GOVERNMENT CONCEDES TO WINDFALL TAX AS FULL REPORT INTO LOCKDOWN PARTIES IS PUBLISHED

GOVERNMENT CONCEDES TO WINDFALL TAX AS FULL REPORT INTO LOCKDOWN PARTIES IS PUBLISHED

This week we got the classic one-two of British politics, a big scandal followed by a big policy announcement. The publication of Sue Gray’s long- awaited report into partying in number 10 painted the government, and particularly the prime minister’s office, in a terrible light which no doubt will have political ramifications down the line. Immediate effects were felt by Rishi Sunak who announced a windfall tax on energy companies to fund a relief scheme for those suffering from high energy prices that only weeks ago was dismissed as damaging and inflationary by the Treasury.

Political scandals come and go along with the politicians engulfed in them and the country usually just carries on. This particular episode demonstrates the damage they do in the short term, however. Supporters of the government point out it got “all the big calls right” but the criticism is the necessary use of “eventually”. A windfall tax and policy support for the cost-of-living crisis is likely good policy, but it would have been better policy a few months ago. The amount of distraction and noise surrounding the PM cannot be conducive to governing.

GLOBAL: SIGNS OF SLOWING GROWTH AS INFLATION ACTS AS A DRAG

Global economic activity showed further signs of slowing as the headwinds caused by the war in Ukraine, supply-disruptions relating to Covid and the rising cost of living impede growth. The UK’s Flash Composite Purchasing Managers’ Index dropped sharply to 51.8 in May from 58.2 in April. Any reading above 50 indicates expansion but business activity has fallen to its lowest level since the lockdown in January 2021. The US and EU also reported a slowdown as Composite PMIs fell to 53.8 and 54.9, respectively.

At the World Economic Forum in Davos this week, IMF managing director Kristalina Georgieva made the case for remaining positive and said that although the war in Ukraine has ‘darkened’ the outlook for global growth in 2022 but overall growth should remain robust at 3.6%. European Central Bank president Christine Lagarde also maintained a hawkish tone as she indicated that the ECB is likely to increase interest rates at its next policy meeting and end negative rates by September to control high inflation.

UK: GOVERNMENT LEANS ON ENERGY FIRMS TO ADDRESS COST OF LIVING

Chancellor Rishi Sunak gave in to demands for a temporary levy on oil and gas companies that have enjoyed huge profits from surging global commodity prices. Oil and gas companies will now need to pay a 25% levy on surplus profits they have made due to recently high commodity prices. To protect investment, the government announced companies that invest their profits will receive an 80% tax relief on capital spending. The levy will raise around £5bn which will be used to help offset the rising cost of living, taking the total ‘cost-of-living’ support to £37bn this year.

Electricity companies were left out of the windfall tax, despite speculation, but the chancellor did not rule out a levy as part of a review of energy generation. Power company shares fell ahead of the announcement. Drax, the owner of the UK’s biggest power station, saw its shares fall 16% while Centrica and SSE fell around 10% and all failed to recover, while oil and gas producers were left unmoved.

COMMODITIES: RUSSIA ACCUSED OF USING WHEAT AS PART OF WAR EFFORT

Russia has been accused of using its blockade of Ukraine’s ports and restricting its grain exports to help finance its invasion. Russia and Ukraine are two of the world’s largest wheat exporters and the invasion has helped drive the price up by almost 50%. The higher prices have helped push Russian government revenues from exports to $1.9bn so far this year. Russia has also been accused of blackmail over its attempts to exchange wheat exports for international political support.

Many countries had been looking to India to make up any shortfall but this week the Indian government banned wheat exports to add to its recent ban on sugar exports. The EU has announced plans to allow additional grain production to offset any shortfall next year, but the risk of hunger and political instability remain in the short term. Sri Lanka has seen political unrest this year in part due to food shortages and the UN and the Egyptian government recently warned of widespread starvation if wheat supplies are disrupted.