Barely arriving at Downing Street, British Prime Minister Andy Burnham sees his first measure against the high cost of living contested on the budgetary front: the abolition of VAT on electricity raises questions about its financing, while the markets are closely monitoring British debt.
• Also read: United Kingdom: new government removes VAT on household electricity next winter
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“I said I wanted to give people a bit of a break, and that’s what I’m announcing on my second day as prime minister,” Britain’s new strongman said in a statement on Tuesday.
Faced with sluggish growth and purchasing power under pressure, he promised on Monday to “re-industrialize the United Kingdom using public procurement” and to provide the British with “a little help with the cost of living”. But its budgetary margins are narrow.
The fiscal boost announced Tuesday, which should reduce the average household’s electricity bill by 45 pounds ($85) per year, will cost the state 850 million pounds ($1.6 billion) this year, according to government estimates.
It will be financed by the abandonment of a digital identity card project (Digital ID), making it possible to free up 1.8 billion pounds ($3.4 billion) over three years.
“Budgetary loosening”
This argument, however, is contested. “The Digital ID program was not funded,” Darren Jones, a loyal supporter of former Prime Minister Keir Starmer and one of the main members of the outgoing cabinet, said on X on Tuesday, calling on the government to detail the financing of its new measures.
The Office for Budget Responsibility (OBR), which establishes official economic forecasts for the United Kingdom, already noted in its analysis of the last budget that “no specific funding has been identified” for this program.
Resolution Foundation similarly believes that the abolition of VAT on electricity “is not fully funded” and further reduces the government’s budgetary room for maneuver.
An analysis shared by Helen Miller, of the Institute for Fiscal Studies (IFS), who judges that the measure increases tensions on public finances already under pressure.
These questions come as markets closely monitor the United Kingdom’s budgetary situation and the first decisions of the new government.
The entire British political class still has in mind the brutal surge in interest rates which followed massive and unfunded budget announcements from the short-lived Conservative government of Liz Truss in 2022.
“There is no shortage of signs of budgetary loosening,” says Neil Wilson, of the Saxo platform, for whom “promises which seem unfunded for the moment are likely to give rise to a budgetary risk premium”.
“The political message is ambitious; the message on financing still remains incomplete,” adds Patrick Munelly, analyst for Tickmill Group.
High debt
If he said he wanted to use the “flexibility” allowed by the government’s balanced budget rules, Mr. Burnham reiterated again on Tuesday that he would respect the line of budgetary discipline imposed by the previous Minister of Finance Rachel Reeves.
On Monday, he named as his successor a reassuring figure for the markets, British Labor Party veteran John Healey, former Defense Minister under former Prime Minister Keir Starmer.
He “will be watching me closely,” Andy Burnham said Tuesday to the markets.
The latest public finance statistics show that Britain’s debt remains high, at around 95% of GDP, at a time when the war in Iran has reignited inflationary fears by pushing up oil and gas prices.
The labor market is also showing signs of weakness: the unemployment rate remained at 4.9% during the three months ended at the end of May, according to data published Tuesday by the National Statistics Office (ONS).
For the moment the market remains calm: after having increased slightly the day before, the yields on ten-year British bonds (“gilts”) were up slightly on Tuesday.
