Autumn statement: Taxes and the big problem facing Rishi Sunak on Thursday

Britain's Prime Minister Rishi Sunak walks outside Number 10 Downing Street, in London, Britain, October 26, 2022. REUTERS/Henry Nicholls
Prime minister Rishi Sunak and chancellor Jeremy Hunt have warned that tax increases and spending cuts will be announced on Thursday. (Reuters) (Henry Nicholls / reuters)

Spending cuts and tax hikes: these are the two issues that will define the government's autumn statement on Thursday amid rising government debt, a deepening recession and a worsening cost-of-living crisis.

On Wednesday, figures showed inflation soared to a 41-year high of 11.1% last month as rocketing energy and food prices intensified the cost-of-living crisis.

Amid the grim economic backdrop, Rishi Sunak and chancellor Jeremy Hunt have warned of "difficult decisions" – with Hunt reportedly looking to find £33bn in spending cuts and £22bn in tax rises to address a so-called "fiscal black hole" in government finances.

Among tax increases being considered is: lowering the threshold for the 45p tax rate from £150,000 to £125,000; making it easier for local councils to increase council tax without referenda; and increasing capital gains tax to match income tax.

Hunt is also expected to extend the freeze in income tax thresholds to 2027/28, and announce another two-year freeze on the lifetime allowance on pension savings.

The price of food, housing and bills are rising steeply (Yahoo News UK/Flourish)
The price of food, housing and bills are rising steeply (Yahoo News UK/Flourish)

Regardless of the public reaction to the statement, Sunak will also need to prepare himself for another significant challenge in the coming months – that of Tory MPs who will be set against the possibility of any tax rises.

Sunak faced fierce criticism during the first Tory leadership contest this summer for refusing to promise a reduction in taxes after they hit their highest level in 70 years while he was chancellor; increases to national insurance contributions were the most controversial and were criticised for breaking a Tory manifesto pledge.

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In a demonstration of the discontent he faces, a number of senior Conservative MPs have already warned against reported tax hikes that look set to become a key part of the government's economic strategy.

Senior Tory MP and former party leader Iain Duncan Smith told Sky News on Thursday he believed rises would make the recession worse.

British Chancellor of the Exchequer Jeremy Hunt speaks at the House of Commons, in London, Britain, October 17, 2022. UK Parliament/Jessica Taylor/Handout via REUTERS THIS IMAGE HAS BEEN SUPPLIED BY A THIRD PARTY. MANDATORY CREDIT. IMAGE MUST NOT BE ALTERED.
Chancellor Jeremy Hunt has said decisions of 'eye-watering difficulty' will be announced in the budget on Thursday. (Reuters) (Handout . / reuters)

"It will be deep concern if we go over the top on tax rises because, as I say, it is absolutely a fact of life that tax rises will make the recession deeper," he said.

"It wont go down particularly well, because many people - and economists, too - think it will be a [problematic] decision to make."

Elsewhere, according to the Daily Mail, senior Tory and former cabinet minister John Redwood has said the UK was at a "tax saturation point" and called for a "credible growth strategy" instead of more rises.

Jacob Rees-Mogg, also a senior Tory and former cabinet minister, said he hoped reports the government is considering increasing the top rate of income tax are "kite flying" – warning it would be "breaking a manifesto commitment".

And during prime minister's questions on Wednesday, senior Tory MP Esther McVey said the government's financial difficulties were caused by "overspending" and called for the cancelling of HS2.

The high-speed railway connecting London with the Midlands and the South, has so far cost at least £70bn and is still not finished.

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"If... [the government] has so little money, it has to increase taxes - which is the last thing for a Conservative government to do - then it doesn't have sufficient money for HS2," said McVey.

"So, can I gently urge the deputy prime minister not to ask Conservative MPs to support any tax rises... until this unnecessary vanity project is scrapped? Because I, for one, will not support them."

Watch: What can we expect from Thursday’s autumn budget?