Windfall tax: a mistake

Fiscal pressures are of the Government's own devising; imposing a windfall levy on the energy companies would not be a sensible solution

Yesterday the French electricity company Électricité de France (EDF) pulled out of a £12 billion deal to acquire British Energy, the nuclear power generator. This is a blow to plans for the next generation of British nuclear power stations. But it also poses a more immediate political problem: a large gap in public finances.

It will be tempting for the Government to resort to exceptional measures to plug this gap. Apparently, it is already considering a windfall tax on energy companies. The fiscal pressures are of the Government's making and there are no easy ways of resolving them. But a windfall tax is no good solution, and should be excluded rapidly from consideration.

The Government has a substantial interest in the fortunes of British Energy. The company was rescued in 2002 from near-insolvency after sharp falls in wholesale electricity prices. The Government currently holds a 35 per cent stake. Had it sold its investment as part of the EDF deal, the proceeds would have amounted to around £4 billion. These would have been given to the Nuclear Liabilities Fund - a body created in 2004 to meet the huge costs of decommissioning older nuclear power stations.

The money that the Government would have earned from the sale was earmarked for covering at least some of the costs of nuclear decomissioning. It would not, by any means, have covered all the costs. But a sale would also have given the Treasury access to funds in the short term to ease the deficit. That route, too, is now shut. So the pressure on the Government to find new pools of money has grown at precisely the moment that it is considering a raid on the energy companies: hence its interest in a windfall tax.

The appeal of a windfall tax to a politician is pretty irresistible. It is a tax that no individual voter pays. It is levied on that easiest of targets, the oil industry. And it seems to hurt the lucky rather than the industrious. High oil prices are a burden for most of us, a blessing for British energy businesses, and beyond the control of both.

However, a windfall tax is not an idea whose time has come. It is a populist expedient that would compound the damage that the Government has already inflicted on its reputation for responsible economic management, and for the coherence of its policymaking.

A windfall tax is a consequence of bad fiscal management by the Government. It creates a moral hazard, establishing a pattern in which Britain punishes businesses that are enjoying a bonanza. It withdraws the investment incentive for large companies.

The proceeds of a windfall tax would not be hypothecated, aimed directly at helping poorer families. They would simply be used to reduce a burgeoning deficit at a time of economic slowdown. The Government cannot prevent global recessionary forces; but this it can do - maintain the principle that economic management operates better by a framework of rules than by arbitrary intervention.

Singling out for a windfall tax an industry whose profits are rising would have severe disincentive effects if investors feared that it was not just a one-off tax. It would damage investor confidence. It might also deter companies from investing.

The Government has already, with lax fiscal policy, undermined its credibility. Investors and business are unlikely to feel that a windfall tax would indeed be an exceptional measure. It would be seen as simply a tax grab on an industry that happens to be doing well because its profits are highly cyclical. A windfall tax is bad economic management. But more serious for Labour, it is politics of a time that has gone.

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Jean-Louis Kayitenkore
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