Jeremy Hunt to unveil package of tax hikes and spending cuts in autumn statement to plug £54bn black hole
Jeremy Hunt will promise to weather an economic “storm” by raising taxes, cutting public spending and scaling back energy support to fill a £54bn black hole in the nation’s finances.
The chancellor will insist to MPs on Thursday that his autumn statement puts the UK on a “balanced path to stability” as he tackles the “enemy” of inflation, which has soared to a 41-year high.
But the measures could put him on a collision course with Tory MPs on the right of his party who are already voicing anger about the prospect of some of the plans.
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An 11th hour petition from two dozen Tory MPs, led by Jonathan Gullis, has been sent to the chancellor asking him not to hike fuel duty in the statement.
The package will be in the form of £30bn of spending cuts and £24bn in tax rises over the next five years – a stark contrast to Kwasi Kwarteng’s unfunded tax-slashing spending splurge two months ago.
Among the measures, annual energy bills for a typical household will stay capped at £2,500, but this will rise to £3,000 in April 2023, when support will become more targeted with additional payments for low-income households and pensioners, Sky’s political editor Beth Rigby understands.
On tax rises, those with the broadest shoulders will bear most of the burden, but there will be pain all around.
The chancellor is expected to lower the threshold for paying the highest rate of tax to £125,000 – down from the existing £150,000.
This is a marked difference to Liz Truss’s plans to scrap the 45p rate altogether, giving the highest earners an average tax cut of £10,000.
Analysis says lowering the threshold will bring an extra 246,000 people into the highest bracket at a cost to them of around £580 each a year, which in turn would raise the Treasury £1.3bn a year.
Mr Hunt is also expected to announce a freeze on personal income tax and national insurance tax thresholds lasting until 2028.
Sometimes referred to as a “stealth tax”, freezing tax thresholds drags more earners into paying higher rates of tax.
Mr Hunt has already hinted he will make it easier for local authorities to increase council tax, with reports suggesting the threshold for raising bills without a referendum could increase from 2.99% to 5%.
There is also expected to be a big increase in the windfall tax on energy companies, and a new tax on electricity generators.
Labour has previously said a windfall tax extension could raise an additional £50bn, and criticised what it calls the “loophole” that allows gas and oil firms to offset their tax liability if they invest back into the UK.
On spending cuts, departments are expected to be told to live within an envelope of the March Spending Review, when inflation at was 3%.
With inflation now at 11.1%, that amounts to a real-terms cut across the board, meaning tough choices will be necessary.
However, there will be some exceptions, with the NHS expected to get more money.
There is also likely to be some protection for the schools budget, Sky’s deputy political editor Sam Coates understands.
“There will inevitably be some good news after the weeks of doom-laden warnings,” he said.
Mr Sunak and Mr Hunt have spent weeks warning that tough choices lay ahead.
However, the prime minister told Sky News on Tuesday that “fairness and compassion” will be at the heart of his decisions.
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It is understood the chancellor will keep the triple lock for pensioners in his autumn statement – honouring a manifesto commitment.
He is also expected to uprate benefits in line with inflation, rather than earnings (a controversial move that would have saved £5bn).
The government has not confirmed what measures will be in the statement, but there has been a constant stream of measures reportedly being considered.
This “pitch rolling” helps markets get an idea of what is coming down the road and avoids spooking traders.
When Ms Truss and Mr Kwarteng made several surprise announcements in their mini-budget in September, it contributed to the financial chaos which saw the pound crash and the Bank of England forced to intervene to prevent pension funds from collapsing.
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Analysis released on Monday by the independent Resolution Foundation think tank found the mistakes they made cost the UK £30bn, doubling the sum the Treasury says will have to be raised.
Mr Hunt will say that his “difficult decisions” are necessary to keep mortgage rates low and tackle the rocketing energy and food prices intensifying the cost of living crisis.
“Families across Britain make sacrifices every day to live within their means, and so too must governments because the United Kingdom will always pay its way,” he is expected to say.
But Tories on the right of the Conservative Party are already voicing anger about the prospect of raising taxes.
Among the Tory critics, former cabinet minister Esther McVey has warned she will not support tax rises without the scrapping of the “unnecessary vanity project” of HS2.
Former business secretary Jacob Rees-Mogg told ITV’s Peston he would vote for the budget so as to not bring the government down, but warned he opposes tax increases, which he believes “risks making a recession worse”.
Labour has also warned that Britain is “falling behind on the global stage”.
Shadow chancellor Rachel Reeves said: “The country is being held back by 12 years of Tory economic failure and wasted opportunities and working people are paying the price.
“What Britain needs in the autumn statement are fairer choices for working people, and a proper plan for growth.”
