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Introduction: Burnham cuts VAT on household electricity bills
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
New prime minister Andy Burnham has announced this morning that VAT will be cut from household electricity bills, as part of his plan to help with the cost of living.
The PM has said he will remove the levy from 1 October, in a move that is expected to take around £45 off the yearly price cap set by the energy regulator.
The government said the decision would be funded by savings from the cancellation of its digital ID programme, which was expected to cost £1.8bn over the next three years. The VAT cut is estimated to cost around £850m in 2026/27 based on forecasts for electricity prices, ministers said.
Burnham said in a statement:
Westminster has not been working for people for too long, with families struggling with the cost of living.
That needs to change. 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.
It comes just a day after Burnham officially became prime minister with a pledge for a “new economic model” for the country.
But the government added this morning that “any further action, including on funding for longer-term measures, will be taken at the budget, and all decisions at that point will be funded and also consistent with the government’s fiscal rules.”
Investors will be watching the bond market carefully today as it weighs the appointment of Burnham’s new cabinet, including the surprise appointment of former defence secretary John Healey as chancellor.
Public sector finance figures released this morning should provide a boost – borrowing for June came in at £15.989bn, below expectations of £18bn and down from £23.94bn a year earlier.
The difference between total public sector spending and income was £16bn in June 2026, according to data from the Office for National Statistics. This was £7.9bn (33.1%) less than in June 2025.
It was £300m lower than the Office for Budget Responsibility (OBR) forecast, largely because of lower inflation-linked debt interest costs.
This should offer some comfort to bond investors today, alongside Healey’s comments last night:
Fiscal control is the first duty of any chancellor. It is mine. And fiscal credibility is the bedrock for economic stability and for national security, and you heard the prime minister this afternoon say, in this more dangerous world, we will meet our commitments on defence to our international allies…
The agenda
Key events
UK defence stocks rally as former defence secretary appointed chancellor
The UK’s blue chip FTSE 100 index has opened slightly lower this morning, down 0.3% – but some of its biggest defence stocks are rallying amid excitement that a former defence secretary now occupies No 11.
Babcock International is up 4%, while BAE Systems is up 2.4%. Over in the FTSE 250, Qinetiq is up 3.5%.
Investors are hoping that chancellor John Healey will use his new position to increase defence spending – possibly though issuing “defence bonds”, a form of borrowing allocated only for the military which he has previously advocated for in government.
But Chris Beauchamp, chief market analyst at the broker IG, warns that Healey’s appointment does not necessarily lead to an immediate windfall for defence.
As chancellor, he will have many competing demands, and won’t just be the MoD’s man in No 11. His experience made him an obvious candidate for the role, and he represents a middle way between Miliband and Mahmood, but it will not be easy to find lots more cash for defence, especially when the new PM is so busy making broad spending commitments in other areas.
Gilt yields edge lower as investors assess new PM and chancellor
Gilt yields are down slightly this morning, after rising late yesterday following comments from Burnham that he will use “flexibility” in the fiscal rules to bolster public investment.
The yield on the 10-year gilt is about 1 basis point lower, though crucially still above the 5% level at 5.03%.
Bond markets are highly sensitive to comments from Burnham, amid expectations he could run a looser approach to public finances than Keir Starmer and Rachel Reeves. However investors may have taken comfort this morning from official figures which showed that the government borrowed less than expected in June.
But Burnham has also promised more cost of living support, which will not be cheap. The VAT cut on household electricity bills announced today is expected to cost £850m and Healey is expected to outline more long-term action to bring down living costs at the budget later this year. There has been speculation around reducing the cap on bus fares and temporarily freezing rents in the private sector.
Sterling is still standing firm against the US dollar, up by 0.13% to around $1.34.
Burnham right to prioritise cost of living and should hike taxes on banks, TUC says
Paul Nowak, general secretary of the TUC, says that the economic data released today show that Burnham is “doing the right thing by pledging action on the cost of living”.
Working people are up against it with stagnant real pay, over a million people stuck on insecure zero-hour contracts, and a million young people not in employment, education, or training.
Cutting VAT on energy bills will provide some welcome relief. But with Donald Trump’s illegal war in Iran continuing to drive up bills, the government will need to go further. The new prime minister could raise up to £60bn over four years by hiking taxes on banks – and use it to bring down bills further for households across the country.
Andy Burnham is sending the right signals by pledging to help young people into work. In the months ahead, he will need to expand the youth jobs guarantee and double down on his pledge to reindustrialise Britain and deliver good growth in every postcode.
UK unemployment at 4.9% in May in ‘stale’ labour market
Elsewhere this morning, new figures from the ONS show that unemployment remained at the same level as in April, at 4.9% – highlighting one of the many tough tasks ahead for Andy Burnham.
Employers cut the number of job vacancies down to 712,000, almost half the level in 2022, as employers put off hiring new staff in the three months to May.
The new prime minister has promised to raise living standards across all regions as part of a 10-year economic plan, but the latest pay data showed private sector earnings growth dropped to 2.9% to leave the average rise in earnings, including bonuses, at 4.3%.
