Economy

Rishi Sunak’s windfall tax on oil and gas profits is set to break records, showering the UK government with more revenues from the North Sea than at any time since fossil fuel reserves were discovered there over 50 years ago. The almost £13bn to be raised in total this year exceeds the next highest figure of £10.5bn in 2008-09, according to the Office for Budget Responsibility, the fiscal watchdog. Separate data from HM Revenue & Customs, which goes back further, suggest the windfall will top the highest ever revenues collected in the past, which was close to £12bn both in 2008-09 and in 1984-85, when tax rates sometimes exceeded 80 per cent.With oil and gas prices rising far higher than anyone expected in the past year, the Treasury has not only found that the North Sea is once again something of a cash cow, but that it is facing calls for a fundamental overhaul of the UK’s taxation of fossil fuel extraction. Wood Mackenzie, the global energy consultancy, is suggesting that tax rates in the North Sea should vary automatically with the price of oil and gas so that companies would face a predictable system rather than the whims of politicians. Separately, the Institute for Fiscal Studies criticised Sunak for making the investment allowances in the North Sea too generous so that heavily loss making projects would be viable after tax — doing no good to the environment or taxpayers. The scale of the change in income from the North Sea is remarkable. From negative net tax revenues in 2015-16 and 2016-17, the chancellor now hopes to raise £13bn, the highest ever in nominal terms. After adjusting for inflation or as a share of national income, however, the peak of North Sea revenues came in the mid 1980s, helping to finance the Thatcher government’s economic reforms and income tax cuts. At there peak revenues accounted for 3 per cent of gross domestic product, compared with an expected 0.5 per cent in 2022-23.

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The Treasury’s hopes of raising £5bn from the windfall tax are based on the OBR’s forecast from the spring that the existing North Sea tax regime would raise £7.8bn this year, assuming an oil price of $94 a barrel and a wholesale gas price of £2.80 a therm.Market prices have not moved much since then — gas has become cheaper, while oil more expensive — so the main calculation assumed that a 25 per cent surcharge would raise the same amount proportionately as the existing 40 per cent rate, with some adjustments for the slightly different way the new tax will work. That brings the Treasury’s estimates to £5bn, although the receipts will depend on the path of profits and the level of production this year. Stuart Adam, senior economist at the Institute for Fiscal Studies think-tank, saw little reason to disbelieve the OBR’s revenue forecast methodology. He said that the 65 per cent total rate of tax on profits was “broadly typical of the historical rates of North Sea taxation since the 1970s”. But even though the new tax rate is broadly in line with the past, oil and gas producers have complained this week that they face destabilising chaos in taxes, which undermines long-term financial planning.An alternative may be to introduce fixed tax bands in advance — low rates when oil and gas prices are low, higher rates when oil and gas prices are high — so companies have certainty over the rates they will face. The UK oil, gas and renewables lobby group, Offshore Energies UK, warned this week that windfall taxes risked creating a climate of uncertainty that “could undermine investments for years ahead”.“Right now, the key task is to prevent a flood of investment formerly earmarked for UK energy projects now being diverted to Norway, Saudi Arabia, and Qatar,” said Deirdre Michie, OEUK’s chief executive.Wood Mackenzie suggested this week that tax banding would give greater clarity to the sector.“No oil and gas company is going to come out and ask to be taxed more,” said Graham Kellas, head of fiscal policy. “But tax bands would deliver one thing the industry does ask for, and that’s predictability in the fiscal system to enable long-term planning.” But the amount of tax taken through the levies could also be lower than predicted, perhaps counter-intuitively, if investment should rise in the North Sea. To offset the impact of the windfall tax, Sunak included a so-called “super deduction” allowing companies to offset up to 91 per cent of taxes paid under the levy against new investment.This gives companies the option of ploughing their windfall profits into future oil and gas production, boosting UK supply security and potentially lowering prices, rather than handing them over to the taxman.Adam, at the IFS, was critical of this incentive for oil companies, describing the investment allowances in the new windfall tax as too generous. “A massively lossmaking investment could still be profitable after tax,” he said, adding that it was, “hard to see why the government should provide such huge tax subsidies and thereby incentivise even economically unviable projects”. More

