James Daley: Why a windfall tax is not the answer

Gordon Brown unveiled a new range of measures to help those struggling with soaring fuel bills this week – all of which were thoroughly underwhelming in the face of the enormous energy price hikes households have suffered in the past nine months.

The promise of a few extra pounds a week if we have a cold winter, along with a few extra discounts on insulation materials, will not go very far to help families already struggling with 50 per cent increases in their energy bills in 2008. It will help people to get their energy bills down for the longer term, but that is only half of the problem.

Although more than 90 per cent of the £1bn package will be paid for by the energy companies, there was disappointment from the left-leaning side of the Labour Party that Mr Brown stopped short of hitting energy companies with a full-blown windfall tax – which could have raised more money, and gone further to help those already making the choice between heating and eating.

While I agree that Thursday's announcement does not go far enough, I'm relieved that the Government no longer resorts to windfall taxes to plug the holes in its budget.

Although it's true that the energy companies have made great profits over the past year, most of these have not been at the expense of the UK consumer. As gas prices have risen, they have passed these rises on to their customers, but their margins have stayed relatively steady.

Meanwhile, the bumper profits that have dominated the headlines have been made mainly from their wholesale divisions – a boost from which the UK Government itself has been one of the major beneficiaries. UK oil and gas producers are taxed at a rate of between 50 and 75 per cent of their profits – and as profits have risen, the Government has seen its tax take from these companies go up by more than £10bn. So it is hard to make the case that these companies are not being taxed enough.

Two years ago, to quell the energy industry's dissatisfaction about such punitive tax levels, the Government promised that it would not raise taxes on the industry during the lifetime of the current Parliament – a promise that it was right not to break by bowing to public pressure and imposing a new windfall tax now.

What kind of message does it send to businesses generally if the Government goes round conducting smash-and-grab operations every time they have a good run, reneging on promises as they go? And let's not forget that any windfall tax would also hit the companies' shareholders, many of whom are pension funds looking after the retirement pots of millions of workers.

What's more, if Britain is to have any chance of meeting its ambitious targets to produce one-third of its energy from renewable sources by 2020 (compared to 5 per cent today), it's going to need to keep the energy companies on side. By the Government's own admission, more than £100bn of investment is required to help meet these targets, so if it continues to tax away all the utility companies' profits, there's no chance that investment on this scale can be made.

The real crime of the latest energy crisis is that while the Government has been raking in billions of pounds of extra tax, it has used barely any of this to help those who have been driven back into poverty by fuel prices. If there should be a windfall tax on anyone this autumn, it should probably be the Government.