The government must follow through on its promise of tax rises and spending cuts in this week’s autumn statement or risk a market backlash destabilising the UK economy, Rishi Sunak has said.
The prime minister is facing the threat of rebellion from backbench Conservative MPs angry at Jeremy Hunt’s announcement that everyone in the UK will pay more tax as a result of the fiscal policies he is set to unveil on Thursday.
But Mr Sunak said that the chancellor has no choice but to deliver on the expectations of the international markets that he will put Britain’s finances on a sustainable path.
He suggested that rowing back on tax rises would risk a return to the chaos which followed Liz Truss’s £45bn package of unfunded tax cuts in September.
On Sunday, in a round of TV interviews, Mr Hunt confirmed his package will include both tax rises and spending cuts, which he said were necessary to deal with the burden of rising energy costs, which he said was the equivalent of funding a second NHS each year.
The chancellor is understood to be considering a package of £25bn worth of tax rises and £35bn of cuts to public spending to fill a gap of up to £60bn in the government’s finances.
The statement will also confirm that support with energy bills will be scaled back after April, so it is targeted only at those who need it most, he said.
Mr Hunt is expected to drag millions of more workers into higher rates of income tax by extending a freeze on thresholds by a further two years. And he is understood to be considering cutting the threshold for the 45p top rate from £150,000 to £125,000.
But he was put on notice of potential backbench rebellion by former cabinet minister Simon Clarke – a close ally of Ms Truss – who said that he should opt for spending cuts over tax rises “as much as he can”.
Flying to Indonesia for the G20 summit in Bali, Mr Sunak warned that Britain’s financial stability has been restored only because he and Mr Hunt have made clear their determination to make good on the mistakes of the Truss regime, and could be lost again if they back down on their plans.
“Financial conditions in the UK have stabilised, clearly,” he told reporters travelling on his plane. “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. That’s what the chancellor will do.”
Mr Sunak said that he and Mr Hunt would ensure that their package “supports the most vulnerable”.
But he added: “We will do that, crucially, [while] delivering on the expectations of international markets, especially to make sure that our fiscal position is on a more sustainable trajectory. And that’s what we will do.”
In a sop to Tory MPs eager for tax cuts ahead of the general election, Mr Sunak signalled that he believes the painful process of consolidation over the coming period will put him into a position to reduce the burden on taxpayers in future years.
“Part of our job is not just to bring stability back to the system – which we will do – but also to lay the foundations for the economy to recover and grow,” Mr Sunak said.
“Ultimately, that’s what we all want to see. That’s how we’re going to be able to cut people’s taxes over time and support public services. And you’ll hear that side of the equation from the chancellor as well.”
Speaking to Sky News show Sunday with Sophy Ridge, Mr Hunt said: “We are all going to be paying a bit more tax.” But he said his statement would show “compassion and support for the most vulnerable people”.
“We will be asking everyone for sacrifices,” said the chancellor. “But in a fair society – as we are in the UK – there is only so much you can ask from people on the lowest incomes.”
He said the statement will also feature “a long-term plan for clean energy, green energy and cheap energy” to ensure that Britain is never again at the mercy of international events like Russia’s war in Ukraine.
Economist Paul Johnson, director of the Institute of Fiscal Studies, said that Mr Hunt’s comments could mean “some substantial additional taxes”, which could include the reinstatement of the 1.25 per cent hike in national insurance announced by Mr Sunak earlier this year but cancelled by Ms Truss.
But he said that, with many people not paying income tax or national insurance, the only way for the chancellor to ensure that everyone pays more tax would be to increase VAT – something Mr Hunt is not thought to be planning.
Mr Hunt signalled that the government’s energy support plan – holding all households’ gas and electricity bills to an annual average of £2,500 for the six months to April at a cost of £60bn – is to be slashed back once the winter is over. Reports suggest that the Treasury is budgeting for £20bn over the following six months.
The statement will set out plans for “short-term support for people who need it, but also a long-term plan to really change our approach to energy”, said Mr Hunt.
And he told BBC1’s Sunday with Laura Kuenssberg that he will impose “constraints” on the support, which is currently available to all households.
“Will it be uncapped, unlimited?” he said. “We have to recognise that one of the reasons for the instability that followed the mini-Budget was that people were worried that we were exposing British public finances to the volatility of the international gas market. So, there has to be some constraints to it.”
Mr Hunt insisted that Britain would get through the difficult period ahead, telling Sky News: “There are going to be very difficult decisions, but we are a resilient country and we have faced much bigger challenges in our history.”
He told Kuenssberg that a failure to take action to get the books into balance would mean soaring mortgages.
“If we do nothing, the Bank of England will then increase interest rates,” said Mr Hunt. “They have to do that constitutionally. It’s their job to bring down inflation.
“A dynamic economy needs low taxes and sound money. But sound money has to come first, because inflation eats away at the pound in your pocket and the pound in your bank account every bit as insidiously as taxes.”
Labour’s shadow chancellor Rachel Reeves warned against “austerity 2.0”, saying that public services are already “on their knees”.
She told Sky: “Seven million people are waiting for an NHS operation or support. If you look at our schools, our class sizes are increasing. Teachers are increasingly having to fund the basics out of their own money.
“So, I don’t believe that austerity 2.0 after the austerity that we’ve gone through for the last 12 years is the right approach, which is why I’m arguing for two things, both fairer choices on taxes but also, crucially, a plan for growth.”
