounds, cutting energy bills across the country”.
Cost of living crisis:
Interest rates and inflation go up
Inflation rose by 8.8% in the 12 months to January 2023, down from 9.2% in December 2022. With interest rates also rising to 4%, those saving money will earn more interest on their finances, whilst those paying mortgages would pay more interest to the bank.
Energy bills
The price of energy went up incredibly as the cost of living crisis hit, with the gas price spike caused largely by the war in Ukraine. The price cap - which is set by an independent regulator to help offset costs onto customers - was set to rise to £3,549 for an average home in October but a price freeze from the government restricted the typical bill to £2,500. That's still an increase of 27% from the previous energy cap and as it's a cap on unit cost, the more energy you use the higher your bill will be.
Food prices
The cost of a weekly shop also has gone up as a result of the cost of living crisis. As a result of the war in Ukraine, a number of products including cooking oils and wheat have been disrupted. This means that several products are now considerably more expensive, driving bills up for customers.
Prices at the pumps
The average cost of petrol has also rose to unprecedented levels. Supply lines for petrol have been thrown into doubt as a result of the war in Ukraine, as Russia is a large export partner for gas, oil and fuel. In April 2022, the average price for a litre of petrol on the forecourt was 160.2p, whilst a litre of diesel would cost 170.5p. By late June 2022 the price had risen to an average of 190.9p for a litre of unleaded and 198.9p for a litre of diesel. In March 2023 the price wass on average of 147.03 in petrol and 167.04 in diesel.
Average cost of filling up a car with petrol hits £100
On 9th June 2022, the average cost of filling up a car with petrol hit £100 for the first time ever. Diesel had already hit that milestone. It comes as the cost of fuel hit a record high of one pound eighty a litre. The 2p rise was the biggest daily jump in 17 years. Prices have dropped by at least 20p per litre since the high point.