Autumn Statement preview: seven things we know so far

With the Autumn Statement only two days away, the leaks are coming thick and fast. We examine seven likely tax rises and spending cuts as Jeremy Hunt looks for more cash.

In the last few months our chancellor has changed from Father Christmas to Scrooge. Jeremy Hunt is planning to reverse nearly all predecessor Kwasi Kwarteng’s tax plans in his Autumn Statement and tighten the screws with more tax rises and spending cuts.

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In an interview with The Sunday Times, Hunt revealed that “I think it is fair to say this is going to be the first rabbit-free budget for very many years.” Commenting on the need for a fiscally responsible budget to limit government borrowing, he said, “I’m Scrooge who’s going to do things that make sure Christmas is never cancelled.”

With a £60 billion black hole to plug, the chancellor and prime minister are currently scouring the cupboards for spare cash. Completing the massive U-turn from Liz Truss’ ill-fated mini-budget, Hunt is looking to keep a lid on spiralling government debt. Of the £60 billion needed, around £35 billion is expected to come from spending cuts and around £25 billion from tax rises.

So, what do we know so far about possible spending cuts and tax rises?

1) State pension

Although nothing is guaranteed, Rishi Sunak gave his strongest hint yet that the state pension triple lock will be reinstated next April. Commenting on his way to the G20 summit, the prime minister said: “My track record as chancellor shows I care very much about those pensioners, particularly when it comes to things like energy and heating because they are especially vulnerable to cold weather.”

Sunak continued: “Conservative governments have got a good track record of protecting pensioners and, in fact, the state pension today is about £700 higher than it otherwise would be as a result of the triple lock.”

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If the triple lock is kept, the full state pension will rise to £10,600 in April 2023, in line with inflation (10.1%). In contrast, if the triple lock is scrapped, the state pension will rise to only £10,156, in line with average wage rises (5.5%).

2) Benefits

Sunak’s recent hints also suggest that he intends to raise benefits in line with inflation.

He said, “we will put fairness and compassion at the heart of all the decisions we make and I am confident people will see that next Thursday...fairness and compassion will be at the heart everything we do”.

Increasing Universal Credit in line with inflation, as well as the pensions triple lock will be costly to the Treasury, so will increase the need for tax rises elsewhere.

3) Energy bills

Hunt has already warned that he plans to reduce Liz Truss’ energy support package, which capped energy costs for an average household at £2,500 for the next two years.

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Thursday’s statement is expected to introduce targeted support from April 2023, meaning that most of us will face a much higher energy cap of possibly around £3,000. There is likely to be additional support for pensioners and those on a low income.

4) Public sector spending

Hunt is rumoured to be planning austerity 2.0 with a future squeeze on public sector budgets. Treasury sources have revealed that the chancellor is considering freezing public spending in real terms between 2025 and 2028, saving about £27 billion per year by 2028.

This spending freeze would be delayed for two years as Hunt plans to increase government spending by 3.3% between 2021-22 and 2024-25, following the recommendations of last year’s spending review.

5) Fiscal drag

The chancellor is expected to freeze tax thresholds until 2028, as he extends fiscal drag to catch more in the net. These tax threshold freezes will mean more of us are likely to be paying higher-rate tax and more of our earnings will be taxed at a higher rate.

Fiscal drag works by freezing tax thresholds while incomes rise with inflation, dragging more and more of our earnings into higher tax bands.

Included in the fiscal drag net are income tax, national insurance, inheritance tax and the pension lifetime allowance, as well as myriad of other taxes.

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Extending fiscal drag is expected to raise £13 billion for the Treasury.

6) Income tax

Hunt is rumoured to be considering reducing the additional tax rate threshold from £150,000 to £125,000. This tax rise, along with income tax fiscal drag, would mean that higher earners have a larger tax burden. It’s in keeping with the chancellor’s warning that, “people with the broadest shoulders will bear the heaviest burden”.

Lowering the additional rate tax threshold would pull an additional 250,000 people into the highest tax band, costing them an extra £580 per year. Critics have warned that this tax rise would be largely symbolic, not raising a huge amount for the Treasury and carry the risk that some higher earners could move abroad to reduce their tax bill.

7) Council tax

Sunak and Hunt are rumoured to be drawing up plans to allow councils to raise council tax by 5%, pushing the average bill above £2,000 for the first time.

Current rules allow only a maximum increase of 2.99% per year without a local referendum, but some councils are facing a huge budget deficit and have warned that they might even go bankrupt without additional funding.

Changing the rules and allowing council tax to increase by 5% would mean band D property owners face paying an extra £100 per year, while someone in a band H property could be charged up to £200 extra per year.

Other possible options

There are several other options that Jeremy Hunt could consider as he scrambles to plug the budget deficit.

Windfall tax

Extending the tax raid on energy companies, by another two years could raise a further £10 billion for the Treasury. However, critics argue that increasing the energy windfall tax could discourage UK investment, as companies weigh up the risk of a future unplanned tax grab.

Capital gains tax

Hunt's hints that those with the broadest shoulders will have to pay more also suggests that he could be considering a capital gains tax (CGT) hike. This could mean increasing the CGT headline rate, or perhaps more likely, reducing thresholds and allowances.

Cut foreign aid

Cutting foreign aid could raise an estimated £4 billion for the Treasury. But it could be difficult for Hunt to reduce the foreign aid budget as a large proportion is currently spent on housing asylum seekers.

Scrap infrastructure projects

Scrapping big infrastructure projects such as Northern Powerhouse Rail could boost the Treasury’s piggy bank by an estimated £17 billion. But it would be a huge blow to Boris’ levelling up agenda and could anger red-wall voters.