How to fund a giveaway out of money that does not exist.

On 20 July, in his first major act as Prime Minister, Andy Burnham announced that VAT would come off domestic electricity bills from 1 October, worth around £45 on the annual price cap and costing around £850m this year. His new Chancellor, John Healey, said the measure was funded by cancelling the Digital ID programme, priced at £1.8bn over three years. It all sounded neatly packaged. A giveaway, a named source, a number that comfortably exceeds the cost. Anyone reading quickly would conclude the proper calculations had been done.

This reminded me of a slightly surreal moment at an investor meeting some years ago. A fund manager was proposing to lift the management fee and justified it by pointing to a technology programme investors had endorsed the previous year, which had since been shelved. The money approved for it, he explained, had not gone away, so it could simply be redirected. One of the investors, a pension trustee, asked which budget line the programme’s costs had sat on. There wasn’t one. I asked, on behalf of my client, to see where the unspent allocation appeared in the accounts, since a real reserve leaves a trace. It appeared nowhere, because it had never existed. What investors had approved the previous year was “permission” to explore an idea, and somewhere between that meeting and this one, permission to explore had quietly become money in the bank.

The calculations for Andy Burnham’s promise had, in fact, been done. Not by the Treasury on 20 July, but eight months earlier by the Office for Budget Responsibility, which recorded that ‘no specific funding has been identified’ for the Digital ID programme, described its costs as provisional, and noted there was no explicit provision for its estimated £600m a year. The trustee’s question, asked at national scale, had already been answered in a published document. No one thought to look.

What Burnham VAT electricity funding actually is

This is where the maths gets awkward. If the Treasury had set aside £1.8bn for Digital ID, cancelling it would release £1.8bn. Cash held against a commitment becomes cash held against nothing, and the Chancellor can spend it. That is a saving in the ordinary sense, the sense the rest of us mean when we use the word.

What the OBR described was a different animal. Digital ID was a cost the government expected to incur, provisionally scoped, with the money to be found later from departmental budgets through the wonderfully elastic mechanism of reprioritisation. No one was actually tasked to find it yet. Cancelling that simply removes a future pressure. It does not produce a present pound. You cannot spend a bill you had not yet worked out how to pay.

Darren Jones, who ran the Digital ID project as chief secretary to the Treasury until Burnham removed him, put it in one word on the day of the announcement. The programme, he said, was unfunded, and the government will have to explain at the Budget how it intends to pay for the new policies. He would know. He is the man who was running it.

The government’s own press release gives the game away. Updated costs, it says, will be set out at Budget. That sentence is doing an enormous amount of quiet work. It concedes, in the same document that announces the funding, that the funding has not been settled. This is narrative substitution at its purest, a story about money standing in for the money itself. The announcement and the caveat travelled together, and only one of them made the headlines.

There is a serious counter-argument and it deserves stating properly. Business Secretary Jonathan Reynolds told BBC Radio 4 that the OBR had scored the £1.8bn as a cost the government would otherwise have had to absorb, and that this pressure has now shifted toward funding the energy cut instead. He has a point. Avoiding a scored cost genuinely creates fiscal room, in the same way that cancelling a holiday you had not yet booked leaves you better off than going on holiday. The difficulty with the Burnham VAT electricity funding claim is that this is not what ‘funded from cancelling the Digital ID programme’ says, and it is not what a listener hears. It is a smaller, more technical, considerably less impressive claim, which is presumably why no one made it from a podium.

The bond market, which reads announcements for a living and has no interest in how they sound, reached its own view within hours. The 10-year gilt yield jumped 8 basis points to 5.04 per cent on the Monday as Burnham’s early remarks raised the prospect of a looser fiscal stance, then pared the move once Healey was installed. That is the same reflex I wrote about a fortnight ago in where the binding constraint actually sits. Voters get the announcement. Lenders get the maths.

The line no one has been asked to defend

Here is why this matters beyond Westminster, and it is the part I would ask you to sit with for a moment. Every budget has a line that exists only because no one has yet gone looking for the money behind it.

You have seen it. The initiative that was approved in principle and became a budget line by repetition. The efficiency saving that appeared in the business case because the business case needed one. The cost avoidance counted as a benefit, then counted again six months later in a different presentation. The synergies. No one lies. Someone writes down a number which stands in for work that has not been done, the number hardens through re-telling, and by the time anyone asks to see it in the accounts, the person who wrote it has moved on.

What the audit world does about this is interesting. On 16 July, four days before Burnham’s announcement, the Financial Reporting Council fined PwC £3.3m over failings in the 2019 and 2020 audits of Babcock International. Whatever else that case shows, it certainly shows a claim eventually being reconciled against reality by someone with statutory power to demand it. It took years, it cost money but it happened. Corporate financial claims live inside an architecture, however slow and imperfect, designed to catch the gap between what was asserted and what was true.

Fiscal announcements have a thinner version of this. The OBR does the work, and does it well, and in this case had already done it eight months before anyone needed it. But its findings arrive as a document, and a document does not compete with a press conference. The verification exists. The timing is wrong. By the time the Budget reconciles the claim, the claim has done its work.

Burnham may well fund the VAT cut properly in the autumn. The Treasury has options and £850m is, by the standards of a state carrying debt north of 95 per cent of GDP, very nearly a rounding error. What will not happen is any reckoning with how it was originally sold. Voters forget a July press release considerably faster than they forget what they had for dinner last Wednesday.

I examine how claims survive when nothing is structured to test them in my book where the argument is that the absence of a verification point is rarely an oversight. It is usually the reason the claim was made in that form.

The next time someone tells you a cost has been cancelled, the only useful question is whether anyone had actually been asked to pay it. Ask it early. Ask it in the room. The answer is almost always available, and the pause before the answer is given will generally tell you everything.