Margaret Thatcher supported windfall taxes – but it won't work this time

Former Ministers say even the Iron Lady would tax the oil giants – but was she right to last time?

Margaret Thatcher
Banks hit with 2.5pc windfall tax in 1981 Credit: Keystone/Getty Creative

Advocates of a windfall tax on oil companies have invoked the spirit of Margaret Thatcher, with former Treasury Secretary Jesse Norman saying even the Iron Lady would take a cut of excess North Sea oil profits to ease living costs.

Mr Norman said arguments against a windfall tax were “very weak”, as Chancellor Rishi Sunak comes under growing pressure to raise extra funds to help struggling households. 

But what windfall taxes have been introduced in the past, did they work and what is different this time around? 

Thatcher's 1981 tax on bankers 

In 1981 Margaret Thatcher levied a 2.5pc windfall tax on banks who were making vast profits on their loans, after interest rates hit 17pc, while paying out little or nothing in interest to savers. It raised around £400m, or £3bn in today’s money, according to the Institute for Government think tank. 

The government of the day, which was facing record levels of inflation and vast public debt, much like now, also levied a supplementary petroleum duty on oil companies which were seen to be profiting from higher commodity prices. 

The argument in favour of the windfall tax at the time was that banks’ excess profits were a direct result of the government’s decision to raise interest rates to record levels. 

Back then the government set rates, while today rates are decided by the independent Bank of England. Affording monopoly drilling rights to certain oil companies had also helped to generate excess profits. The money raised was used to balance the public finances after the recessions of the 1970s and early 1980s.

Blair's 1997 windfall tax on utilities 

A similar justification was used when Gordon Brown levied a £5bn windfall tax on private utilities companies in 1997. Tony Blair’s Labour argued the previous government had privatised national utility companies at too low a price, allowing the newly private companies to make excess profits at the expense of the taxpayer and customers.

The tax was calculated as 23pc of the value of the difference between the companies’ value at the time of privatisation and what they were worth four years later. The money raised was used to provide support for the unemployed via the “welfare to work programme”, as well as to provide extra funding for education. 

Critics of the tax argued the policy hurt pensioners and shareholders invested in the firms. 

Labour has said another windfall tax is now needed to help families with high gas bills. It has proposed upping taxes by 10 percentage points on the profits of North Sea oil firms, after their profits soared on the back of high oil and gas prices, as the chart above shows. It says this would raise £3bn, which could be handed out to households to take the sting out of rising bills. 

The proposal has won more backers amid rising energy and oil costs, which have helped to double BP's profits for the first three months of the year to £5bn. 

What has changed this time?

Those who argue against a windfall tax have said the key difference now is that companies are not making excess profits because of government policy, but because of global economic conditions and worldwide supply and demand issues. 

Andy Mayer of the Institute of Economic Affairs think tank said: “A one-off tax on excess profits derived as a direct result of government policy is very different to simply taxing companies that are making money because it looks like a convenient way to source extra revenue.” 

There is a temptation for governments to make supposedly one-off taxes permanent. In 2011 George Osborne increased the “supplementary charge”, an additional tax levied on oil corporations, to 32pc, from 20pc, saying in his Budget “when oil and gas prices'' were high, it was “fair that companies should contribute more”.  A 10pc surcharge still exists today.

The higher tax lasted until 2015, and it could provide the blueprint for Boris Johnson and Rishi Sunak to raise taxes. Osborne’s increase raised some £2bn a year according to the Economists Observatory research group.

This, they say, could result in greater reliance on foreign energy sources and ultimately end up increasing bills for consumers, while diminishing the profits of shareholders, including pensioners. 

Offshore Energies UK, a pressure group, has said a windfall tax could add £700 to consumers’ annual heating bills if investment declines and oil stocks plummet. North Sea oil production is already in decline, as the above chart shows, falling by around a fifth since 2019. 

The Taxpayers' Alliance pressure group has said the trade-off is simply not worth it, with the amount raised just "a drop in the ocean" compared to the rising cost of electricity and gas, which is expected to be £38bn more in 2022-23 than the previous year, according to Aurora Energy Research. 

The proposed levy would raise just a fraction of the £9.1bn energy bills rebate support the Chancellor announced for households in February.

License this content