Trussonomics versus Austerity

Sometime today, the UK’s Chancellor of the Exchequer, Jeremy Hunt, is going to share his Autumn Statement – also known as the “austerity” mini-budget.

Crucially, it’s the second mini-budget for this year.

The first one, brought to you by Trussonomics, shook the market for gilts (UK government bonds) and caused headlines – of the bad sort – around the world.

No doubt, this latest offering from the Tories will be much more… restrained.

Amazingly few leaks, and very rubbery numbers

Interestingly, there have not been many leaks about the contents of the latest mini-budget coming through, which is a miracle given the state of the parliament only 28 days ago.

Apparently, there is a massive deficit in the government’s books: this mini-budget will see higher taxes and spending cuts in an attempt to plug the £55 billion black hole. This is notwithstanding an observation from BBC that the “black hole could actually disappear if government debts were calculated differently”.

That statement along just goes to show how rubbery and disconnected from reality government numbers actually are.

I don’t know a single household or business that could “calculate” their finances differently to wipe out their debts…  

… but back to second-guessing the Autumn Statement.

The short version is that it’s highly likely that people earning over £100,000 per annum will be impacted. Changes to inheritance tax are rumoured as well.

What interests me most, though, is this one question: will the government go after energy companies in the pursuit of windfall taxes?

It might make for good headlines, with the government penalising the oil and gas sector for the greater good. The problem with this strategy, though, is that taxing energy companies will only make your bills even higher than they otherwise would have been in the long run.

Higher taxes won’t solve the problem

Already the UK government has lobbed a 25% “windfall” tax onto oil and gas extraction companies as well as electricity generators in the UK.

There are whispers that figure may be jacked up to 35% today, with the increase tax obligation on this sector set to run to 2028 instead of 2025 as is currently planned, according to Reuters at least.

Supposedly the higher tax grab will bring in £45 billion in the next five years.

Of course, we may or may not have the answer to this by the time you’re reading this.

The answer of whether an oil and gas companies pay extra tax or not doesn’t really matter.

That is because no matter how many taxes the government throws at private companies, those costs will always be passed on to the final consumer.

The problem with the higher taxes isn’t that the government benefits. Higher taxes on highly profitable companies are popular, but they’re bad economics in the long run.

Sure, the government looks as if it’s the good guy, bringing in extra money and stopping greedy corporations from profiting at the expense of the poor.

But really, all high taxes do is alter the flow of capital and encourage malinvestment.

Right now, the last thing that oil and gas companies need is higher taxes.

Ooft. I can almost feel the “no fossil fuels” brigade thump the screen as I type that.

But… hear me out.

While there are meaningful attempts at moving away from fossil fuels, the long-term goal of running an economy on renewables is decades away. Right now, and for the foreseeable future, the lifeblood of the UK economy in terms of energy is oil and gas.

Increasing the taxes on oil and gas companies in the UK is unlikely to stop immediate exploration or capital expenditure plans. Nevertheless, higher taxes deter long-term investment that industry desperately needs to achieve energy security goals for the rest of the decade.

If this new budget were to increase the windfall tax to 35%, oil and gas companies would be left with a headline tax rate of 75%.

That means that, for every pound these companies make, the UK government expects 75 pence.

The North Sea, while still a productive oilfield, is an ageing one.

Extracting from existing wells is becoming increasingly expensive: this is at a time that oil companies are reluctant to invest heavily into finding new wells as the UK pushes ahead with its decarbonisation plans.

Lifting the windfall tax even higher will reduce the chances of energy security for the rest of this decade, see massive job losses and leave the UK even more reliant on crude imports.  

It will only drive up costs for you, as a consumer of energy.

Only governments like losing money

If you want to share in the profits of a company, the government taxing it more doesn’t get the profits to you.

You can buy shares in it for the annual dividends or, ideally, long-term capital growth in the share price.  

That’s how individuals benefit from a company seeing increased profits.

Imposing an enormous tax to stop these companies profiting from short- to medium-term price fluctuations is absurd. Taxing a company because its profits have increased only encourages them to hoard the cash – which is equally unproductive for investors.

We want these companies to reinvest their profits into finding more resources. More oil and gas, for example, extracted, refined and shipped locally, is what will drive costs of petrol and heating down. What we don’t want is more taxes.

I’ll say it again. No matter how many taxes are lobbed onto oil and gas companies, it’s not going to bring the price of the underlying commodities down. Nor will it reduce your energy bills.

At the end of the day, private enterprises are there to make money.

Just as one shouldn’t want the government to prop up a company when it’s failing, one shouldn’t want the government to increase taxes because it’s successful.

The dust will settle on the Autumn Statement – probably within a week or two. At that point it will be worth revisiting the investment case for oil and gas stocks.

Until next time,

Shae Russell
Co-editor, Exponential Investor