Labour's misguided plans for a windfall tax

In the midst of all the Conservative party’s recent bluster about the tax implications of a Labour government, one accusation continues to find its target. This is that Gordon Brown’s plans for a tax on so-called “windfall” profits would fall heavily and unfairly on the privatised utilities, and in the process would be extremely damaging to the very consumer interests that it pledged to protect.

Details of how the tax is to be levied remain sketchy. But, assuming that Labour will target total above-average shareholder return (dividends, share repurchases and equity price rises less the average for the market as a whole), the party runs the risk of penalising present shareholders (mostly pension and insurance funds) to the advantage of those real beneficiaries (mainly smaller shareholders) who sold out earlier.

Recent studies show that using this method could raise a one-off total of as much as #30bn, well on the way to funding Labour’s plans to combat long-term youth unemployment. Although some utility companies have prepared for this eventuality by putting cash aside, the inevitable consequence would be that spending on upgrading distribution networks will suffer.

In addition, it is not at all clear that fresh equity capital would be available for these industries which investors would naturally perceive as having limited growth prospects.

At a time when Labour shadow ministers are excoriating water companies for not spending enough on stopping leaks, this is not just hypocritical it is plain illogical as the consumer will be the long-term loser.

It would be much better to let competition chip away at utility profitability – at the same time bringing down prices to the consumer. While this would undoubtedly work in the case of the gas, electricity and telecommunication industries, other industries such as water and airports would continue to rely on the regulator to guard consumer interests – something which they have become increasingly adept at doing.

This, more than half-baked plans for a windfall tax, would show the depth of Labour’s conversion to a vigorous market-led economy.