Chancellor Jeremy Hunt is planning a big package of spending cuts and tax increases in Thursday’s Autumn Statement after being warned that UK public borrowing will be about £70bn larger than expected.
The Office for Budget Responsibility estimates that a worse economic outlook will raise government borrowing close to £100bn in 2026-27, according to an ally of the chancellor. In its March forecasts the UK fiscal watchdog had calculated a budget deficit of just £31.6bn for that year.
Hunt acknowledged the need to take action after receiving horrible forecasts from the OBR. “We are going to see everyone paying more tax. We’re going to see spending cuts,” he told the BBC on Sunday.
Prime Minister Rishi Sunak said the UK would be punished by financial markets if it did not proceed with tax rises and spending cuts to fix public finances.
Liz Truss’s disastrous “mini” Budget in September unleashed turmoil on the markets, including a sharp rise in government borrowing costs, and culminated in her resignation as prime minister.
Sunak, speaking to reporters en route to the G20 summit in Indonesia, said: “Financial conditions in the UK have stabilised clearly, but they have stabilised because people expect the government to take the decisions that will put our public finances on a sustainable trajectory, and it’s the government’s job to deliver on that.”
Roughly half of the £70bn increase in borrowing is caused by higher anticipated costs of servicing government debt, with the remainder coming from a weaker economic growth outlook hitting tax revenues and inflation raising the expense of welfare benefits and state pensions.
The deterioration in the underlying public finances estimated by the OBR is significantly greater than that calculated by think-tanks such as the Institute for Fiscal Studies and the Resolution Foundation and has underpinned the Treasury’s search for measures to repair government coffers.
That is likely to result in tax increases and spending cuts building annually to between £55bn and £60bn in five years’ time, enough to ensure the UK debt burden is falling in 2027-28, the final year of the latest OBR forecasts.
Hunt’s ally said the Autumn Statement will focus heavily on fixing the public finances because it was “hard to sugar coat” the OBR forecasts, but this person insisted the Treasury was not deepening the coming recession with excessive tax rises and spending cuts. The OBR declined to comment.
Hunt will focus on limiting the growth of day-to-day spending on public services after the government’s existing plans for Whitehall departments expire in 2025.
Holding this spending flat in real terms would save roughly £27bn a year by 2027-28, according to Financial Times calculations.
Hunt meanwhile intends to freeze many annual allowances and thresholds across the tax system so as to secure more revenue as people’s incomes rise amid high inflation.
He is seeking symbolic increases in taxes on richer people to show those with the broadest shoulders are paying the most.
The threshold for the 45p top rate of income tax is expected to fall from income of £150,000 to £125,000. The £12,300 annual allowance for capital gains tax is likely to be halved.
Hunt said he would outline on Thursday the government’s new plan for helping households with soaring energy bills from April.
The government at present caps electricity and gas bills for all households following a surge in wholesale energy prices, but is expected to focus future help on pensioners and the vulnerable.
Officials said the government’s overall fiscal stance as the UK economy enters recession was “incredibly supportive” to households via the help with energy bills, but the most important thing was to help the Bank of England curb inflation.
Sunak suggested that by focusing on stabilising the public finances now, the government would eventually be able to cut taxes and increase spending on public services.
“That’s how we’re going to be able to cut people’s taxes over time and support public services,” he said.
The chancellor stressed the government wanted to promote economic growth as part of the Autumn Statement, noting the labour market shortages caused by 600,000 mostly older people deciding not to work.
But with officials stressing the statement will primarily be a fiscal consolidation, Hunt is planning to outline barriers to growth that the government will focus on fixing in the months ahead.
Additional reporting by Daniel Thomas in London