Utilities blow cool over windfall tax

Unpopular though it may be to the firms involved, the windfall tax could have long-term benefits

To the wider world, the new Labour Government may have tinged its red sentiments to a deep purple, but to the privatised utilities they remain a firm scarlet.

The utilities’ windfall tax has been one of the Labour defences against Conservative claims that income taxes will go through the roof. It has also become the thorn in the side of privatised heavyweights such as Powergen and BT.

Expected to raise between £3bn and £10bn, the one-off retrospective levy is supposed to compensate for the `excess profits’ enjoyed by privatised utilities because of their favourable market positions.

When announced in the forthcoming budget, the tax is expected to affect the water companies, electricity power generators and distributing companies and, possibly, BT.

Predictably, many in the industries are incensed. BT’s chairman Sir Iain Vallance has led the battle by saying BT will issue a legal challenge if affected harshly. The electricity companies are likely to follow if stung too hard.

The utilities argue against the windfall tax. Some argue for exemption on the grounds that they are not monopolies.

BT may enjoy a 90% market share, but the power generators Powergen and National Power claim they compete, as will the regional electricity companies from next year.

The Engineering Employers’ Federation has joined the fray. In a letter to the education and employment secretary, director general Graham Mackenzie says: `The utility windfall tax will threaten capital investment and jobs in the engineering and construction industry.’

But antipathy towards the tax is likely to change into grudging acceptance. The companies have privately said that when the tax takes effect, it should be phased in over as long a period as possible.

Smaller employers will be more grateful. They hope to take advantage of the schemes the tax will underwrite.

Plans announced in last week’s Queen’s speech include a new programme, Welfare to Work, intended to return 250,000 unemployed to the workplace.

The tax will translate into subsidies of six-month £60 a week rebates for employers who take on a young person unemployed for six months, and £75 if the person is over 25 and has been out of work for more than two years.

The business sector is generally pleased with the idea. In the same letter, the EEF says: `If [the tax] is imposed we understand and appreciate the reasons for using the utility windfall tax. We applaud the fiscal incentives which are to be offered to employers to take on young people.’

What is far less clear is which sectors will benefit. The worst fears are that the programme could be another exploitative Youth Training Scheme that would let employers pay state-subsidised wages for short-term jobs that require no training – which would not benefit engineering.

`Some of the profits from the windfall tax should be directed to economic needs rather than social needs,’ says the Engineering and Marine Training Authority.