“I thought the Fed’s posture at last was broadly appropriate,” Summers told Bloomberg Television’s “Wall Street Week” with David Westin. “Now the question’s going to involve carrying through.”Fed policy makers backed raising interest rates by half a percentage point at the June and July meetings after a hike of that magnitude on May 4, minutes of this month’s gathering showed on Wednesday. “Many” officials thought they’d then be well positioned to “assess the effects” of their actions and the extent to which policy adjustments were needed, the minutes indicated.Summers, a Harvard University professor and paid contributor to Bloomberg Television, suggested that the tightening in US financial conditions could shape how high the Fed needs to take interest rates.“I’ve been uncertain as to where interest rates will have to go to achieve” an economic downturn that sends unemployment higher — a necessary condition for pulling down inflation. “Particularly all that’s happening that’s been adverse for financial conditions, in the stock market and in credit markets.”CBO CriticismThe S&P 500 Index is down about 14% from its high in early January, while yields on investment grade corporate bonds have surged by almost two percentage points since the end of last year. Summers separately blasted the Congressional Budget Office, a nonpartisan arm of the federal legislature, for what he saw as inaccurate economic projections in its latest release this week.“I’ve always thought of the CBO as a bastion of credibility” with regard to their projections, Summers said. But “this is their least plausible one in the 40 years that I’ve been watching.”While the forecasts were prepared months ago, it appears that the CBO is “the last holdout on ‘Team Transitory,’” Summers said, referring to those who anticipated high inflation to be a blip as supply chain woes resolved and price gains came back down.The CBO predicted that the year-over-year inflation rate will drop to 4% by the fourth quarter of 2022, and to 2.3% a year later, as measured by the price index for personal consumption expenditures. That gauge saw a 6.3% jump in April, a release showed Friday.It’s “conceivable” that supply-side shifts do help bring down inflation despite the “overheated” economy, Summers said. “How they could regard that as the most likely outcome is not something I can understand.”A good rule of thumb in forecasting is to ensure that the upside and downside risks are equally plausible, Summers said. He said that 4% inflation is “much, much more plausible” than 0% inflation two years from now — which means that a roughly 2% call “isn’t really a best guess.”©2022 Bloomberg L.P. More

Traders on the floor of the NYSE, May 27, 2022.
Source: NYSE

Signs that inflation is at least starting to abate from a 40-year high could be a positive for stocks, according to Goldman Sachs.
Markets rallied Friday as a government report showed the pace of inflation slowed a bit in April, primarily due to falling gas prices but also from other factors that at least suggested the run-up was cooling.

Goldman analysts said history indicates the market will react positively when inflation shows signs of peaking.
“The market usually falls in the run up to the peak in headline inflation, just as we have seen in recent months,” a team of analysts led by Sharon Bell said in a note. “But after the peaks, there is a little more variance and on average the market does recover.”
In 13 inflation runs since 1951, the market was higher 12 months later nine times. The biggest gain was a 33.2% increase from the March 1980 top; the worst was a 17.3% decline from the January 2001 peak, a time when the market languished after the dotcom bubble popped.
“In truth the peak in inflation might be helpful but equities really need other supports, especially if investors fear a sharper downturn,” Goldman’s team wrote.
Key components needed to boost market momentum include a strong economy, low valuations and falling interest rates.

All of those issues present a challenge in the current environment.

The economy contracted at 1.5% annualized rate in the first quarter, stock market valuations have come down significantly but remain just above their 10-year average, and interest rates are on the rise, though bond yields are off their highs.
October 1990 was positive in all three regards and saw a 29.1% increase in the S&P 500 over the next year, a “very different set-up from the one we have today,” Goldman said.
Markets also drew encouragement this week from the Federal Reserve. Minutes from the policy meeting earlier this month indicated that officials are willing to reexamine the pace of interest rate hikes later this year, but they also noted the possibility of rates going into a “restrictive” level aimed at slowing the economy.
The Goldman strategists said the picture for Europe and the U.S. is similar.
The firm reiterated its positive outlook on European stocks with strong balance sheets, high and stable profit margins and companies that benefit from rising capital expenditures and government investment. Goldman is still cautious on consumer stocks even with the potential for falling inflation.

