Andy Burnham has made cutting the cost of living his first major policy move as prime minister, announcing an immediate cut to VAT on energy bills, but he faces mounting scrutiny over how he will fund this and other spending pledges. With bond investors already wary of Britain's high borrowing and debt levels, and fiscal headroom shrinking, economists warn there is little room for manoeuvre without raising taxes or cutting other spending.

Burnham has pledged to stick to Labour's fiscal rules and its manifesto pledge not to raise taxes on working people, even as the Resolution Foundation estimates the headroom against the fiscal rule has fallen from £23.6bn at the spring statement to roughly £10bn now. His flagship measure cuts VAT on domestic energy bills from 5% to zero for six months from 1 October, saving a typical household around £45 a year, at a cost of about £850m in 2026-27, which No 10 says will be funded by scrapping Keir Starmer's £1.8bn digital ID scheme. Critics, including the Institute for Fiscal Studies, say the VAT cut is poorly targeted since wealthier households benefit most, and question whether the funding sums add up given the mismatch between the one-year cost and the scheme's three-year savings. The appointment of John Healey as chancellor has also been read as a signal of an upcoming boost to defence spending, adding further pressure on the public finances.