Will the tax burden finally start falling?

Is the government ready to start cutting taxes? After taking the burden to a post-war high, it seems ministers are preparing to change direction – in one area, anyway. This morning Jeremy Hunt announced that the energy levy on oil and gas companies, known as the ‘windfall tax’, will come to an end in 2028 – a direct response to growing fears that the effective 75 per cent tax on profits was driving business and investment out of the country.

Divestment from the North Sea has become a heavily contested topic. Keir Starmer announced that Labour would ban all new production in the North Sea, perhaps putting into perspective for the Tories just how far their windfall tax has shifted what is politically possible. There’s been plenty of evidence of businesses getting cold feet too: the largest energy producer in the North Sea, Harbour, has been shedding hundreds of jobs, after the company claimed its tax bill, which includes the levy, ‘all but wiped out’ profits last year.

The decision to end the windfall tax in five years’ time looks like an admission that it was hurting British business. What will be interesting to is whether this gets raised in the corporation tax debate that’s playing out among Tories.

Still, today’s announcement is not exactly a tax-cutter’s dream scenario, as the windfall tax is with us for another five years. Labour is calling for an even bigger levy on oil and gas profits, so a change in government could easily see the levy stay. The Treasury also appears to be tinkering, ushering in ‘a new Energy Security Investment Mechanism to protect domestic energy supply’. The tax rate will only fall back to 40 per cent when ‘both average oil and gas prices fall to, or below, $71.40 per barrel for oil and £0.54 per therm for gas, for two consecutive quarters’. This essentially means that the government is designing the tax code to grab profit from companies in the so-called good times, leaving very little room for them to make up for lost profit when more difficult years hit.

This is not the only energy announcement this morning. Shadow chancellor Rachel Reeves has ditched the specific commitment to spending £28 billion a year on green investment. Instead, the amount spent on ‘green jobs’ and technological investment will be made year-on-year, depending on what the UK can afford at the time, with the aim of reaching the £28 billion figure by 2027. Speaking to the Today programme this morning, Reeves insisted she could not be ‘reckless’ with the public finances in the wake of the mini-Budget last year, which Reeves says ‘crashed the economy’.

Of course, the economy didn’t crash (it’s the eurozone, we learned this week, that technically entered recession, not the UK). Rather, we quickly learned the limits on just how much the UK could spend, unfunded, without serious repercussions for borrowing costs. This lesson applies to every political party – it’s smart on Reeves’s part not to try to relearn it any time soon.