21st July 2026
Andy Burnham’s decision to scrap VAT on household electricity for the 2026–27 financial year is one of his first major fiscal moves. The government says the measure will cost £850 million this year and will be funded by scrapping the Digital Identity Scheme. Now let's look at it in detail.
However, analysts, civil servants, and policy commentators are divided on whether this funding explanation is credible — or whether the government has simply attached a convenient “saving” to justify a politically popular tax cut.
Below is a full analysis of the arguments and what the announcement really means.
1. The Government’s Claim: £850m Funded by Scrapping the Digital Identity Scheme
Burnham’s team argues:
The Digital Identity Scheme had planned spending allocations for development, infrastructure, and rollout.
Scrapping it frees up £850 million, which can be redirected to cover the VAT cut.
This makes the VAT removal fiscally neutral for 2026–27.
This is a clean, simple narrative: cancel one scheme, fund another.
But critics say the numbers don’t match reality.
2. The Counterargument: The Digital Identity Scheme Never Had £850m of Real Funding
Critics — including former Treasury officials and digital policy experts — argue:
A. The scheme was not fully costed
It was still in consultation and design phase.
No detailed, approved budget existed.
B. No £850m spending line was ever published
There was no official Treasury allocation of that size.
Some early estimates suggested £200–300m over several years, not £850m in one year.
C. Scrapping an unfinalised scheme does not generate immediate savings
You cannot “save” money that was never formally committed.
D. The VAT cut is therefore effectively unfunded
Unless the government finds alternative savings, borrowing rises by £850m.
This is why analysts say the funding explanation is politically convenient but fiscally weak.
3. What Does £850m Mean in Context?
To understand the scale:
VAT on electricity raises around £1 billion per year depending on consumption.
Cutting it for one year at £850m is plausible and consistent with OBR-style modelling.
But it is far larger than any realistic saving from cancelling a scheme still in design phase.
In other words:
The cost is real. The saving is questionable.
4. So Is the VAT Cut Actually Funded?
Short-term answer:
The government can claim it is funded because the Treasury can reassign “planned” spending even if not fully costed.
Long-term answer:
The funding explanation is not robust, because:
No £850m allocation existed
No published costings support the claim
Scrapping a conceptual scheme does not produce cash savings
This leaves the VAT cut politically justified but fiscally ambiguous.
5. The Big Question: What Happens After This Year?
Burnham has only committed to the VAT cut for 2026–27.
This creates three major uncertainties:
A. Will VAT return next year?
If no long-term funding source is identified, VAT may be reinstated.
B. Will the government find new savings?
Departments may face pressure to cut budgets to make the VAT removal permanent.
C. Will borrowing increase?
If the VAT cut is extended without funding, borrowing rises — something the Treasury may resist.
6. How Does the Announcement Stand After Scrutiny?
Strengths
Immediate cost-of-living relief
Strong political messaging
Shows decisive early action
Cancelling a controversial digital scheme is popular
Weaknesses
Funding explanation is contested
No evidence of a real £850m saving
VAT removal is temporary, creating uncertainty
Long-term fiscal sustainability is unclear
Overall assessment
Burnham’s announcement is politically effective and popular, but the fiscal justification is not fully substantiated.
It leaves the government with a strong headline but a weak long-term funding plan, and raises questions about what happens after this financial year.