Announcing the measures on Thursday, in a bruising week for the government, the chancellor said his “significant set of interventions” would help the poorest in society – with a one-off £650 payment for 8 million families on means-tested benefits, alongside an extra £200 for all energy bill payers that will not have to be repaid.
After months of rejecting Labour calls for a windfall tax on energy giants, Sunak announced what he called a “temporary targeted energy profits levy”, which is expected to raise £5bn.
He was forced to deny the package had been brought forward in order to generate positive headlines after Sue Gray’s final report exposed the culture of alcohol-fuelled parties in Downing Street. “I can categorically assure you that that had no bearing on the timing,” he said.
Thursday’s announcement was far more ambitious than had been predicted – and was broadly welcomed by charities and the influential Institute for Fiscal Studies, which described it as a “genuinely big package of support”.
Critics warned, however, that the measures still only amounted to a “sticking plaster” that failed to tackle longer-term pressure on households, and would need updating should the cost of living emergency fail to abate next year.
Rachel Reeves, the shadow chancellor, said Sunak’s about-face on the windfall tax showed Labour was “winning the battle of ideas in Britain”, while arguing that the move came months too late and was not accompanied by a long-term plan to deal with soaring living costs.
“Today it feels like the chancellor has finally realised the problems that the country is facing,” she said.
“We first called for a windfall tax on oil and gas producers nearly five months ago to help struggling families and pensioners. Today he has announced that policy but he can’t dare say the words. It’s a policy that dare not speak its name.”
The chair of Asda, Stuart Rose, warned the measures were still only a “drop in the ocean” in regard to the pressures facing families.
“I can remember the last time inflation was [like this] and it took nearly eight years to get [it] under control,” Lord Rose said.
After weeks in which ministers – including Boris Johnson – had said they were not in favour of a windfall tax, Sunak told MPs the extraordinary profits being made by the oil and gas companies should now be taxed to help ease the cost of living emergency.
He insisted the energy levy – which he refused to call a windfall tax – was designed not to deter investment, with a 90% tax relief for firms that invest in oil and gas extraction.
However, BP warned it would now review its plans in the light of the levy, which is set to stay in place for up to three years, though the Treasury said it would be phased out when oil prices return to historically normal levels.
BP said in a statement: “Today’s announcement is not for a one-off tax – it is a multi-year proposal. Naturally we will now need to look at the impact of both the new levy and the tax relief on our North Sea investment plans.”
Some Tory backbenchers objected to the levy, with Richard Drax accusing Sunak of “throwing red meat to socialists”, while Craig Mackinlay said: “Higher taxes can never mean lower prices. All in all, I’m disappointed, embarrassed and appalled that a Conservative chancellor could come up with this tripe.”
Sunak rejected the idea he was a tax-and-spend chancellor, however, saying: “What people want and what I am is to be a pragmatic chancellor, to do the things that I believe are right for the county both in the short term and in the long term.”
Sunak’s third economic package in less than six months amounted to a doubling of support to more than £30bn, with an additional £300 payment for pensioners and £150 for recipients of disability benefits.
Economists said Sunak was gambling on current high rates of inflation fading next year, despite signs that Russia’s war in Ukraine and China’s zero-Covid policy, causing disruption for global trade, could lead to persistent pressure on living costs.
Inflation in Britain soared to 9% in April, the highest level since 1982, driven by a surge in energy bills, record petrol prices and the rising cost of a weekly shop. The Bank of England forecasts inflation will peak at close to 10% later this year, after a expected £800 increase in energy bills to close to £2,800.
Alison Garnham, the chief executive of the Child Poverty Action Group charity, expressed relief that Sunak was finally waking up to the scale of the crisis for ordinary families but warned the chancellor he was “kidding himself if he thinks that the problem is temporary”.
“If the chancellor is serious about supporting those who are struggling then he will need to make long-term changes to the structure of the social security system and restore the value of benefits to something that families can really live on,” she said.
After a decade of austerity, the real value of benefits has fallen to the lowest level in four decades. Although Sunak promised benefits would rise next spring by the rate of inflation this September – expected to deliver a multibillion-pound boost for the poorest families – charities warned the overall safety net was threadbare.
Despite criticism for taking months longer than necessary, leading economists said the updated government plan was a marked improvement on two previous attempts by Sunak, which were widely criticised for failing to help the poorest in society.
The Resolution Foundation said twice as much of the fresh £15bn support package would go to the poorest households than to wealthier families, with an average gain for those on the lowest incomes of about £823 compared with £296 for the richest.
Paul Johnson, director of the Institute for Fiscal Studies (IFS), said the intervention was well targeted to deal with the cost of living shock from soaring energy bills. “This is hugely redistributive – taking from high earners and giving to the poor,” he said.
Taken together with all three support packages announced by Sunak this year, the poorest 8m households in Britain are now expected to be entirely compensated for the rising cost of energy bills, with help worth £1,200 on average.
City economists warned that the chancellor offering £400 of support for even the wealthiest bill-payers – £200 announced in February, which will now not have to be repaid, plus the additional £200 – risked fuelling already high rates of inflation.
“The consequence of easing the pain now may be worse pain later on,” said Kallum Pickering, senior economist at Berenberg.
Tasked with keeping inflation low and stable while supporting jobs and growth, Threadneedle Street has raised the cost of borrowing four times this year to the highest level since after the 2008 financial crisis. Some analysts said the Bank would now be forced to raise rates further.