Chancellor Jeremy Hunt is drawing up plans for tax increases and public spending cuts worth up to £54bn a year to fill the black hole in the UK public finances, according to allies of Britain’s chancellor.
With just 10 days until the Autumn Statement is announced, Hunt is preparing a huge budgetary tightening on the same scale as his predecessor George Osborne’s austerity Budget of 2010.
The final spending cuts total is yet to be decided, reflecting daily changes in gilt markets but is now higher than ministers expected a fortnight ago.
The Treasury is aiming to overshoot the actual black hole of about £40bn in order to create additional fiscal headroom to allow for the possibility that economic conditions deteriorate more than currently expected.
Under his draft proposals Hunt intends to cut £33bn from public spending while raising taxes by about £21bn, according to officials, which would imply tight restraints on departmental spending.
The chancellor could also break the “triple lock” on increases in the state pension, which ensures that pension payments rise in line with inflation, average earnings or by 2.5 per cent each year, whichever is higher. Another controversial option would be to raise benefits in line with average earnings rather than inflation.
Hunt has warned that “eye-wateringly difficult” decisions will need to be made to balance the books. Not only is there a fiscal black hole in Britain’s public finances but the country is facing, according to the Bank of England, its longest recession for a century.
Many of his revenue-raising measures will be “stealth taxes”, for example freezing income tax thresholds for another two years until 2027-28, meaning that more people pay more tax as their incomes rise.
The chancellor is looking at raising the taxation rate on share dividends as well as cutting the tax-free allowance on dividend income. He has also examined the case for cutting the reliefs or allowances for capital gains tax, which is paid on shares and second homes.
Hunt is expected to freeze the pensions lifetime allowance for another two years to 2027-8 at its current rate of £1,073,100. However, he is thought to have decided against cutting the tax relief on pension contributions.
The chancellor is also expected to start charging vehicle excise duty on electric vehicles for the first time. Further savings could be made by maintaining a less generous overseas aid budget for longer.
The previous administration led by Boris Johnson cut UK overseas aid from 0.7 to 0.5 per cent of gross domestic product, indicating that the original figure would be restored by 2024. However, Hunt is thought to be considering extending the policy to 2027-8 to save £5bn a year.
