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Autumn budget: How could PM Rishi Sunak and Chancellor Jeremy Hunt reduce '£60bn financial black hole'?

Autumn budget: How could PM Rishi Sunak and Chancellor Jeremy Hunt reduce '£60bn financial black hole'?

In the autumn statement later this month, the chancellor is expected to outline how taxation, public spending and public borrowing measures will fill the significant black hole in the nation's finances.
The announcement of the government's economic plan was delayed from Halloween to 17 November last month, with the chancellor saying it will help ministers make "difficult decisions... that stand the test of time".

Jeremy Hunt said the announcement that was initially planned would be turned into a full autumn statement - expanding its remit and providing longer term plans.

The announcement will be made less than two months after former prime minister Liz Truss's tax slashing mini-budget in September left the markets in turmoil.

A report from the Resolution Foundation economic think tank has suggested Prime Minister Rishi Sunak and his chancellor face a thankless task to re-balance the nation's finances, with at least £40bn needing to be found by the government.

A combination of tax rises and spending cuts is likely to find that money, it said.

Treasury sources have told Sky News the financial "black hole" could be as large as £60bn - which may require up to £35bn of spending cuts and an extra £25bn raised through taxation.

So what measures could the chancellor take when he sets out his autumn statement later this month?

Freezing tax thresholds

In the 2021 spring budget, Mr Sunak, who was chancellor at the time, froze personal tax thresholds, which meant more low-income households had to pay the basic rate of income tax while those with earnings nearing £50,000 were made to pay the higher 40% rate.

The freezes were at the time forecast to last five years and raise billions for the Treasury by 2026, but it is thought this could be extended to 2028.

The Conservative Party's winning 2019 manifesto promised to keep taxes low, so prolonging the freeze in the threshold at which workers start paying taxes is politically delicate ground for Mr Sunak's government

However, it would send a signal the UK is committed to balancing its books over the long term.

Income tax

As chancellor, Mr Sunak also promised to cut the basic rate of income tax to 19% in April 2024 and then to gradually reduce it to 16% by 2029.

While Ms Truss's government had said it would cut 1p of the basic rate of income tax from April 2023.

But given the great need to cut the country's debt, it is unclear whether or not this will be a pledge that is kept.

The Telegraph newspaper has suggested Mr Hunt is planning on reverting to Mr Sunak's initial policy and planning a delay in the cut to the basic rate of income tax until 2024.

The cut could be completely off the table, however the Conservative Party's commitment to keeping taxes low where possible suggests this is a less likely outcome.

Public sector pay

It has been reported Mr Sunak and Mr Hunt are looking at pay rises of 2% across the board in the public sector for 2023/24 as the government attempts to fill the £40bn gap in the public finances.

An original report in The Times suggested the measure was spoken about in meetings this month between the prime minister and chancellor.

Such a pay rise would represent a real-term cut for those including nurses, teachers and police officers - as inflation is forecast to remain at up to 9% for much of next year.

The Resolution Foundation has warned the public sector would struggle to recruit and retain staff if this policy were to be adopted.

Not raising benefits in line with inflation

Benefits are usually uprated along with inflation every April, but there have been reports ministers could switch to raising them in line with average earnings instead while inflation remains so high.

The Institute for Fiscal Studies has said if benefits were to increase by inflation, this would likely be a 10% rise - equating to a real-value increase of on almost £500 on average per year for an out-of-work benefits claimant.

However, around £7bn would be saved if the government were to increase benefits in line with earnings instead.

The Resolution Foundation has said this move would save £5.6bn if applied to the state pension and pension credit and an additional £2.4bn if applied to working-age benefits such as Universal Credit.

It is predicted about nine million UK households would face a loss in income if benefits were to be increased in line with earnings rather than inflation.

The Resolution Foundation has estimated a single disabled adult on Universal Credit would lose £380, while a working single parent with one child would lose £478, and a working couple with three children would lose £978.

Pensions triple lock

The triple lock is a government policy designed to ensure people's pensions are not impacted by gradual rises in the cost of living over time.

In practice, it means the state pension must rise in April by whichever of the following three things is highest: average earnings, inflation or 2.5%.

