Nick De Bois

Ed Miliband’s windfall tax on tobacco to fund the NHS is economically illiterate

The ‘windfall tax’, a concept introduced in the UK by the Blair government, is by definition a one-off seizure of revenue from a profitable industry, to fund an invariably unprofitable but popular project. It has been justified as putting ‘right a bad deal’ on the excesses of profits of unpopular industries. Between 1997 and 1998, Gordon Brown raised £5 billion from privatised utility companies to fund the Welfare-to-Work Programme.

Today we have face another well-intentioned policy initiative, of ensuring every NHS patient is guaranteed a cancer test within 7 days, supposedly to be funded by a windfall tax on tobacco companies. Labour’s incoherent economic policy is enough to challenge whether this plan is even sustainable for anything but a short period of time. But the wider concept of a windfall tax is more political gimmickry than sound sustainable policy.

As nice as such initiatives may sound, they severely disrupt long-term investments, ultimately driving up prices across the board and disproportionately hitting those least well-off.

Gordon Brown’s ‘windfall levy’ on utility companies, for instance, ignored the fluctuating and internationally driven supply costs of energy, meaning that when wholesale market prices increased, the levy’s additional costs were passed onto consumers. Equally, the ‘carbon levy’ acts as a stealth tax, with consumers subsidising the increased burdens whilst the industry takes the flak for increasing its prices.

The folly of such arrangements has also recently been shown in Australia. In 2012, the Australian Labor party taxed mining companies who were at the time benefiting from the growth of exports to China. The now-repealed Mining Tax, which was conceived to provide increased funding for education, prompted a collapse in investment in the sector that never recovered, and became one of the reasons for Labor losing the 2013 election.

At the UK Labour Party conference last month, Ed Miliband promised to ‘raise extra resources from the tobacco companies’ to fund his NHS plans.

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