The Chancellor could not have been clearer. The light at the end of the pandemic tunnel may be in sight, he said, but the economic emergency has only just begun.

That grim truth shone through the forecasts from the Office for Budget Responsibility in this week’s Spending Review. The British economy will shrink this year by 11.3%. That’s the biggest fall in at least 300 years. We will not get back to pre-pandemic levels of activity until the fourth quarter of 2022.

The Government will borrow £394bn this year. That’s 19% of GDP, the highest amount relative to the size of the economy in peacetime.
Total debts, more than 90% of GDP today, will rise in every year of the Government’s forecast horizon until they reach 97.5% in the year to April 2026. Unemployment will rise next year to 7.5% of the workforce, or 2.6 million people.

Even if you are lucky enough to keep your job through the difficult winter ahead or have already retired, next year could bring a different sort of pain. This year has largely been about protecting jobs and businesses. The Chancellor has been good at spending money; next year we will find out how he plans to claw at least some of it back.

We are in that moment between stubbing your toe and feeling the pain. Next year the tab starts to be paid. Working out how to do that in a way that satisfies two very different constituencies will not be easy. Cutting spending will play badly with one set of supporters; raising taxes won’t please the other.

So, whatever the Prime Minister says about not returning to austerity, it seems certain that both paths to more sustainable public finances will be tested out.

Today we heard about some of the spending cuts to come. Public sector workers have enjoyed a pay rise this year, even as private sector employees have seen their earnings shrink. The Chancellor says he can’t justify that, so outside of the NHS and the very lowest earners there will be a pay freeze.

A politically easier but nonetheless a symbolic cut reduces the amount earmarked for overseas aid from 0.7% of GDP to 0.5%. The intention is to return to the previous level of spending in due course. We shall see.

Unfortunately for the Government this kind of austerity-lite won’t make much of a dent in the gargantuan debts that it has run up during this crisis. And that can mean only one thing. Tax rises are on their way in the spring. March’s Budget is going to be hard to swallow for many people and those with the broadest shoulders are going to be expected to bear the greatest burden.

We don’t know exactly what this tax squeeze will look like, but we have been given some hints. The Chancellor has just commissioned a review of Capital Gains Tax. If he accepts the findings of that study, we should expect closer alignment between CGT and income tax rates and a much less generous annual tax-free allowance.

That could hit investors, business owners and buy-to-let landlords alike. Perhaps a half-way house might be to align the CGT rate for non-property assets (10% and 20% for basic and higher rate taxpayers respectively) with those for property (20% and 28%).

Perhaps the Chancellor will go the whole hog and apply income tax rates (20%, 40% and 45%) to capital gains as well. Hitting the relatively small number of people who pay CGT is politically easy, but it will raise relatively little - the amount paid in CGT is a fraction of that levied as income tax.

If you were a Chancellor in search of billions, you might also look hard at the tax relief that is currently enjoyed by pension savers, mainly by higher-rate taxpayers who receive the lion’s share of this generous incentive.

It is possible that income tax could be in the Government’s sights. Again, expect the wealthier to be targeted, with the re-introduction of a 50% top rate a possibility. As with CGT, this might win political brownie points but raise little.

One further possibility has also been hinted at by the Chancellor. When he introduced the Self-Employment Income Support Scheme in April, it came with a warning that the self-employed would need to pay for the bailout through future tax rises. He could follow through on that threat.

All of these possibilities will be the source of intense speculation over the next few months. We should all use that time carefully - to understand the tax we pay now and how that might change in March.

Read more news and insights

Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.