UK and Hungary governments launched windfall taxes

The governments of the UK and Hungary launched windfall taxes to tackle the rises in living costs because of soaring energy prices.

In the UK, chancellor Rishi Sunak announced a 25 per cent energy profit levy, which increased taxes for North Sea oil companies from 40 per cent to 65 per cent. The levy could be in place until December 2025. Experts say the increase raises £5 billion in extra revenue, which the government will use to cut fuel prices for energy customers.

In addition, Hungary’s government announced its own €5 billion package of windfall tax measures. The bulk of that levy hit banks and energy companies, but it also affected a wider range of industries.

One-off taxes?

Windfall taxes are supposed to be a one-off levy on any industry. In practice, governments use them periodically to fix specific economic problems.

For example, the conservative government created a “special tax” (petroleum duty) in 1981 due to oil price increases. It did so again when George Osbourne was chancellor in 2011 to raise an estimated £2 billion from the sector. Osbourne said: “When oil prices are high, as now… UK oil and gas production is more profitable at such times, so it is fair that companies should contribute more.”

The US also used the instrument to tax oil companies in 1980, according to research by the Economic Observatory.

Impact

The main argument against a windfall tax is that it creates uncertainty for the companies affected about their future tax liabilities. That in turn, could affect a company’s willingness or ability to invest in future projects.

“By definition, windfall taxes are unpredictable –- and so would challenge investment in home-grown energy,” BP’s CEO Bernard Looney said at BP’s AGM. “We know that from past experience for the whole of the North Sea sector and supply chain.”

In fact, BP said that it would invest £18 billion in the UK over the next decade whether there was a windfall tax or not.

On the other hand, windfall taxes are seen as fair because the gains (from higher oil prices, for example) are accidental, say analysts. Windfall taxes redistribute wealth gained from unforeseen circumstances to solve the problems those events create elsewhere.

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