91探花

The King’s Speech outlined a total of 39 bills last week covering a broad range of legislative plans. The initiative to which the government has committed the most spending (£8.3bn), is Great British Energy, a publicly owned clean power company. However, some may have a degree of scepticism as to the robustness of the tax revenue forecasts earmarked to fund this initiative.

Labour have stated that the funding for GB Energy, and other measures included within its Green Prosperity Plan, will primarily comprise the additional tax revenues from the increase and extension of the Energy Profits Levy (also known as the “windfall tax”) being £6bn over five years, with the balance coming from borrowing. The windfall tax is a temporary tax levied on the profits of oil and gas companies. Currently this is set at 35% and Labour intends to increase this to 38%, extend it to the end of this Parliament’s term and remove what it describes as ‘unjustifiably generous investment allowances’. 

The assumptions underlying the £1.2bn per annum increase are not immediately obvious but there appears to be a belief of an increase in the amount of taxable profits, which might not stand up to scrutiny when factoring in the possible behavioural response to the proposals and the resultant shrinkage of the tax base.

Anecdotal feedback from the market supports the concern that the proposals may not raise the forecasted funds. Oil and gas fields need ongoing drilling to maintain production levels. Without the incentive to continue drilling, production will naturally begin to decline more rapidly which in turn will lead to a decrease in revenue and taxable profits. So, without a major upturn in prices, the tax base may decline over the five-year tax forecast period.

In addition to the potentially flawed assumptions about the tax base, there is the fact that an opposition policy costing prepared by the previous Conservative government in January 2024 indicates the predicted tax revenues are roughly half of those published in the subsequent Labour manifesto (June 2024). 

Using the data from the public sector finances bulletin released by the Office of National Statistics on 19 July 2024, the revenue from this tax has been on a downward trajectory since its inception, seeing a between 2022/23 and 2023/24, and a 15% decrease between average quarterly take in 2023/24 versus estimated figures for Q1 2024/25. The historical trends support the concerns about the shrinking tax base and cast further doubt on the assertion of a £1.2bn per annum windfall tax increase.

In short there is a lack of clarity over how the numbers are compiled and prima facie they do not appear to stand up to scrutiny. Simply put, unless the return on capital from GB Energy (the recipient of the forecast additional tax revenues) outperforms the private sector early stage returns in the renewables sector, channelling these forecast revenues for this initiative may exacerbate the budgetary deficit with increased borrowing likely to fund any shortfall.