And Sharon Graham, the general secretary of the Unite union, warned Mr Hunt “workers are ready to take a stand”.
“He can choose to inject investment into the NHS and deliver a fair pay deal – or he can leave it as it is today, in danger of fatal collapse,” she said.
Black Friday sales do not appear to have provided much cheer for retailers amid continued consumer caution, according to official figures.
The Office for National Statistics (ONS) reported a 0.1% decline in sales volumes during November, compared to the previous month, when the data is adjusted for seasonal effects due to the pre-Christmas shopping bonanza falling in December last year.
Economists polled by the Reuters news agency had expected growth of 0.4%. The dip was worse when the effects of fuel sales were excluded.
Rolling three-month data showed positive sales volumes were only propped up by strength in September.
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ONS senior statistician Hannah Finselbach said: “Retail continued to grow in the three months to November, helped by a strong performance from clothing and tech shops.
“This year November’s Black Friday discounts did not boost sales as much as in some recent years, meaning that once we adjust for usual seasonality, our headline figures fell a little on the month.
“Meanwhile, our separate household survey showed that although some people said they were planning to do more shopping… this Black Friday than last, almost twice as many said they were planning to do less.”
The data was released against a backdrop of widespread consumer and business caution in the run-up to the budget on 26 November – held just two days before Black Friday – although promotional activity was already well underway before Rachel Reeves’s speech.
That period was dominated by on-off signals over income tax hikes and black holes in the public finances, but the budget itself largely backdated many of the most painful measures towards the end of the parliament.
While the ONS data does little to boost retailers’ expectations for the Christmas season, there was a crumb of comfort to take from a closely-watched survey released just beforehand.
GfK’s consumer confidence index nudged up to its joint-highest level this year – though it remained deep in negative territory.
The biggest upwards contribution came from a willingness to make major purchases, despite perceptions for personal finances weighing amid continuing cost-of-living pressures in the economy.
Neil Bellamy, GfK’s consumer insights director, said: “Consumers resemble a family on a festive winter hike, crossing a boggy field – plodding along stoically, getting stuck in the mud and hoping that easier conditions are not far off.”
We have had better economic news since the survey was completed.
It was revealed this week that a much larger decline in the rate of inflation, to 3.2% from 3.6%, had allowed the Bank of England to cut interest rates to 3.75%.
It promises a boost to spending power as borrowing costs come down further, with wage growth still rising above that pace for price growth.
It is now hoped that the end of the budget circus will spark some life into the economy following two consecutive monthly contractions for output and a surge in the unemployment rate.
Much of the increase has been attributed to the retail and hospitality sectors reacting to sharp rises in employment costs under the Labour government.
Consumer spending accounts for around 60% of the UK economy.
Richard Carter, head of fixed interest research at Quilter Cheviot, said of the outlook: “Markets do not believe growth is coming to the UK anytime soon.
“Indeed, the UK is likely to slip into recession if the latest GDP figures are anything to go by, and there is little sign of positive momentum being generated.”
The Bank of England has cut interest rates from 4% to 3.75%, its sixth cut since last summer.
The decision follows a bigger-than-expected fall in the consumer price index rate of inflation in data released this week. While inflation is still above the Bank‘s 2% target, the fall to 3.2% helped swing today’s decision, with five of the Bank’s nine-member monetary policy committee (MPC) voting for a cut.
The governor, Andrew Bailey, who had voted to leave rates on hold in November pending more data on inflation, shifted his vote this time around.
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“We’ve passed the recent peak in inflation and it has continued to fall,” he said, “so we have cut interest rates for the sixth time, to 3.75 per cent, today. We still think rates are on a gradual path downward. But with every cut we make, how much further we go becomes a closer call.”
The decision will mean those with floating rate mortgages should immediately see a reduction in their monthly repayments – and some lenders are now reducing fixed-rate deals to 3.5% or below.
The Bank also gave its first full assessment of the economic impact of last month’s budget. It said the budget, which included measures to reduce energy bills and freeze fuel duty, should help push inflation half a percentage point lower next year.
That would mean CPI inflation would drop to close to the Bank’s 2% target as soon as the second quarter of 2026, nearly a year earlier than it originally expected.
However, the Bank also warned that growth remained weak. It said it expected gross domestic product to flatline in the fourth quarter of the year.
Since the decision was a narrow one, with four members of the MPC voting against the cut, some investors might judge that the Bank remains finely balanced on future decisions. Right now investors expect another cut by the end of next spring and, possibly, another one thereafter.
But whether rates eventually settle at 3.5% or 3.25% – or even lower – remains a matter of debate.
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