A stunning U-turn to ease Britain’s cost of living crisis

For an open fiscal conservative, the Chancellor of the Exchequer has the power to make some pretty big twists. This week, Rishi Sunak unveiled some staggeringly large changes in direction — announcing massive new tax and spending pledges.

The most dramatic U-turn was a £5bn windfall tax on energy companies. Sunak slammed the idea when he unveiled his last budget in March, before being pushed by the opposition Labour Party. “We want to provide the UK with more domestic energy and more jobs. A windfall tax will delay that,” he said. How things change.

The tax is intended to partially fund £15bn support package For families with cost of living questionThat doesn’t change direction: it’s the third time a Conservative government has offered temporary help to families. But it was a sudden acceleration – the support doubled.

Temporary help for families should be widely welcomed. Consumer price inflation is expected to break into double digits. In October last year, the energy price cap on household charges was capped at £1,277. It is expected to rise to £2,800 in October this year.

is a good policy protect the poorest from these shocks. It is also important to maintain support for Ukraine by mitigating the effects of the civil war. It’s not enough to wait for the automatic annual process of benefits to gradually increase to match price increases.

A troubling question for Sunak is why it took so long for the money to arrive: These price increases have been apparent for months. The answer is politics. The windfall tax and new measures aim to outflank Labour, which now holds a solid lead in the Conservative vote.

This is also why, while much of the spending is targeted, each household has been given a £400 discount on their bill – an unnecessary splurge for many who could afford it, which should have been avoid. Against a backdrop of high inflation and a tight labour market, this increase in demand will have to be offset by the Bank of England. It would be better if more resources were devoted to improving welfare benefits for the most vulnerable. It also leads to inflation – but for a better purpose.

This windfall tax driven by the same politics. The Conservatives needed to respond to Labour’s call for a tax on energy suppliers, so used the tax code to get one. “The official Labour view is that the windfall is going to raise £2bn. The way we’ve structured ours means it’s actually going to raise £5bn,” Sunak boasted. He is also considering a similar measure for power generators “Extraordinary profits” are taxed.

These windfall taxes are bad policy.The UK needs to make huge investments in this sector as part of the transition to clean energy vitality economy. This means clear and predictable future taxes. Ministers can make regulations to limit profits in specific sectors – as they have done in the past. But they should do it in advance, not afterward.

In fact, the biggest benefit of these windfall taxes is that they draw attention to the deficiencies of UK energy policy. Over the decades, layers and layers of complex regulatory and tax decisions have been stacked. A price surge is a good time to rationalize this chaos.

This is unlikely to be the last time the UK government will come back to this issue; this week’s packages are one-off patches, and it may be morally or politically obligated to update them when they expire. Indeed, a disturbing theme running through this small budget is that short-term political solutions matter to this administration – effective long-term policies can wait.

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