Andy Burnham’s first major policy announcement in government – an immediate tax cut removing VAT on energy bills – has already sparked a furious row over how it will be paid for, with his own chancellor, John Healey, challenging Cabinet ministers to “look harder” at spending priorities.
The prime minister said the measure, which cuts the VAT rate on energy bills from 5% to zero for six months from 1 October, would provide “breathing space” for households. But within hours, Burnham was under scrutiny over funding, as official figures show the UK borrowed less than expected in June, yet bond investors remain on high alert over elevated borrowing, the Iran war and rising spending pressures.
“Burnham faces funding row over VAT cut as Healey demands Cabinet savings.”
Burnham has pledged to stick to Labour’s fiscal rules and his manifesto promise not to raise taxes on working people. Yet the Resolution Foundation warns the headroom against the fiscal rule has been slashed from £23.6bn at the spring statement to about £10bn now. “There is no spare cash lying around,” the thinktank said.
Downing Street expects the VAT cut to cost about £850m in 2026-27, and says it is funded by cancelling Keir Starmer’s digital ID programme, which was to cost £1.8bn over three years. But Darren Jones, sacked as chief secretary in Burnham’s reshuffle, has questioned this, saying on X that the digital ID scheme itself was “unfunded”.
The policy has also drawn criticism from the Institute for Fiscal Studies. Director Helen Miller 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 government says the cut will effectively reduce the annual energy price cap by £45 and cut headline inflation by 0.1 percentage points.
In his first Cabinet meeting under Burnham, Chancellor Healey urged ministers to “look harder” at spending priorities across their departments. Burnham also pressed them to consider “how we are going” to fund his ambitions, leaving the Cabinet to search for savings – with no clear answer yet in sight.