Ed Miliband’s windfall tax on tobacco to fund the NHS is economically illiterate

The ‘windfall tax’, a concept introduced in the UK by the Blair government, is by definition a one-off seizure of revenue from a profitable industry, to fund an invariably unprofitable but popular project. It has been justified as putting ‘right a bad deal’ on the excesses of profits of unpopular industries. Between 1997 and 1998, Gordon Brown raised £5 billion from privatised utility companies to fund the Welfare-to-Work Programme.

Today we have face another well-intentioned policy initiative, of ensuring every NHS patient is guaranteed a cancer test within 7 days, supposedly to be funded by a windfall tax on tobacco companies. Labour’s incoherent economic policy is enough to challenge whether this plan is even sustainable for anything but a short period of time. But the wider concept of a windfall tax is more political gimmickry than sound sustainable policy.

As nice as such initiatives may sound, they severely disrupt long-term investments, ultimately driving up prices across the board and disproportionately hitting those least well-off.

Gordon Brown’s ‘windfall levy’ on utility companies, for instance, ignored the fluctuating and internationally driven supply costs of energy, meaning that when wholesale market prices increased, the levy’s additional costs were passed onto consumers. Equally, the ‘carbon levy’ acts as a stealth tax, with consumers subsidising the increased burdens whilst the industry takes the flak for increasing its prices.

The folly of such arrangements has also recently been shown in Australia. In 2012, the Australian Labor party taxed mining companies who were at the time benefiting from the growth of exports to China. The now-repealed Mining Tax, which was conceived to provide increased funding for education, prompted a collapse in investment in the sector that never recovered, and became one of the reasons for Labor losing the 2013 election.

At the UK Labour Party conference last month, Ed Miliband promised to ‘raise extra resources from the tobacco companies’ to fund his NHS plans. But as with all windfall taxes, this will invariably lead to higher prices and particularly hit those who can least afford them. Now, whilst that may be welcome as a device for discouraging smoking, it will reflect another financial attack on an industry that is viewed by investors as a stable long-term business. I would prefer it if no one smoked a cigarette, ever, but whatever one’s view is of the tobacco industry, the fact is that it attracts considerable investment, profits and employment.

An ill-conceived windfall tax of this kind – seizing revenue and taxing industry returns – would seriously disrupt the investments of public- and private-sector pension schemes. Out of 67 industry groups covered in the MSCI World Index, investments in the tobacco industry have seen the most significant returns in the last 10 years. On investment terms, tobacco is second only to mining. Like it or not.

Local authorities across the UK have pension investments in the tobacco industry worth at least £1.3 billion. They benefit from the low risk and high returns of the industry to bolster their portfolios with a safe, strong and stable investment.

By 2015, public-sector pension expenditure is expected to increase to over £33 billion. Local councils are currently holding a pension deficit of more than £50 billion, and there is a public-sector pension black-hole in excess of £1.3 trillion. It would be madness to disrupt one of the safest, strongest and most stable sectors in the world, and would only further add to the severe liabilities facing the UK.

With Labour’s track record of attacking big business to plug unfunded spending commitments, Miliband’s windfall tax could set a dangerous precedent for other stable investments, such as the easy targets of confectionary, insurance and – again – energy.

Labour’s mooted policy is equally difficult to justify on grounds of ‘fairness’, since tobacco consumers subsidise their own health care costs by at least four to one. The highest estimates (and there are many much lower ones circulating) show that the cost of smoking-related illness to the UK health service is £6 billion, whilst government revenues from the sector top £12 billion per year.

Miliband’s announcement is yet another example of a Labour Party more interested in short-term electoral point-scoring, than in providing a realistic policy package. It sustains further their acumen for economic illiteracy, whilst doing untold damage to the country’s long-term economic future. And though it’s only tobacco today, who is to say what industry will be next?

Nick de Bois is the Conservative MP for Enfield North.