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For an avowed fiscal conservative, Britain’s chancellor of the exchequer is capable of some sizeable contortions. This week, Rishi Sunak unveiled some changes of direction of surprising size — unveiling huge new tax and spending commitments.The most striking U-turn was a £5bn windfall tax on energy companies. When unveiling his last budget in March, Sunak had assailed this idea, then being pushed by the opposition Labour party. “We want more domestic energy and more jobs for the UK. A windfall tax would put that off,” he said. How things change. The tax is intended to fund, in part, a £15bn support package for households with cost of living problems. This was not a change in direction: this is the third time the Conservative government has improvised help for households. But it was a sudden acceleration — doubling the amount of support. The temporary help for households should be broadly welcomed. Consumer price inflation is expected to break double figures imminently. The energy price cap, which limits how much households can be charged, stood at £1,277 last October. It is expected to rise to £2,800 in October this year. It is good policy to guard the poorest from these shocks. It is also important to maintain support for Ukraine by cushioning the effects of the war at home. Waiting for the automatic annual process by which benefits creep up to match price rises was not enough. One troubling question for Sunak was why this money took so long to arrive: these price rises have been evident for months. The answer is politics. The windfall tax and new measures were designed to outflank Labour, who now hold a firm polling lead over the Tories. That is also why, while most of the spending is targeted, every household is getting a £400 discount on their bills — an unnecessary splurge for many households that can bear the burden, which should have been avoided. In the context of high inflation and a tight labour market, this demand boost will have to be offset by the Bank of England. It would have been better to put some more resources into uprating welfare benefits for the most vulnerable. That, too, would have been inflationary — but to a better end.The windfall tax has been driven by the same politics. The Tories needed a reply to Labour’s call for a levy on energy providers, so used the tax law to get one. Sunak bragged: “The official Labour party view is that the windfall tax would raise £2bn. The way we have structured ours means it will in fact raise £5bn.” He is considering similar steps to tax the electricity generators’ “extraordinary profits”, too.These windfall taxes are bad policy. Britain needs huge investment in this sector as part of its transition to a cleaner energy economy. That means clear and predictable future taxation. Ministers can write regulations to limit profits in specific sectors — as they have in the past. But they should do so upfront, not post-hoc.Indeed, the best thing about these windfall taxes is that they draw attention to the inadequacy of the UK’s energy policy. Layers of complex regulation and tax decisions have been deposited, one on top of the other, over many decades. The price spike is a good moment to rationalise this mess.This is unlikely to be the last time the UK government returns to this problem; the package this week is for one-off patches which it may be obliged — morally or politically — to renew when they expire. Indeed, the disconcerting theme that runs through this mini-budget is that short-term political fixes are what matter to this government — and effective, long-term policy can wait. More

