New prime minister Andy Burnham has set out his first major cost-of-living measures, announcing a £2 bus fare cap across England from January and a six-month cut to zero of VAT on energy bills – policies that together will cost more than £1.3bn and immediately raise questions about how they will be funded.
The bus fare cap, which will revert to £2 after rising to £3 under Sir Keir Starmer’s government, is expected to cost more than £500m. Burnham said the policy would “help with the cost of living and give people the breathing space they need”. Transport secretary Heidi Alexander told the BBC’s Today programme that the measure offered “a little bit of hope” after fuel costs spiked as a result of the US-Iran war, but admitted it was “not the whole solution”.
“Burnham announces £2 bus fare cap and VAT cut on energy, but funding questioned amid tight fiscal headroom.”
The VAT cut, announced on Burnham’s first full day in office, will reduce the rate on energy bills from 5% to zero for six months from 1 October, saving a typical household £45, according to government figures. Downing Street expects the cut to cost about £850m in 2026-27, and said it would be funded by cancelling Keir Starmer’s digital ID programme, which was due to cost £1.8bn over three years. However, Darren Jones, sacked as chief secretary to the treasury in Burnham’s reshuffle, questioned that plan on X, saying the digital ID scheme itself was “unfunded”.
The new chancellor, John Healey, faces the task of finding the money. The Resolution Foundation warned there is “no spare cash lying around”, noting that the headroom against the government’s fiscal rule had shrunk from £23.6bn at the time of the spring statement to about £10bn today. Bond investors are on high alert, wary of Britain’s elevated borrowing and debt levels, the impact of the Iran war and rising spending pressures.
Critics have also challenged the targeting of the VAT cut. Helen Miller, director of the Institute for Fiscal Studies, said: “If the goal is to help low income households, a VAT cut is a poor lever since the biggest cash gains will go towards richer households.”
The bus fare cap, which takes effect from January for participating buses outside London, is intended to particularly help passengers in rural and coastal areas, where single fares can be higher. But the Campaign for Better Transport said rural areas were still suffering from fewer bus routes and services. Services in those areas – as measured by vehicle miles – decreased by 18% between 2019 and 2024, according to the County Councils Network. “What we need to see is the replacing of those lost services which have particularly affected those in rural areas,” said the campaign’s Michael Solomon Williams.
Scotland and Wales will receive equivalent funding, with the Scottish government considering a £2 cap across the whole country by the end of this parliament. In Northern Ireland, public services will get additional money, although ministers will not be obliged to spend it on transport.
Burnham has pledged to stick to Labour’s fiscal rules and not raise taxes on working people. But with fiscal headroom dwindling and bond markets jittery, the question of how to fund his ambitions is far from settled.