Last week, Chancellor Sunak gave in to calls from the PLP, echoed in the media, to impose a windfall tax on energy companies. The measure had nothing to do with economic logic, and everything to do with appeasing petty-bourgeois moral outrage at the fact that large energy companies have been making large money profits, as inflation surges, and gas and energy prices, in particular, have risen sharply following US/NATO measures to boycott Russian oil and gas supplies to Europe. In that respect, its all of the same kind of reactionary, petty-bourgeois attempts to hold back rational capitalist development of large-scale capital, in favour of some rose-tinted liberal view of a golden age of free markets, and the noble small producer. As I set out in my series of posts on Lenin against economic romanticism, it is the same kind of reactionary petty-bourgeois, mentality that was purveyed by the Narodniks, and by Sismondi, and Proudhon, before them.
Windfall taxes are a bad idea, because they are arbitrary, but for a Marxist, more importantly, those like the ones imposed by Sunak, are invariably aimed at big capital, as a form of punishment for its ability to make large profits, due its superiority over small capital, and its greater levels of efficiency. But, its precisely that superiority of big, socialised capital that Marxists see as being progressive. It is a harbinger of the future socialist society. As Lenin said, far from wanting to hold it back, to punish it with taxes or other such measures, we welcome its further development, as part of the process of faster development of its contradictions, and it being transcended by socialism. Rather than taxes to punish its development, what Marxists seek is rather workers control over it, because as socialised capital, it is, in fact, workers' collectively owned property already. As Marx put it, they represent the transitional form of property between capitalism and socialism.
Not only are these windfall taxes economically irrational, and arbitrary, but in the context of claims to be trying to deal with rapidly escalating living costs, they at best do nothing, and at worst, make the situation worse. The high levels of inflation currently being suffered are a consequence of the vast amounts of liquidity that has been injected into the system over decades, and particularly that injected in the last two years, during lockdowns, and which is now feeding into the real economy, whereas, in the past, it was contained within the sphere of financial and property markets, massively inflating asset prices. A windfall tax on energy companies does nothing to deal with that underlying cause of inflation, whatsoever. You might as well say there should be a windfall tax on farmers, because food price inflation is running at 20%, or on used car dealers, because used car prices are rising at 40%! And, of course, it was the PLP, along with the media that was so insistent upon having lockdowns, and then needing to pay people not to work or produce anything!
The reason why energy prices have risen by even more than other prices is that, as lockdowns across the globe ended, the demand for energy rose sharply, and other frictions still existing as a result of lockdowns and associated measures have caused frictions in all sorts of movement of goods that has meant that various forms of transport were in short supply, either because of lack of equipment or labour, ports became clogged, and all this pushed up costs at all stages of the production and distribution network. All of the available excess liquidity was then able to flow into those spheres, enabling prices to soar, as supply failed to expand fast enough to match demand.
But, on top of that, we have had all of the measures introduced to boycott Russian energy supplies. Its true that energy prices rose sharply even before the Russian invasion of Ukraine, but part of the reason for that is set out above. However, the sanctions against Russia themselves were introduced long before Russia invaded Ukraine. The US, as it sought to develop its economic war against Russia/China continually pressed for Germany to cancel the Nordstream 2 gas pipeline, even years before Russia invaded Ukraine, and Germany eventually complied. Under pressure from the US, EU countries have sought to boycott Russian oil and gas, meaning they have had to try to source supplies from elsewhere, at much higher costs.
Again, the windfall tax on energy companies will do nothing to compensate for the economic self-harm, caused by the economic war that US/NATO is engaged in against Russia/China, which has led to those higher prices. And, the same is true about the generally higher costs, and increased frictions that Britain faces in relation to all of its supplies resulting from the idiocy of Brexit. Brexit increases costs, introduces unnecessary frictions in the movements of goods and labour, and so reduces profits, which firms seek to compensate via higher prices, which in an inflationary environment, with excess liquidity, they have been able to do. But, the PLP is not calling for an end to Brexit. On the contrary, they have become ardent Brexiteers, and nationalists to go along with their overall reactionary, petty-bourgeois politics. A windfall tax does nothing to deal with that either.