Good evening,An impending global food crisis has been high on the agenda at the World Economic Forum, and could turn into the worst hunger catastrophe in decades.Since the war in Ukraine, wheat and corn prices have jumped 41 per cent and 28 cent respectively, as Russia and Ukraine combined represent about 30 per cent of global wheat exports.Some European nations are concerned that rising food prices and shortages in the fragile emerging markets in Africa and the Middle East could lead to a humanitarian disaster and trigger another wave of migration to EU countries.Russian president Vladimir Putin told Italian prime minister Mario Draghi that Moscow could help alleviate the crisis stemming from the blockade of Ukrainian grain exports, if the west eases its sanctions against Russia. Putin also suggested that the country could export its own grain and fertiliser, if sanctions were lifted.David Beasley, executive director of the UN World Food Programme, said up to 323mn people were “marching towards starvation” and 49mn were “knocking on famine’s door” in 43 countries. Food protectionism is also a growing concern, with India announcing a ban on wheat exports this month. Beasley told Gideon Rachman: “Export ban on food can create havoc in the market. We ask countries not to do that.”This month, German foreign minister Annalena Baerbock said the G7 group of industrialised nations was urgently seeking alternative routes for the export of Ukrainian grain. The group also recently launched a “Global Alliance for Food Security” with the World Bank, to co-ordinate a short-term response. The alliance aims to increase supplies of food, fertiliser and fuel and to provide financial support to help vulnerable countries avert famine.Food systems to tackle the global crisis in agriculture will also be given as much weight as energy conservation at the COP28 conference next year in the United Arab Emirates, according to a top official at the WEF. Mariam Mohammed Saeed Al Mheiri, UAE’s minister of climate change and the environment, stressed that the world would need 50 per cent more food by 2050. She called for the importance of keeping markets open to prevent famine and increased efforts to cut meat consumption and food waste.Latest newsRussian forces step up attacks in Ukraine’s eastern Donbas regionUS inflation gauge cools in April as Americans continue to shopG7 urges Opec to boost output to cool oil marketFor up-to-the-minute news updates, visit our live blog.Need to know: the economyFiji will join the US-led Indo-Pacific Economic Framework just days before China’s foreign minister lands in the country, giving the Biden administration a victory in its competition with Beijing over influence in the Pacific.Chinese technology shares leapt today after the country’s largest internet groups beat first-quarter earnings estimates despite the damage caused by Beijing’s zero-Covid policy and widespread lockdowns in the country. However, China’s industrial groups posted their worst decline in profits in two years in April, in the latest sign of the economic and corporate pain stemming from lockdowns.Federal Reserve officials discussed the possibility of moving the US central bank to a “restrictive” policy stance that would better fight inflation through more aggressive interest rate increases, minutes from the May meeting showed.China has offered to lend “a few hundred million dollars” to Sri Lanka to help alleviate a shortage of essential goods in the crisis-hit country, according to the island’s prime minister.Latest for the UK and EuropeEurope is developing contingency plans in case of a complete halt to Russian gas imports, the EU’s energy commissioner Kadri Simson said, as she warned that any country was at risk of being cut off by Moscow. The EU is racing to store as much gas as possible.British ministers are preparing to launch a £3bn-a-year loan guarantee scheme to replace a broad set of emergency financial support measures brought in to help businesses during the pandemic.A huge share of UK workers feel that companies are failing to tackle race inequity in the workplace, despite promises to address the issue in the wake of global protests over the murder of George Floyd, a black man, by a white police officer in the US.British chancellor Rishi Sunak said his latest package of support for UK households will have a “minimal impact” on inflation after the government announced a windfall tax on energy companies to fund lower fuel bills.The UK has the most persistent post-pandemic drop in employment of any G7 country. Britain also performs poorly among the countries that went into the pandemic with a high employment rate, noted Tony Wilson, director of the Institute for Employment Studies.Global latestThis month marks the 30th anniversary of the demarcation of lands in the Amazon rainforest for the Yanomami, one of Brazil’s indigenous tribes. They have suffered abuse and violence as illegal gold miners, empowered by the support of president Jair Bolsonaro and the surging price of gold, have flocked to the supposedly protected reserves in search of treasure.Need to know: businessJPMorgan Chase has started to collect data on race and ethnicity from some borrowers in an effort to make good on promises to do more for the black community after the murder of George Floyd. The US commercial bank pledged to spend $30bn by the end of 2025 to address the racial wealth gap through initiatives including $14bn in mortgages and small business loans for black and Latino communities.Europe’s most valuable private tech business Klarna is cutting 10 per cent of its more than 7,000 staff — and its net loss in the first quarter quadrupled. Critics say the business encourages vulnerable consumers to buy items they do not need with money they do not have.EY is working on a split of its audit and advisory operations worldwide in the biggest shake-up of a Big Four accounting firm in two decades. The proposal is a bold attempt to escape the conflicts of interest that have dogged the industry and brought regulatory action in the UK and the US.Apple will increase pay for its workers in a bid to deal with inflationary pressures, unionisation efforts among employees and increasing competitiveness in the labour market.For the first time, the Financial Times, Nikkei Asia and Statista have compiled a list of Asia-Pacific companies that have achieved the greatest reduction in greenhouse gas emissions intensity.The inaugural FT annual ranking of Africa’s fastest growing companies provides a snapshot of the corporate landscape on a continent where technology, fintech and support-service businesses have had to adapt to changes such as Covid restrictions.Science round upGlaxoSmithKline’s ViiV Healthcare is “actively negotiating” a voluntary licence on the patents for its injectable HIV prevention drug to make it more widely available in poorer nations, where fewer than a third of those at risk are having prophylactic treatment.Women are more than twice as likely as men to suffer from long Covid, according to the largest study of the condition to date. It also found a history of autoimmune disease or depression increased the likelihood of experiencing symptoms.Vaccines have the potential to combat growing antibiotic resistance. The Hib conjugate vaccine, given to children shortly after birth to protect them against Hemophilus influenzas, which can cause meningitis, has proved the most successful. Better diagnostic tests are also crucial in the fight against antibiotic resistance to ensure drugs are used appropriately. However, there are barriers to progress in poorer regions.Scientists in the UK have successfully created tomatoes that make large amounts of vitamin D in their leaves and fruit using pioneering gene editing technology. This development could advance global efforts to tackle a vitamin D deficiency affecting about 1bn people.Get the latest worldwide picture with our vaccine trackerAnd finally . ..Members of music band Abba are reviving their hits in a virtual concert performing as avatars — or Abbatars — garnering rave reviews such as “a blockbuster spectacle” and “fun in an age of high anxiety”. John Gapper writes: “I do not blame Abba for seeking to avoid the stress of performance, and relying on technology to deliver the old numbers.”Abba’s band members may age but their avatars portray them in their prime, and the songs remain the same © PA More

