Billions of pounds that could be spent on fixing public services and filling the "black hole" in the UK's finances is being lost through unpaid taxes, MPs have warned.

An "eye-watering" £42bn is outstanding in tax debt, with about 5% of tax owed each year failing to be collected by HMRC, according to the Commons Public Accounts Committee.

The Liberal Democrats labelled the amount "absolutely staggering" as the country battles a cost of living crisis and the biggest outbreak of industrial action in a generation - with multiple sectors striking over pay in the face of high inflation and stretched public finances.

In his Autumn Statement in November, Chancellor Jeremy Hunt announced a raft of tax hikes and spending aimed at making £54bn worth of savings.

But Dame Meg Hillier, chair of the committee, said: "The eye-watering £42bn now owed to HMRC in unpaid taxes would have filled a lot of this year's infamous public spending black hole."

MPs on the committee criticised ministers for not doing more to claw back the money owed to the public purse.

Dame Meg said HMRC will only employ more staff to tackle compliance over the next few years and that is "not fast enough to dent the tax gap at a time of huge public sector spending pressures".

According to the 22-page document, £731.1bn was collected in taxes and duties in 2021-22.

Although this was the highest on record as the UK emerged from the pandemic, the committee said more could be done to claim unpaid taxes.

The report said that for every £1 that HMRC spends on compliance activities, it recovers £18 in additional tax revenue - and the government "is missing the opportunity to recover billions in lost revenue by not resourcing compliance".

MPs warned more is now owed in tax debt than before the pandemic, with the debt also expected to fall more slowly than previous years as taxpayers feel the effects of the cost of living crisis.

The £42bn in unpaid taxes comes on top of the £4.5bn lost to fraud in COVID support schemes - of which HMRC only expects to recover a quarter.

Dame Meg said HMRC is "settling for trying to recover less than a quarter of estimated losses in schemes such as furlough".

"We recognise the problems HMRC faces - due to poor controls, the horse has bolted - but we believe there is a moral duty to pursue fraud," she said.

"HMRC must ensure dishonesty is not seen to create advantage."

HMRC 'have 6,000 fewer customer service staff than five years ago'

The Chartered Institute of Taxation (CIOT) welcomed the report and said the current levels of service being provided by HMRC are not acceptable.

The CIOT said HMRC has 6,000 fewer customer service staff than five years ago and the government "appear to have cut staff numbers anticipating efficiencies and time savings from digitalisation that have not yet arrived".

Susan Ball, president of the CIOT, said members tell them every day "of the delays they face getting answers and action from HMRC".

She said: "It is crazy that people trying to get help from HMRC on paying the right amount of tax find it so difficult to get through, especially when an estimated £3bn a year is lost to the Exchequer from non-deliberate taxpayer error.

"The first principle of compliance surely has to be making it easy for willing taxpayers to comply with their obligations."

Christine Jardine, the Liberal Democrat Cabinet Office spokeswoman, said: "This government is losing absolutely staggering amounts of money through its incompetence and inability to collect the tax it's owed.

"We need to see serious action to close this tax gap black hole.

"Ministers need to immediately get a grip on this situation, anything less would be a failure for millions of people who are struggling with the cost of living crisis."