Burnham cuts electricity VAT as UK borrowing falls
New UK Prime Minister Andy Burnham has removed VAT from household electricity bills to ease living costs, a limited fiscal intervention that coincides with softer wage growth and falling public borrowing.
Andy Burnham has used his second day as prime minister to scrap VAT on household electricity bills, a move set to save the average household around £45 a year from 1 October. The Treasury estimated the tax cut will cost roughly £850m in the 2026/27 financial year, funded entirely by cancelling a planned £1.8bn digital ID programme. The measure is expected to reduce inflation by 0.1 percentage points.
The announcement was accompanied by public finance figures that should soothe bond investors. Public sector net borrowing came in at £15.989bn in June, below the £18bn forecast by the Office for Budget Responsibility and down significantly from £23.94bn a year earlier. The outperformance was largely driven by lower inflation-linked debt interest costs.
Investors are also weighing the surprise appointment of former defence secretary John Healey as chancellor. Healey moved quickly to assert fiscal discipline, stating that "fiscal control is the first duty of any chancellor" and that "fiscal credibility is the bedrock for economic stability".
Labour market loosens
The fiscal backdrop arrives alongside fresh evidence that the UK labour market is cooling. Unemployment held steady at 4.9% in May, but job vacancies fell to 712,000 in the three months to May, almost half the level seen in 2022.
Earnings growth missed economist forecasts, with total pay including bonuses rising by 4.3% in the three months to May, below the 4.5% expected. Private sector earnings growth dropped to 2.9%. Thomas Pugh, chief economist at RSM UK, described a labour market with "a whiff of staleness about it, but it’s still loosening gradually".
This combination of stagnant wage pressures and external shocks gives the Monetary Policy Committee cover to keep interest rates unchanged next week. However, it also complicates the government's broader economic agenda. With wage growth expected to hover between 3.0% and 3.5%, real wages are likely to stagnate in the second half of the year even with the VAT reduction.
The limited scope of Burnham's intervention reflects these fiscal constraints, with the government stating that any further action will wait until the budget. SSE chief executive Martin Pibworth called the tax cut a "very welcome first step", but analysts warn that ongoing geopolitical tensions are still expected to push the October energy price cap up by roughly 5%.