With costs for ground beef and chicken breasts at all-time highs, consumers have few alternatives to switch to different proteins — so some may skip them entirely. The US Memorial Day holiday on Monday is considered the unofficial opening of the outdoor grilling season, and the surging costs are pointing to a disappointing start. Price pain in meat comes after Russia’s invasion of Ukraine stalled crop exports in the Black Sea, pushing up the costs of animal feed.  Even prices for propane used to power grills have soared.“The inflationary environment is starting to take its toll,” said Michael Nepveux, senior analyst for animal protein at Stable USA, which offers  risk-management tools for some commodities.  ‘‘Instead of steak or chicken, we might have pasta or a pizza.’’ ©2022 Bloomberg L.P. More

Political uncertainty and three elections last year delayed the plan, drafted after Bulgaria was admitted together with Croatia to the ERM-2 mechanism, a mandatory stage for joining the euro in 2020. [L2N2OC1PM]The European Union’s poorest member, which already pegs its lev currency to the euro, has pledged to adopt the single currency at its current fixed rate in 2024.”Bulgaria has, de facto, already adopted the euro through the currency board arrangement. Because of the fixed peg, for example, if we want to raise the interest rates, we cannot do it,” Finance Minister Assen Vassilev told reporters. “The plan gives a clear timeline to banks and other payment institutions how the euro will be adopted. It is just a first technical step,” he said.The Socialists and the ITN party, members of the four-party ruling coalition, who support in principle the euro adoption, were against the plan’s approval. They said there was a lack of an analysis from the central bank on how the euro will impact people’s incomes and the economy as a whole. “It has been clear since we joined the EU that we will adopt the euro. When this should happen, depends on us. We need to take an informed and reasonable decision and the one today is not such,” Socialist leader and Economy Minister Kornelia Ninova said.Vassilev said discussions in the parliament, where legal changes need to be approved, are yet to be held as well as public debates. Bulgaria, which is yet to show tangible results in fighting corruption, may also face challenges in meeting the nominal criteria for joining the euro zone.Bulgaria is one of the least indebted countries in the EU, but it has been running fiscal deficits of about 3% since 2020, while surge in energy and food prices have pushed annual inflation to 14.4% in April, the highest level since 2008. More

Canada’s budget deficit in fiscal 2021/22 shrank to C$95.57 billion ($75.02 billion) from C$314.00 billion in the previous year, as emergency spending on the COVID-19 pandemic eased, preliminary data from the finance ministry showed on Friday.Revenues for the fiscal year grew by 32.5%, mostly on higher tax revenues, while expenses were down 20.8%, as the government spent less on aid to businesses and individuals.On a monthly basis, Canada posted a deficit of C$25.75 billion in March, compared to a C$31.44 billion deficit in March 2021.Revenues were up 14.2% in March compared with a year earlier, again on higher tax revenues. Expenses were down 1.4%, reflecting less emergency transfers offset by costs for disaster assistance and environmental liabilities.($1 = 1.2739 Canadian dollars) More