Households up and down the country could face tax rises for years to come as Rishi Sunak looks to address a "fiscal black hole" of up to £50 billion in the public finances.
During a meeting on Tuesday morning, the prime minister and chancellor Jeremy Hunt agreed that "given the enormity of the challenge, it is inevitable that everybody would need to contribute more in tax" in the coming years.
Mr Sunak also told Cabinet members that the NHS will be "prioritised" as "difficult decisions are taken on spending" in the run-up to Mr Hunt's Autumn Statement on November 17.
The PM and chancellor also shared the opinion that those in society "with the broadest shoulders should be asked to bear the greatest burden".
Taxes must rise because spending cuts alone won't repair the nation's finances, a Treasury source told ITV News.
"It is going to be rough. The truth is that everyone will need to contribute more in tax if we are to maintain public services," the source said.
They continued: "After hundreds of billions of pounds through Covid-19 and implementing massive energy bills support, we won't be able to fill the fiscal black hole through spending cuts alone".
Mr Sunak and Jeremy Hunt are expected to extend a freeze on the thresholds at which people start to pay the different rates of income tax and national insurance.
Mr Hunt will set out his plans in the Autumn Statement on November 17 and is considering splitting the burden equally between tax rises and spending cuts.
Health spending is one of several major areas that could face further spending constrains, as the government seeks out ways to restore fiscal credibility in the wake of Liz Truss’s ill-fated mini-budget.
Ahead of impending fresh pressures on the NHS this winter, Mr Sunak told his Cabinet "that in return it was right to look at further ways to improve the service the public receive and that he was confident this could be achieved,” according to Downing Street.
The tax hike warning came as the Resolution Foundation think tank said Mr Sunak and Mr Hunt face an “unpalatable menu” when it comes to rebalancing the nation’s finances.
With a deteriorating economic outlook and the legacy of last prime minister Liz Truss’s disastrous mini-budget as a backdrop, it suggests the government will need to find at least £40 billion – likely through a combination of tax rises and spending cuts.
The think tank said the Office for Budget Responsibility could predict a recession next year, with GDP forecasts cut by up to 4% by the end of 2024.
Unemployment could also rise by around half a million, the report suggests, with the weaker economic outlook bringing borrowing up by around £20 billion a year by 2026-2027.
In order to stave off civil servant redundancies that could have cost billions of pounds, Mr Sunak earlier announced he had scrapped a government target of axing around 91,000 jobs.
The target of reducing the Civil Service by around a fifth was being worked on earlier this year by Jacob Rees-Mogg while he was a Cabinet Office minister under Boris Johnson.
Mr Sunak instead said in a message to civil servants on Tuesday that he and Mr Hunt will ask individual departments to “maximise efficiency within budgets” as he criticised the “top-down targets” set under his predecessor.
Writing to civil servants, he said: “Together, we must make sure every taxpayer pound goes as far as it possibly can. I do not believe that top-down targets for Civil Service headcount reductions are the right way to do that."
According to the Resolution Foundation's report, the government may struggle to meet its fiscal rules of reducing the debt-to-GDP ratio in the medium term and deliver a current-budget balance unless “significant further policy action is taken”.
“The government has a little over two weeks to finalise its plans to repair its economic credibility and the sustainability of the public finances,” said James Smith, research director at the Resolution Foundation.
“While the recent focus has been on conditions improving post-Trussonomics, the central picture remains one of a weaker growth, higher borrowing costs and expensive tax cuts that have left a fiscal hole of at least £40 billion to fill.”
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Among the “menu” of options open to the chancellor are cuts to investment spending, a move the Resolution Foundation said could save £10 billion but also have a detrimental impact on growth.
The think tank also suggests the government could try to choose the so-called “austerity option”.
Such a move would require cuts to already-squeezed department budgets.
“With inflation at its highest level for 40 years, government departments are already seeing their budgets fall in real terms by around £22 billion by 2024-25. It is hard to see how the Treasury could credibly save more than £20 billion by announcing cuts to day-to-day public service spending,” the think tank said.
The Resolution Foundation study suggests the new administration could save £9 billion by choosing not to raise benefits and pensions in line with rising prices next year.
It said any such move would have a “huge” impact on those struggling, with a low-income working family with two children losing around £750 and a pensioner £342.
One option open to the prime minister and chancellor would be to “go full circle” on the mini-budget by reinstating the health and social care levy – a move that would raise £15 billion by 2026-27.
Around £2 billion could also be raised by extending the “stealth” freezes in income tax thresholds by a further year to 2026-27.
Mr Smith said the lesson from history is public investment projects are likely to face cuts.
“History tells us that this will involve cuts to public investment, which are easy to announce but reduce growth in the longer term,” he said.
“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 £22 billion thanks to high inflation.
“This reality means that the Autumn Statement is likely to involve tax rises, not just spending cuts.”