Russ Mould, investment director at AJ Bell, comments on the windfall tax and new Investment Allowance for oil and gas companies and their impact on the Government’s energy transition policy:
“Believers in free markets will tell you that the best cure for high prices is high prices, as they persuade people to consume less or encourage suppliers to produce more (or both). With fuel and energy (and food for that matter), it is not quite so simple, as people still need to move around, to heat their homes and get their daily intake of calories. As a result, demand for energy is relatively price inelastic – people spend on it almost regardless of price.
“As the public clamour for someone, somewhere to do something grows, it is therefore not surprising that the Government’s latest policy U-turn should focus on a windfall tax.
“A windfall tax and targeted support for those that need it the most looks like good politics and it may provide economic relief too, in the near term.
“However, this short-term solution must be complemented by long-term planning and the Chancellor has gone some way to addressing that with the new Investment Allowance which is designed to incentivise oil and gas firms to invest by saving them 91p via tax relief for every £1 they invest.
“Moreover, the UK’s energy policy appears confused. In the run up to COP26, the Government was understandably beating the renewables drum and it even blocked the development of a gas field in the North Sea by Shell. In its wake, it has cut air travel duty for domestic flights, cut fuel taxes to effectively subsidise car travel and now used the windfall tax to fund further fuel consumption. If it does not help stimulate supply, then demand will rise and the current problem of lofty prices may only be perpetuated, so a clear, long-term policy on how best to manage the gradual transition from hydrocarbons to renewables is required. Political grandstanding and would-be acts of escapology are of little use in this respect.
“From the narrow perspective of financial markets this move may have long-term ramifications, too.
“It was the former chairman of chair and CEO of Citicorp, Walter Wriston, who argued that capital will go where it is wanted and stay where it is well treated. It is not clear how retrospective windfall taxes satisfy that particular law and financial markets may take fright accordingly, especially if we get a repeat performance further down the road.
“If Mr Johnson does not wish to heed the words of a banker, given his chequered relationship with business in the past, perhaps he might instead think back to the words of his hero Winston Churchill, who once acerbically noted, ‘I contend that for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle’.
“Whatever path the Prime Minister takes, investors in financial markets will have much to ponder, even if their selfish requirements may pale in the eyes of many when compared to the social hardships suffered by many in the face of rising food, fuel and energy prices.
“Investors face the threat of inflation (or stagflation) on one hand and more aggressive Government redistribution of wealth on the other. After 40 years or so where capital has had the upper hand over labour, the tables may be turning and for the sake of social cohesion this may be for the best, as the gap between the haves and have nots is uncomfortably large. This takes us back to the 1970s, a time when capital preservation was difficult and capital accumulation even more so. After a decade of bounty (or even longer if you look at the near 40-year boom in bonds and share prices) perhaps things are going to let an awful lot harder from here, especially in real, post-inflation terms, and a fresh perspective on asset allocation may be required. The dream team of a 60-40 equity/bond asset allocation may be in for its biggest test in a long while.”
