The Prime Minister has agreed to a “painful” blueprint of stealth taxes and spending cuts to help bring down debt.
It raises fresh fears about the future of the triple lock with government ministers steadfastly refusing to guarantee the 10.1 percent rise in state pensions.
Mr Sunak agreed an outline plan with Chancellor Jeremy Hunt during intensive talks yesterday. Treasury insiders warned the autumn statement on November 17 will be “painful”.
“It is going to be rough,” a source said. “The truth is that everybody will need to contribute more in tax if we are to maintain public services. After borrowing hundreds of billions of pounds through Covid-19 and implementing massive energy bills support, we won’t be able to fill the fiscal black hole through spending cuts alone.”
The PM and Chancellor agreed they would not increase income tax or VAT and they will leave national insurance alone after Mr Sunak’s previous 1.25 percent hike was reversed by Liz Truss. But income tax thresholds are expected to be held down for two years beyond the current freeze that ends in April 2026.
Experts expect the existing four year plan will already hit households’ income by £1,250 on average while saving the government £30 billion by the end. Small businesses will also face extra pressure and many other obscure taxes are expected to be in the mix.
Sir Iain Duncan Smith warned the UK is already heading for recession and the measures are likely to make a “bad situation worse”. He said: “Tax rises will make the recession deeper and increase the deficit.”
Another senior Tory said: “We have the highest tax burden in 70 years. This will not be popular on the backbenches.”
Treasury sources said given the eyes watering size of the fiscal black hole, the PM and the Chancellor agreed that tough decisions are needed on tax rises, as well as on spending.
The source said they agreed on the principle that those with the broadest shoulders should be asked to bear the greatest burden. But the “enormity” of the challenge means it is “inevitable” that everybody will need to contribute more in tax in the years ahead.
The PM and the Chancellor recommitted to protecting the most vulnerable over the coming years. But ministers and officials continued to refuse to guarantee the triple lock will remain in place.
Economists warned the government has limited options for filling the gap in public finances. The Resolution Foundation said one “unpalatable” measure would be axing the triple lock and keeping down benefits.
It said extending the “stealth” freezes in income tax thresholds by a further year to 2026-27 could save another £2 billion annually.
The think tank said the Office for Budget Responsibility could predict a recession next year and unemployment could also rise by around half a million when it reports on November 17.
It said there are four options for meeting the financial shortfall – cutting investment, reducing departmental spending, increasing taxes and keeping down pensions and benefits.
By “reneging” on pledges to raise working-age benefits and the State Pension in line with prices next year would save £9 billion but the impact on living standards would be “huge”.
The think tank estimates a low-income working family with two children would lose around £750, and a pensioner £342.
James Smith, research director at the Resolution Foundation, said: “The Government has a little over two weeks to finalise its plans to repair its economic credibility and the sustainability of the public finances.
“While the recent focus has been on conditions improving post-Trussonomics, the central picture remains one of weaker growth, higher borrowing costs and expensive tax cuts that have left a fiscal hole of at least £40 billion to fill.”
The report warned the Government faces a struggle to reduce debt proportionally unless “significant further policy action is taken”.
Mr Smith said that the lesson from history is that public investment projects are likely to face cuts.
“History tells us that this will involve cuts to public investment, which are easy to announce but reduce growth in the longer term.
“Further austerity for public services is also likely, but there are limits to how big these can credibly be, as public services are already facing cuts of £22 billion thanks to high inflation.
“This reality means that the Autumn Statement is likely to involve tax rises, not just spending cut.”
John O’Connell, chief executive of the TaxPayers’ Alliance, said: “Taxpayers will be horrified by talk of bigger bills to come.
“With the tax burden at a 70 year high, Brits are being expected to bear the brunt of a spiralling cost of government crisis. The chancellor must make significant savings to ease the strain on hard-pressed households.”