Andy Burnham is facing criticism from his own backbenches after claiming he would fund his cost of living plans by scrapping Labour’s digital ID scheme – despite the policy being unfunded at the last budget.

In his first major policy announcement as prime minister, Burnham revealed today he would remove VAT from domestic electricity bills from October 1 in time to impact the next Ofgem price cap. In an announcement, he said the move would be funded by the cancellation of the (£1.8bn) Digital ID programme.

But in its fiscal outlook published at the last budget, the Office for Budget Responsibility (OBR) said “no specific funding has been identified” for the programme which was estimated to cost £1.8bn. It also described the costs as “provisional” and warned there was “no explicit provision” to pay for its estimated £600m annual cost.

According to Burnham’s announcement today, savings were due to be identified for the digital ID plans from existing budgets through “reprioritisation”, which will now be redirected towards the VAT cut. 

The policy is now facing criticism from Burnham’s own backbenches. Darren Jones, the former Treasury minister and Keir Starmer loyalist, who was sacked by Burnham yesterday, pointed to the fact the plans were unfunded and called on Burnham to set out how he would finance the policy.

“Good news that VAT will be cut on electricity bills. It’s a simple way for families to save a few quid, and to mechanically help to keep inflation that little bit lower,” Jones wrote on X.

“But the Digital ID program was unfunded. The government will have to set out how it will pay for its new policies at the budget.”

Shadow Chancellor Mel Stride said: “We are only one day in and already Labour are playing fast and loose with the public finances.”

‘Not just about the money’

Burnham had said in his first speech on Monday that he would set out emergency cost of living support in a bid to “to give people some breathing space now”. 

“Westminster has not been working for people for too long, with families struggling with the cost of living,” the new prime minister said. “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.”

Newly-appointed Chancellor John Healey said: “For too long, too many people have struggled with the cost of living. Today’s energy tax cut will give families some breathing room on bills, and provide some reassurance this winter.”

The commitment is expected to cost £850m this year.

Funding for longer-term measures will be need to be taken at the Budget, the government said in its announcement, adding that it would then stick to funded measures that complied with the fiscal rules set out by former Chancellor Rachel Reeves.

Over the weekend, Labour deputy leader Lucy Powell also stopped short of saying how much money Burnham’s scrapping of Digital ID would save.

“It’s not just about the money,” Powell told the BBC’s Sunday with Laura Kuenssberg. “It’s actually about the attention and the focus.”

Burnham’s office has argued that scrapping digital ID is as much about freeing up the machinery of government as it is about reducing spending, saying ministers want to focus on “creating breathing space and delivering change people can feel in their everyday lives”.

HENRYs brace for tax squeeze

City advisors have warned that Burnham’s wider plans could lead to more pain for higher earners.

Charlotte Kennedy, Chartered Financial Planner at Rathbones, said the a “relatively narrow group of taxpayers” are feeling the pressure.

“Our analysis shows that someone earning £150,000 earns 3.8 times the median full-time salary yet pays more than 10 times as much in income tax,” she said.

“Frozen tax thresholds have also steadily pushed more people into higher tax bands without a corresponding improvement in their standard of living. This is particularly relevant for HENRYs – high earners, not rich yet – who may look affluent on paper but are often juggling hefty mortgages, childcare costs, pension contributions and other financial commitments.

“So, while the government may want to pursue a different economic strategy, the question is how much more pressure can be placed on the same relatively narrow group of taxpayers. The key issue is not simply whether taxes will rise, but who will ultimately be expected to pay for Burnham’s economic agenda – and whether those already carrying a disproportionate share of the burden have much more capacity left.”

Digital ID still has supporters

Starmer initially pitched digital ID as a way to tackle illegal working before broadening the policy into a wider overhaul of government services.

Ministers argued it could eventually allow people to access everything from childcare support to tax services through a single digital identity.

The plans were steadily watered down after attracting fierce opposition from campaigners and Labour MPs.

Ministers first dropped proposals to make the scheme compulsory before Burnham scrapped it altogether ahead of entering Downing Street.

The move leaves Britain moving away from a policy several European countries have embraced.

Belgium’s digital identity system is used to access hundreds of public and private services, while the EU is rolling out a digital identity wallet across member states that will allow citizens to prove their identity and store official documents digitally.

“There are countries where it works and makes life so much easier”, Brent Hoberman, co-founder of Lastminute.com, told City PM.

Rather than scrapping digital identity altogether, Hoberman suggested ministers had failed to make the case for how it could benefit the public.

“I wonder if they’ve done enough to explain this really can help,” he said.

The decision was welcomed by privacy campaigners, who argued the government had finally listened to public concerns after months of opposition.

Burnham was the minister responsible for Labour’s failed ID cards programme under Tony Blair nearly two decades ago. His government has said mandatory digital right-to-work checks will remain in place despite scrapping the wider digital ID scheme.