Andy Burnham’s first major policy announcement – an £850 million tax cut on electricity bills – has been criticised as “unfunded” by a sacked ally of Sir Keir Starmer.
From October 1 electricity bills will be VAT free, saving households around £45 per year as part of the Prime Minister’s promise to help ease cost-of-living pressures.
But Darren Jones, who lost his Cabinet post as chief secretary to the prime minister when Mr Burnham took office, questioned how the policy would be paid for.
The Government said the move will be funded in part by scrapping Sir Keir’s digital ID project, which had been estimated to cost around £600 million a year over three years.
But that falls short of the estimated £850 million hit to tax revenues from the VAT cut and funding for digital ID was meant to have come from unidentified Whitehall savings.
Mr Jones, who was the minister in charge of the digital ID scheme, said in a post on X: “Good news that VAT will be cut on electricity bills. It’s a simple way for families to save a few quid, and to mechanically help to keep inflation that little bit lower.
“But the DigitalID program was unfunded.
“The government will have to set out how it will pay for its new policies at the budget.”
His public criticism is a sign that Mr Burnham’s premiership could face problems from Starmer loyalists.
The Government insisted the £1.8 billion cost of the digital ID scheme over three years had been “scored” by the Office for Budget Responsibility, meaning the money would have had to be found.
The money that would have been used has been reprioritised to fund the tax cut.
Chancellor John Healey said: “This measure is funded this year from cancelling the digital ID programme, and it will help bring down inflation while supporting households in every postcode.”
Mr Burnham said: “I said I wanted to give people breathing space, and that’s what I’m announcing on my second day as Prime Minister.
“We’re taking immediate action to cut taxes on energy bills, put more money in people’s pockets and bring back hope.”
But Tory leader Kemi Badenoch said: “It’s only one day into Burnham’s Government and already the explanations are falling apart.
“You can’t use the funding from an unfunded programme to pay for cheaper bills.”
Martin Lewis, founder of MoneySavingExpert said the VAT cut would have little impact.
“This is a good totemic step and very welcomed,” he said. “Yet in practice people won’t feel much benefit.”
Helen Miller, director of economic think tank the Institute for Fiscal Studies, said she was “disappointed” by a policy which creates more complexity in the tax system and will be “hard to undo” after a year.
“Government think they have found funding for this year – but only by reallocating savings that haven’t yet been made,” she said.
“If the Government can’t add 5% VAT back onto bills next year, how will they pay for it next year and the year after?”
Energy suppliers are expected to pass the VAT reduction on to all customers, including those on fixed tariffs, the Government said.
Officials said the VAT cut, from 5% to 0%, is estimated to reduce the consumer prices index measure of inflation by around 0.10 percentage points.
The policy will cost the Exchequer around £850 million in 2026/27.
For households with dual fuel bills the VAT cut will only apply to the electricity used, not gas, Downing Street said.
Because of Brexit, EU VAT rates apply on electricity bills in Northern Ireland so the cut will not apply there, instead the Stormont executive will be given funding to implement an equivalent level of support.
Mr Burnham made the VAT announcement before chairing the first meeting of his new Cabinet on Tuesday after a purge of Sir Keir’s allies, including Mr Jones.
The sweeping changes to the Cabinet, started with the appointment of Mr Healey as the new Chancellor to replace Rachel Reeves.
Other major figures jettisoned by Mr Burnham include ex-deputy prime minister David Lammy, former attorney general Lord Hermer and former housing secretary Steve Reed.
Louise Haigh, a key ally of Mr Burnham who was instrumental in getting him into No 10, was made First Secretary of State and Chancellor of the Duchy of Lancaster, giving her a powerful role as a fixer across Government.
Ed Miliband was appointed Foreign Secretary, and Shabana Mahmood remains as Home Secretary, while Wes Streeting became the new Defence Secretary, and Angela Rayner returned to Government as Housing Secretary.
Hamish Falconer will lead work on the UK’s post-Brexit relationship with the European Union, while Ellie Reeves, sister of the ex-chancellor, has been promoted to Attorney General.
The Department for Science, Innovation and Technology (DSIT) was scrapped, with responsibilities for its areas of policy assigned to other departments.
Jonathan Reynolds was made Business Secretary with a beefed-up portfolio that now includes science and innovation, while Lisa Nandy remained as Culture Secretary with an extended brief covering digital. Kanishka Narayan will attend Cabinet as AI Minister.
Anneliese Midgley, who played a major role in Mr Burnham’s return to Parliament and ascent to No 10, has been made chief whip.
A No 10 source said the new Cabinet brought together all parts of the Labour Party to deliver Mr Burnham’s agenda for the country.
