Rishi Sunak will cave in to pressure to impose a windfall tax on the soaring profits of oil and gas firms to fund a relief package for households struggling with rising bills.
Labour said the Chancellor had been “dragged kicking and screaming” into backing its call for a levy on fossil fuel giants which have benefited from high global prices.
Mr Sunak is expected to tell MPs he will scrap a requirement to repay the previously announced £200 discount on energy bills, and could increase the level of the grant.
Other measures which could form part of a package worth around £10 billion are expected to be targeted at the poorest households.
Shadow chancellor Rachel Reeves welcomed the Chancellor’s U-turn on a windfall tax, after months of Tory opposition to Labour’s calls for a levy.
She asked: “Why has it taken so long? Why have families had to struggle and worry while he dragged his feet?”
The timing of the Chancellor’s announcement, the day after the publication of the embarrassing Sue Gray report on the partygate scandal, has led to claims that ministers were seeking to avoid further damaging headlines about Boris Johnson’s No 10 operation.
But the Prime Minister’s chief of staff Stephen Barclay insisted the decision to announce the package was in response to Ofgem’s indication that the energy price cap would rise by more than £800 in October.
He told Sky News: “In terms of the timing, firstly we don’t control the timing of the Sue Gray report. The timing of that is shaped by the Met Police investigation.
“What we’ve always said is, in terms of the fiscal response, we wanted to see from the Ofgem guidance what the full impact would be in the autumn on families so that we can get the design of that package right.
“We’ve had that guidance this week from Ofgem. That is why the Chancellor is coming forward today.”
With MPs away from Westminster on a half-term break next week, Mr Barclay said the “parliamentary timetable” was also a factor.
Ofgem’s chief executive Jonathan Brearley indicated this week that the energy price cap will increase to £2,800 in October.
The Times reported the previously announced £200 loan on energy bills will be replaced with a grant that will not have to be paid back, with the discount possibly increasing to as much as £400.
Ministers have spent months criticising the idea of a windfall tax because of its potential impact on investment.
But on Wednesday a Tory source said the arguments had been “tested rigorously” within both the Treasury and wider government.
“There’s a high threshold that any package that we bring forward delivers more gain than pain, that the gain is worth the pain, that it does not jeopardise the investment,” he said.
“You don’t introduce random taxes that make the economic environment unpredictable.”
Offshore Energies UK, which represents the offshore oil and gas industry, has warned a one-off tax on North Sea firms would see higher prices and do long-term damage to the sector.
The Chancellor will need to be careful that any extra help he puts in to the economy does not add further to inflation, which is running at a 40-year high.
As well as the possible impact on inflation, the Chancellor’s ability to help beyond the £22 billion package already announced will also be restricted by the state of the nation’s finances.
A Treasury spokesman said: “The Chancellor was clear that as the situation evolves, so will our response, with the most vulnerable being his number one priority.”
The Prime Minister said the hundreds of billions poured in to dealing with the Covid pandemic had left a “very difficult fiscal position”.
At a Downing Street press conference, he acknowledged households “are going to see pressures for a while to come” as a result of the spike in global energy prices and supply chain problems following the pandemic.
A windfall tax risks reduced energy security, higher prices for consumers – and long-term damage to the UK’s offshore energy industry.
— Offshore Energies UK (@OEUK_) May 25, 2022
But he said: “We will continue to respond, just as we responded throughout the pandemic.
“It won’t be easy, we won’t be able to fix everything.
“But what I would also say is we will get through it and we will get through it well.”
Mr Johnson has previously said a windfall tax would “deter investment”, would be “totally ridiculous” and would “raise prices for consumers”.
The Chancellor also voiced opposition but began laying the grounds for a change of policy in recent weeks, saying he was “pragmatic” about the possibility.
Some of the most vehement criticism has come from Brexit opportunities minister Jacob Rees-Mogg, who has argued it is wrong to raid the “honey pot of business” and the measure would ultimately see the public pay more tax.
But Labour leader Sir Keir Starmer had argued a Government U-turn was “inevitable” as the tax on North Sea firms would “raise billions of pounds, cutting energy bills across the country”.