In fact, a windfall tax exacerbates the situation, because it acts as a disincentive for future investment, which Sunak's, measures only partially counteract. By introducing arbitrariness, windfall taxes, act to dis-incentivise investment in general, because they create uncertainty, and greater irrationality. For example, if you are going to introduce a windfall tax on energy companies, because, as a result of inflation and so on, they are currently making large money profits, are you then going to reverse that tomorrow and pay out large subsidies to them, because energy prices have cratered, leading to large losses. After all that is the nature of all primary product markets, which go through alternate periods of feast and famine. For example, its only a couple of years ago, on April 20th 2020, that oil prices actually went negative, falling to a price of -$37 a barrel! Back in the 1990's, oil prices also fell to just $10 a barrel. A windfall tax on high profits, but no equivalent subsidy when prices are low, simply means that companies will seek to invest elsewhere, either as energy companies elsewhere in the world, or else simply moving capital to some other sphere of production. The result is a reduced supply of energy, compared to what it would have been, and consequently higher prices.
But, of course, this reactionary petty-bourgeois mentality has been seen in other spheres too. We have the proposals to tax more heavily online retailers and so on, because they make higher profits than bricks and mortar retailers, who have to pay taxes and higher rents on their High Street premises. It is a tax on development and efficiency, and a reactionary attempt to hold it back.
The opportunism that is really behind this action – opportunism by the PLP who proposed it as a cheap attack on the government, and as an alternative to a socialist, or even progressive social-democratic response from them; opportunist by the media, which likes to see itself as championing some crusade on behalf of “the people”; and opportunist by the government, which, as with lockdowns, caved into it for fear of standing against “public opinion” - was ineffectively covered by Sunak, in arguing that the proceeds could be used to subsidise consumers facing the higher prices. Again, the argument is irrational.
On the one hand, as set out, none of these measures do anything to deal with the underlying cause of the inflation, which is the vast amount of excess liquidity that the Bank of England, and other central banks have pumped into the system over the last three decades, or even just over the last couple of years. With inflation at double digits, the Bank of England has its policy rate at just 1%, meaning a real rate of -9% at best. It has not taken any decisive action to remove excess liquidity from the system, so as to begin reducing UK inflation, a process that takes two years from any such action anyway. Nor do they do anything to deal with the particular aspect of energy price rises, which is the reduction in supply resulting from the US/NATO sanctions and boycott of Russian energy. On the contrary, the arbitrary nature of a windfall tax is likely to lead to lower production and supply than it would otherwise have been.
So, having done nothing to reduce the underlying cause of inflation – excess liquidity – and done nothing to reduce the cost of energy production and increase energy supply, the measures then act to increase monetary demand for energy still further, compared to what it would otherwise have been, be giving consumers large windfall payments from the Treasury coffers. Economics 101 should tell Sunak that restricting, or at best not increasing, supply, whilst subsidising, and so increasing demand, particularly in conditions of excess liquidity, is bound to lead to even higher market prices for energy!
In the absence of taking any effective action to stop the inflation, by meaningfully raising official interest rates, and measures of Quantitative Tightening, or measures to reduce the cost of energy production, and increase supply, or to reduce the demand for energy, by, for example, undertaking a massive programme of home insulation, conversion to heat exchangers and so on, then, of course, those on fixed incomes need some means of continuing to pay their energy bills. Indeed, with inflation continuing to soar, they need means of paying all their bills. As I have set out before, workers will undoubtedly begin to get above inflation wage rises, so as to protect themselves, but as those wage rises squeeze profits, firms will seek to compensate by raising their prices, and with excess liquidity already awash in the system, they will be able to do so, pushing inflation higher still. For those workers in small businesses, and in precarious, unorganised spheres, a big rise in the Minimum Wage, based upon a Minimum Monthly Wage, would be an effective solution, and one that the TUC should demand, and begin to organise a General Strike to obtain. And, with double digit inflation, rising higher as time passes, annual wage and benefits rises are no longer sufficient. We need a sliding scale of wages, benefits and pensions, that rise in line with a workers cost of living index, calculated by committees of workers and socialist economists, on a monthly basis.
