Johnson nicks a big idea from Labour for now!

It’s rare to see the Labour Party offer such a fulsome embrace of a set of Conservative policy announcements. Then again, opposition leader Keir Starmer’s shadow bench was really cheering Boris Johnson’s government adopting Labour calls for a windfall tax on energy companies and more help for consumers hit with cost-of-living increases. Democracy in action.
Chancellor of the Exchequer Rishi Sunak had no qualms appropriating the policy, nicking Labour’s idea but giving a Tory spin, calling it an energy profits levy to distinguish it from the opposition’s windfall proposal.
The political rationale for the hastily cobbled-together package is clear. After months of bruising revelations and investigations into Partygate, the government is desperate to change the subject and be seen to be addressing real voter concerns, notably the effect of surging inflation and what the media has dubbed the cost-of-living crisis.
But the idea that the hurried measures will boost consumer confidence or avert a recession is dubious. The substantial package announced feels like fiscal policy defense, a panicky chess move intended to protect the king but not really advance the government’s own position. On the plus side, the new spending should make a difference to the average household’s energy costs, as well as helping more vulnerable people cope with cost-of-living increases generally.
The package includes a lump-sum payment of up to £650 ($819) for some 8 million families already receiving benefits, with payments also for pensioners and disabled persons. Most of the support lands in the fourth quarter, when Britain’s energy regulator Ofgem is expected to raise the price cap to £2,800, an increase of over £800.
But tinkering with taxes and exemptions is risky business. Before introducing his tax, Sunak had argued that it would hurt investment. So he is offering energy companies a chance to offset the 25% levy against investment. As BP Plc Chief Executive Officer Bernard Looney has noted, investment plans in the industry are made well in advance, so it’s not clear how well that will work. There’s also a moral hazard risk: Will investors be so sure there won’t be other windfall taxes in the future to plug holes?
It’s also not clear the measures will be sufficient to boost consumer confidence, which has slumped to its lowest in four decades, below even the levels of the last four recessions. One reason is that the cost of increased energy prices to UK households is around £55 billion; Sunak’s relief doesn’t begin to cover that (as he more or less acknowledged).
Sunak’s hope is that the £15 billion package of relief — which, at 0.6% of gross domestic product is still substantial — will help avert a recession this year. That’s debatable. Bloomberg Economics expects GDP to contract 0.4% in the second quarter of the year, then grow 0.3% and then fall in the fourth quarter again. The bobbing and weaving may not technically amount to a recession (defined by two consecutive quarters of falling GDP), but that’s also largely academic.
“There’s no point in saying a contraction isn’t a recession on the grounds that it’s not two quarters back-to-back, when the average person is 5% poorer,” notes Mark Bathgate, an independent economic consultant.

—Bloomberg