Rishi Sunak's £50bn problem - why taxes could go up
New PM Rishi Sunak is facing the daunting task of sorting out the UK economy. Here we look at what his appointment could mean for your money.
Rishi Sunak has become the UK’s third prime minister in seven weeks. The former chancellor secured the top post after rival Penny Mordaunt dropped out of the race to become the leader of the Conservative Party earlier this week.
The new PM pledged to “fix” the “mistakes” made under his predecessor Liz Truss, who resigned after a turbulent 44 days in office.
In his first speech outside 10 Downing Street, Rishi Sunak acknowledged the country was in a “profound economic crisis” and that “difficult decisions” were going to be necessary in order to restore stability.
Markets reacted positively to Sunak’s appointment as prime minister; borrowing costs dropped and the pound strengthened against the dollar.
But what will his appointment, and his new cabinet, mean for your money?
When is the first budget happening under Rishi Sunak?
The Autumn budget was originally scheduled for the end of November, but when Liz Truss’ first chancellor of the exchequer, Kwasi Kwarteng delivered his so-called mini-budget at the end of September, this timeline was thrown into disarray.
The resulting market turbulence forced a rethink. The new budget date was pulled forward to the end of October.
However, the announcement has now been pushed back again to 17 November to make sure it reflects the most accurate economic forecasts.
It will be delivered by Jeremy Hunt, who replaced Kwarteng after he resigned following the mini-budget chaos.
Hunt, a previous contender for the leadership of the Conservative Party, retained his position when Rishi Sunak took over the top job.
How big is the challenge facing the new chancellor?
According to reports Rishi Sunak and Jeremy Hunt are aiming to bring in tax hikes and spending cuts worth up to £50bn a year to fill a hole in the public finances. That's roughly 2% of the UK's GDP.
Initial projections put the scale of the budget black hole at between £30bn and £45bn. However, it seems as if the Treasury is looking to free up more cash than required in order to provide fiscal headroom.
Reports had suggested the new PM was reconsidering tax hikes, but it does not look as if that's the case.
One of the biggest issues facing Hunt is the lack of room for further spending cuts. He has pledged to get "debt falling over the medium term", and has warned of "very, very difficult decisions" when it comes to taxes and spending.
But according to the Institute for Fiscal Studies most departments' spending budgets are still as much as 25% below their 2010 levels in real terms.
That suggests there are no easy options when it comes to spending cuts for the chancellor.
What is happening to our taxes?
The chancellor has promised that “protecting the vulnerable - and people's jobs, mortgages and bills - will be at the front of our minds as we work to restore stability, confidence and long-term growth”.
Rishi Sunak introduced a 1.25% increase to National Insurance, which was undone by Liz Truss shortly after she came into office, as a way to raise money. But it seems unlikely he’ll u-turn on this.
When he was running his initial leadership campaign over the summer following Boris Johnson’s resignation, Sunak had also promised to cut the basic rate of Income Tax to 16% from 20%. However, this now seems unlikely given he has a massive hole to plug in the government’s finances.
Instead, it looks as if the government will try to raise money by keeping tax bands and thresholds frozen, pushing people into higher tax bands as wages go up.
There's also speculation that the government could increase capital gains taxes so they're more in line with income taxes, and add a council tax surcharge to homes worth more than £2m.
Hunt's said multiple times that he's committed to helping the vulnerable, and this suggests he could place an emphasis on increasing taxes for the wealthy over cutting benefits.
One option that could be on the table is scrapping the non-dom tax status as proposed by Labour. That would bring in an extra £3bn and would likely go down quite well with voters.
Will Rishi Sunak scrap the pensions triple lock?
In its 2019 manifesto, the Conservative Party committed to maintaining the state pension triple lock, which guarantees state pension will increase every year along with the rate of inflation, the rate of wage growth, or 2.5%, whichever is higher.
But with inflation currently running at 10.1%, this promise could become too costly to maintain. Sources have confirmed pensions are under consideration ahead of the new fiscal statement.
Liz Truss promised the triple-lock was safe in one of her last weeks in office, but Sunak’s government has yet to make the same commitment.
The Policy Exchange think tank, where Sunak worked before he was a member of parliament, has encouraged the government to ditch the measure and raise pensions in line with earnings instead.
As well as the pensions triple lock other benefits could be in the firing line for below-inflation increases.
What other options are on the table?
As the government tries to find extra tax revenue it's looking increasingly likely energy companies are going to have to pay more tax.
When he was chancellor, Sunak introduced a 25% "energy profits levy" on the income of UK oil and gas producers. This windfall tax is due to expire in December 2025, but it now looks as if Hunt will extend the levy.
What's more, he could extend it to renewable energy generators and other power producers.
Another politically safe option available to Hunt is to increase taxes on banks.
At present banks pay an 8% surcharge on profits as well as corporation tax of 25% taking the overall bank tax rate to 33%.
When he was chancellor Sunak had promised to reduce the surcharge to 3%, but keeping it at 8% would be a quick and easy way to raise an additional £500m a year (according to current projections).
Hunt could also cut the amount of interest the government pays out to lenders which have deposits at the Bank of England. While such a move would be equivalent to a windfall tax, it could save a staggering £90bn over the next two years.