Speculation has risen over the possibility of tax increases in the upcoming Autumn Statement as the Government tries to fill the £50 billion "black hole" in public finances without increasing borrowing.
Chancellor Jeremy Hunt is set to deliver the Budget on 17 November after it was pushed back by over two weeks following the appointment of Rishi Sunak as Prime Minister.
Fiscal rules, introduced by Sunak when he was Chancellor, stipulate that the debt as a ratio of GDP must begin to fall within the third year of the Office for Budget Responsibility's forecast, which will form part of Hunt's statement.
The result is Hunt insisting "nothing is off the table" to achieve that goal.
A Treasury source has been quoted saying:
"It is going to be rough. The truth is that everybody will need to contribute more in tax if we are to maintain public services."
Income tax and National Insurance
Rumours of tax hikes and spending cuts follow then-Chancellor Kwasi Kwarteng's flurry of tax cuts in September 2022, the majority of which Hunt rolled back following market backlash.
Rumoured to be on the agenda is a freeze to the tax-free thresholds for income tax and National Insurance contributions (NICs) freeze.
The thresholds currently sit at £12,570 and are to remain unchanged until 2026. However, if the rumours are true, this could continue until 2028.
The original freeze on the rates was already due to hit 27.1 million taxpayers with an average real-terms loss of £196 per year.
Hunt could also freeze the £50,270 threshold at which taxpayers start paying 40% income tax, a stealth tax that would net the Treasury £40bn a year.
State pension rise in doubt
There has also been doubt cast over the increase in pensions which was promised by former PM Liz Truss before leaving office.
Originally, Truss announced that pensions would rise in line with inflation by April 2023 (10.1%), but that has been thrown into doubt since Sunak took office.
The 2019 Conservative manifesto states that the party would promise to raise pensions by the triple lock - the highest earnings, 2.5% or in line with inflation.
In his inaugural speech, Sunak stated that it was his full intention to deliver the party's previous manifesto.
Tax hikes for businesses and savers
Hunt is also considering tax hikes for capital gains tax, which is levied on the sales of shares and assets, including property.
The Chancellor is eying changes to the headline rate, reliefs and allowances on capital gains tax, it has been reported.
He may also cut the £2,000 tax-free allowance for dividends and a 1.25 percentage point increase to all dividend tax bands, according to the Telegraph.
The fiscal black hole
Think tank the Resolution Foundation believes that the PM will need to cut and save up to £40bn to stabilise the economy.
James Smith, research director at the Resolution Foundation, said:
"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.
"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 £22bn thanks to high inflation."
However, critics reject the idea of a black hole in the public finances. Larry Elliot, economics editor of the Guardian, wrote:
"A country that has its own currency, as the UK does, can print money to cover its spending.
"While it is never admitted, the Bank of England's quantitative easing - large-scale buying of bonds - effectively funded government deficits during both the global financial crisis and the pandemic."
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