Sunak already diddled millions of pensioners out of money last year, by failing to honour the triple lock on pensions. Pensions and benefits rise in line with CPI, rather than RPI, as they used to do, and RPI is rising more steeply than CPI, as it usually does, which is why the government moved to CPI indexing. But, also, the indexing is based on the data in September, whilst the increments only take effect from April. But, there has been a huge spike in inflation between September last year, and April this year, meaning, again, that the increase in pensions and benefits is only a fraction of the actual increase in prices.
But, the government has a similar problem. On the face of it, inflation has given it a boon too, as with the energy companies. Higher money prices, means higher money VAT and Excise Duty receipts; higher money corporate profits, higher money Corporation Tax receipts; higher money dividends payments, and wages, higher money Income Tax receipts. So, the government appears to be more flush than it otherwise would have been. However, the government does not just receive tax revenues that have been inflated, it also spends huge amounts of money, accounting for about 40% of the economy. The prices of all the things it has to buy have also increased by 10% plus as a result of that same inflation, and much of that is not accounted for in the data, as that big increase in inflation has occurred in the earlier parts of this year. Given that central and local government is renowned for not paying its bills for several months, that increase in spending is yet to hit public sector budgets.
Indeed, the pubic sector, is also renowned for suffering higher rates of inflation than other parts of the economy. If you work in a local council, the NHS, or some other public body, its not your money you are spending, and so you tend to be less diligent in the way you spend it, and suppliers know that. Although public services, as services, tend to be very labour intensive, they also consume vast amounts of materials, energy and equipment. Hospitals not only consume large amounts of materials in their construction and maintenance, but also consume large amounts of fixed capital equipment, as well as large amounts of energy, to heat and light large buildings, to power equipment and so on, and they require lots of materials from medicines and medical supplies, to bed linen, cleaning materials and so on. The prices of all those things will have risen, by anything between 10 and 20%, and so, just to stand still in real terms, the NHS budget is going to need to increase in nominal terms by around 20% in the coming year, or about £30 billion. That is a vast amount of additional spending for the government to have to find from its revenues.
But, a similar thing can be said for schools, for road building, and so on. The government may hope that public sector workers will continue to accept way below inflation wage increases, but that is unlikely, because, for one thing, with more job vacancies than unemployed workers, it becomes increasingly possible to just to move into other jobs paying higher wages, but, even with reluctant and timid union bureaucrats, pressure from workers in heavily unionised and organised public sector unions, seeing high and continuing levels of inflation, are going to press them relentlessly to protect their interests and take action to win rises that give protection against it. And, with inflation set to continue to soar into the rest of the year, when September comes, the basis for determining the rise in pensions and benefits for next year is going to be much higher than this year, meaning that the government is going to have to find tens of billions extra to finance those increases.
Government borrowing is already at extremely high levels, as a result of lockdowns, and the subsequent income replacement policies, and inflation is going to cause it to rise much higher still. Rising interest rates mean that even that causes the governments payments to rise, as it must pay out much more just in interest on its existing debt, even before it adds to it. With the chances of higher taxes, being small, as they would be seen as yet another burden placed on a populace already suffering under the weight of high levels of inflation, the government will have to again resort to even more borrowing, which, in turn, will push interest rates, and its debt burden higher still. To avoid that, it will turn to the Magic Money Tree, the Bank of England, providing it with the liquidity required to cover its spending, and that additional liquidity, fed directly into the economy, and consumption, will push inflation higher still, giving yet another twist into this spiral of inflation, higher costs, higher spending, increased debt, increased borrowing, higher interest rates, more money printing....
It will all end in tears.
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