On his first full day as prime minister, Andy Burnham announced that VAT on household electricity bills would be cut to zero from 1 October, saving a typical household about £45 a year. Hours later, news emerged that he also plans to reduce the bus fare cap from £3 to £2 from January 2027. These are the opening moves of what Burnham calls a “cost of living government”, but they have already ignited a fierce debate about how the new administration will pay for its promises.
The VAT cut applies to England, Scotland and Wales (Northern Ireland is regulated differently, though the government says equivalent funding will be provided). The reduction from 5% to 0% will be passed on to all household customers, including those on fixed tariffs, and will also benefit some small businesses, charities and residential care homes. According to the government, the policy will cost £850 million in the 2026-27 financial year. To fund it, Downing Street said it would cancel the digital ID programme, which had been set to cost £1.8 billion over three years. Alongside this, Burnham’s team confirmed the return of the £2 bus fare cap for England, which was originally introduced by the Conservatives in 2023, then raised to £3 by Rachel Reeves. The move is expected to help millions of passengers, but again raises the question of where the money will come from.
“Andy Burnham’s first policies: VAT cut on electricity and bus fare cap, but funding doubts.”
The background to these announcements is a prolonged cost-of-living crisis that has left millions of households struggling. The Joseph Rowntree Foundation recently estimated that 7.4 million low-income households could not afford at least one essential item in the past month. Burnham, who took over from Keir Starmer on Monday, said in his first cabinet meeting: “Life’s hard out there … we need to be a cost of living government, getting that cost of living down, looking at all possible ways of doing that.” However, he has also promised to stick to Labour’s fiscal rules and not raise taxes on working people. The Resolution Foundation says the headroom against the main fiscal rule has shrunk to about £10 billion, leaving little room for error.
For UK households, the immediate impact is modest but tangible. The £45 saving on electricity bills is a help, but critics argue it is poorly targeted. Helen Miller of the Institute for Fiscal Studies said the biggest cash gains will go to richer households, who use more electricity. The bus fare cap, meanwhile, will reduce travel costs for millions, especially in areas with few alternatives. But both policies are temporary: the VAT cut is funded only until the end of the financial year in March 2027, and the bus cap requires future budgets to renew it.
The bigger question is whether Burnham can sustain his agenda. Already, questions have been raised about the funding of the VAT cut. Darren Jones, the sacked chief secretary to the prime minister, said the digital ID programme was itself “unfunded”, meaning the government has simply swapped one unfunded commitment for another. Conservative shadow chancellor Mel Stride called it “smoke and mirrors”. Meanwhile, Burnham faces pressure to boost defence spending and accelerate a national care service, adding to the strain on public finances.
Q: How much will the VAT cut save me on my energy bill? A typical household will save around £45 a year, based on average electricity use. Larger households and those using more electricity will save more, but the saving is applied automatically via the price cap set by Ofgem.
Q: When does the £2 bus fare cap start and where does it apply? The new £2 cap on single bus fares in England is expected to come into force in January 2027. It covers around 5,000 bus routes across England. London and other areas with devolved transport may have separate arrangements.
Q: Why is there a debate about how the policies are funded? The government says the VAT cut is paid for by cancelling the digital ID programme. But critics argue that programme was never properly funded in the first place, so the money isn’t real. The bus fare cap and other promises will require further spending, and the UK’s tight fiscal headroom leaves little room for error. On 21 July, the Office for National Statistics reported that government borrowing in June was £16 billion, roughly on target, but bond investors remain wary.
What happens next? Burnham will convene his cabinet again this week, and the new chancellor, John Healey, faces the task of fleshing out the details in a Budget later this year. The interim funding for the VAT cut lasts only until March 2027, meaning the government must find a permanent solution or face another fiscal headache. Meanwhile, the prime minister is due to hold further talks with President Donald Trump, who has backed new North Sea drilling—a move that could create a new dividing line within Burnham’s party. For now, the new prime minister has bought himself some breathing space, but the question of how to pay for his promises is not going away.