It is a long-term manifesto commitment of the Conservative Party, but has been under threat since inflation reached 10.1% in September.

To stick to the triple lock, the government would need to raise the state pension by 10.1% come April.

Last month, the newly-appointed chancellor Mr Hunt said he could not make a commitment to keeping the triple lock during an interview with Sky News' political editor Beth Rigby, saying everything was on the table when it came to possible cuts to cover the fiscal blackhole in Whitehall.

Getting rid of the triple lock would save the Treasury billions, with the Resolution Foundation estimating that linking state pension increases to the lower rate of average earnings, around 5.5%, rather than inflation, would save £5.6bn next year.

But charities warned the impact on poorer pensioners, who are facing soaring food and energy bills amid the cost of living crisis, could be huge.

Keeping National Insurance increase

When he was chancellor, Mr Sunak brought in a 1.25 percentage point increase in National Insurance payments in what was referred to as a "social care levy".

The money was due to go to the NHS to help clear the COVID backlog before the rest was set to be used to improve the social care sector.

Ms Truss announced the increase would be reversed on 6 November as more people began to struggle with bills during the cost of living crisis.

But, in search of more savings, Mr Hunt could be tempted to reintroduce the policy or to alter it so that the cut only applies to those on the basic rate of income tax.

Cutting defence spending

Mr Hunt has refused to commit to lifting the amount of money spent on the armed forces to 3% of national income by 2030, as had been promised by then prime minister Ms Truss.

He also said the Ministry of Defence, like all other departments, would have to make additional savings.

"I'm going to ask all departments to find more efficiencies than they were planning to find," Mr Hunt told Sky News.

Defence Secretary Ben Wallace has fought hard over the past three years to secure much-needed increases in defence spending at a time of growing security threats.

Asked whether any backtracking on defence spending goals would be a resigning issue, a defence source a few weeks ago said that Mr Wallace would hold the prime minister to the pledges made.

This includes a commitment to increase defence spending to 2.5% of gross domestic product (GDP) by 2026 from around 2% at present and then to 3% of GDP by 2030 in what would equate to around an extra £157billion over eight years.

Prolonging temporary cut to foreign aid

Another idea being mooted is prolonging the cut to international development aid.

While chancellor, Mr Sunak reduced foreign aid spending to 0.5% of GDP saying it would return to the baseline 0.7% when the economic situation had improved following the coronavirus pandemic.

According to The Times, Mr Sunak and Mr Hunt could now argue it will not be possible to increase aid spending until 2027 or 2028 given the economic turmoil caused by Ms Truss and former chancellor Kwasi Kwarteng's so-called mini-budget.

However, in his recent ministerial reshuffle, the prime minister appointed Conservative MP Andrew Mitchell as development minister, 10 years after his tenure as secretary of state for international development.

Mr Mitchell has been an ardent critic of reducing the foreign aid budget to 0.5% of GDP and his appointment could be a sign that Mr Sunak may be willing to compromise on this issue.

Windfall tax

Reports have suggested Mr Sunak is working on proposals to expand the windfall tax on energy companies.

The concept of a windfall tax is to target firms which are benefitting from something they are not responsible for - such as energy firms getting more money for their oil and gas compared to last year because of supply concerns following the Ukraine war and increased demand after COVID restrictions were lifted.

A number of briefings to newspapers have suggested the options could include increasing the levy, extending the deadline and expanding its remit to include renewable energy generators such as wind farms.

At present, the energy profits levy on oil and gas firms - also known as the windfall tax - is set at 25%. It is also due to expire in 2025.

With companies such as Shell reporting their second highest quarterly profit on record last week - £8bn - there is a suggestion the government should increase the levy above the 25% level.

The current windfall tax is expected to raise around £5bn in its first year.

Row back on promise to cut VAT on energy bills

Ms Truss's government capped average annual household energy bills at £2,500 for two years in an attempt to relieve the burden for households across the UK.

Entering his new post, Mr Hunt scaled this back so that it will only continue until April 2023.

As part of his campaign to become Conservative Party leader the first time around in the summer, Mr Sunak promised he would scrap VAT on energy bills if he were to be victorious in the contest.

However, it is not known whether this pledge will be followed through with or not.
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