Economists had forecast a rise in average pay with bonuses in the three months to May of 4.5%, up from 4.4% for the three months to the end of April.
Thomas Pugh, chief economist at the consulting firm RSM UK said the figures pointed to “a labour market with a whiff of staleness about it, but it’s still loosening gradually”.
That gives the MPC good cover to keep rates unchanged next week as it waits to see the impact of the latest escalation in fighting in Iran on inflation.
Meanwhile, stagnant, or even negative, real wage growth in the second half of this year will intensify the pressure on Burnham and Healey to come up with a package to support the cost of living. However, doing anything substantial without breaching either the fiscal rules or the manifesto commitments looks increasingly difficult, given the deterioration in headroom.
…Looking ahead, the unemployment rate will most likely continue to climb gradually through the summer as the full impact of the surge in input costs, tighter financing and higher uncertainty weighs on hiring appetite.
What’s more, wage growth in the 3.0%–3.5% range means that even with lower oil prices, real wages are likely to stagnate in the second half of this year, despite the reduction in VAT on electricity, which will shave 0.1 percentage points off inflation. That presents a major challenge for the new government, which has made tackling the cost of living a priority.
VAT cut on electricity bills is positive but ‘not a cure’, energy campaigner says
The removal of VAT from electricity bills is positive but it does not address the scale of the problem that British households are facing, campaigners at the End Fuel Poverty Coalition have said.
Simon Francis, coordinator of the group, said:
Removing VAT from electricity bills is a positive statement of intent by the new administration. But it does not address the scale of what households are facing, with millions still left paying an unaffordable share of their income on energy and record levels of energy debt built up over successive winters of high bills.
The prime minister’s next move must be to go even further on bringing down the cost of energy and bringing in increased levels of targeted support for those who need it most: an enhanced warm home discount, reformed cold weather payments and an energy debt relief scheme.
This breathing space is also not a cure. The only way to bring bills down for good is to change how they are set. That means breaking the link between gas and electricity prices, tackling excess profits in the energy industry and ending our exposure to volatile fossil fuel markets through homegrown renewables and more energy efficient homes.
But many in the energy industry are welcoming Burnham’s move today, including Martin Pibworth, chief executive of SSE,:
Cutting VAT gives immediate relief to homes and businesses and is a very welcome first step to making electricity as cheap as possible. Electrifying our economy is the way we take advantage of cheap, homegrown renewable power to cut bills, reduce energy dependence and boost economic growth.
SSE added that its analysis found that 70% of the increase in domestic energy bills since 2017 has been driven by global commodity prices and inflation.
Richard Neudegg, director of regulation at Uswitch.com, added that the removal of VAT on electricity bills in October could help households deal with global rises in energy prices triggered by the conflict in the Middle East.
There is continued pressure on wholesale prices, driven by the situation in the Middle East, meaning it is likely that the October 1 price cap will increase.
Some supplier predictions suggest the next price cap could rise 5% from October for a household with both gas and electricity, so this tax change could take the sting out of a potential increase.
There’s still time for customers to lock in significant savings before winter by switching to a good-priced fixed tariff.
The cheapest deals are currently undercutting standard rates by £210 for the average household. Doing so on top of this VAT change could leave households considerably better off over the winter.
Introduction: Burnham cuts VAT on household electricity bills
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
New prime minister Andy Burnham has announced this morning that VAT will be cut from household electricity bills, as part of his plan to help with the cost of living.
The PM has said he will remove the levy from 1 October, in a move that is expected to take around £45 off the yearly price cap set by the energy regulator.
The government said the decision would be funded by savings from the cancellation of its digital ID programme, which was expected to cost £1.8bn over the next three years. The VAT cut is estimated to cost around £850m in 2026/27 based on forecasts for electricity prices, ministers said.
Burnham said in a statement:
Westminster has not been working for people for too long, with families struggling with the cost of living.
That needs to change. 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.
It comes just a day after Burnham officially became prime minister with a pledge for a “new economic model” for the country.
But the government added this morning that “any further action, including on funding for longer-term measures, will be taken at the budget, and all decisions at that point will be funded and also consistent with the government’s fiscal rules.”
Investors will be watching the bond market carefully today as it weighs the appointment of Burnham’s new cabinet, including the surprise appointment of former defence secretary John Healey as chancellor.
Public sector finance figures released this morning should provide a boost – borrowing for June came in at £15.989bn, below expectations of £18bn and down from £23.94bn a year earlier.
The difference between total public sector spending and income was £16bn in June 2026, according to data from the Office for National Statistics. This was £7.9bn (33.1%) less than in June 2025.
It was £300m lower than the Office for Budget Responsibility (OBR) forecast, largely because of lower inflation-linked debt interest costs.
This should offer some comfort to bond investors today, alongside Healey’s comments last night:
Fiscal control is the first duty of any chancellor. It is mine. And fiscal credibility is the bedrock for economic stability and for national security, and you heard the prime minister this afternoon say, in this more dangerous world, we will meet our commitments on defence to our international allies…
