Rishi Sunak is on the ropes, and not just over allegations that he has been less than transparent about his and his wife’s personal finances.
The Chancellor looks as if all he needs is a top hat and dressing gown to complete his transformation into a tough Victorian financier, aloof from the troubles of the common man. Details of his expensive homes, cars and vacations abroad only reinforce the image of a minister who is out of touch with his constituents.
As he listened to phone calls on the radio during the day, he heard the personal stories of hungry and shaking families devastated by the cost of living crisis. These callers are selling cars, not buying them. For cost reasons, they delay visits to the laundromat and default on debts.
Municipal tax increases dating back more than five years are also helping to push up the cost of living, as is income tax threshold freezes. An increase in Social Security this month is another added cost, although the Chancellor will point out that she is excluding low-income families. He forgets they are already under water after losing £20 a week on their universal loan income last year.
To avoid criticism, Sunak draws attention to the one important element of the economy judged to be a success – the job market. Almost everyone who wants a job has a job. what would be better
Aside from the fact that unemployment figures are flattered by 500,000 people leaving the workforce and that a lack of adequate sick pay means many people with Covid are working when they should be recovering at home, the fact that the most people about their dire circumstances are at work.
Most analysts are expecting this week’s jobs numbers from the Office for National Statistics, covering the three months to February, to register another month of falling unemployment. But the data will show that inflation-adjusted wages are also falling.
In January, non-bonus salary growth for employees was 3.8%. Meanwhile, the consumer price index rose by 5.5%. The situation in February is likely to worsen as wage growth stagnates and inflation, which we already know to have hit 6.2% this month, continues to climb to 8% or more.
In the fortnight since his spring declaration, Sunak has refused to take any further action to ease this financial burden on households. He will not reintroduce the general loan cut of £20 a week or increase the £150 council tax refund. The £200 cut in energy bills in October is still a loan. He says the government’s finances are precarious given slightly rising debt burdens.
One answer could be to impose a windfall tax on North Sea oil companies that could easily raise £4bn to offset the worst of fiscal inflation. But again he refuses.
Business secretary Kwasi Kwarteng has spent more time than Sunak rejecting opposition parties’ calls for such a tax because they misunderstand how businesses work.
Let’s take this claim head-on and ask what an unexpected win means to a company. This question was asked in the 1990s by economist Olivier Blanchard – former chief economist at the International Monetary Fund and still a driving force at the Peterson Institute in Washington today. He noted that windfall profits were not used by companies to fund investments because, by definition, they were unsustainable. Investments are planned over five years or more and are based on projected earnings for that period, particularly in the oil and gas industry.
However, if the excess cash were retained rather than invested, the company could become a takeover target. Another option would be to reward bosses with the windfall, but the bonuses would be undeserved and shareholders would rightly object.
After examining a number of situations where companies have been showered with cash, he concluded that the only way to handle windfall profits was to pay them out to shareholders, unless there were debt holes too Plug.
The North Sea development companies, which are now all swimming in cash from the high oil and gas prices, are likely to follow the same course.
So it is Kwarteng who misunderstands the deal, not Labor or the Lib Dems, when he says an unexpected tax would undermine investment. He also misunderstands the stock market when he says retirees are shareholders and miss out on rising stock prices. How can this be when pension funds own less than 10% of the UK market?
All good chancellors steal the best policies from the opposition, and this is an opportunity where Sunak could do himself a favor. Oil must stay in the ground and excess profits should be reclaimed from those who made them – the public.
Surely the government will do something. If it doesn’t tax the companies that benefit most from the war in Ukraine, May’s local elections could be a game changer.