British finance minister Jeremy Hunt announced a string of tax increases and tighter public spending in a budget plan on Thursday that he said was needed after the blow dealt to the country's fiscal reputation by former prime minister Liz Truss.

Outlining a 55 billion-pound plan – almost half from tax rises – to fix the public finances, Hunt said the economy was already in recession and set to shrink next year as it struggles with inflation forecast to average 9.1 percent this year and 7.4 percent in 2023.

Britain's budget watchdog said rising prices would further erode people's wages and reduce living standards by 7 percent by April 2024 – the year a national election is expected. Millions of Britons are already struggling with a cost-of-living crisis.

The tax burden would hit 37.1 percent of GDP, its highest sustained level since World War Two, at the end of its five-year forecast period, the OBR said, up from 33.1 percent in the 2019-20 tax year.

But Hunt said he could not avoid painful fiscal medicine if Britain is to build on the recent restoration of calm in financial markets.

"Credibility cannot be taken for granted and yesterday’s inflation figures show we must continue a relentless fight to bring it down, including an important commitment to rebuild the public finances," he told parliament.

British inflation was 11.1 percent in October, a 41-year high.

Sterling was down almost 1 percent against the dollar and 0.2 percent against the euro after Hunt spoke, as investors assessed the scale of belt-tightening, which looked more severe than anything planned by other rich economies.

Hunt announced changes that will mean more people pay basic and higher-rate income tax, and lowered to 125,000 pounds the threshold at which people pay the top 45 percent rate, as well as cutting tax-free allowances for income from dividends.

He froze until 2028 a threshold at which employers start to pay social security contributions, which will cost companies more.

A levy on energy companies' profits of will rise to 35 percent from 25 percent from January 1 until 2028, and a new temporary 45 percent tax will be imposed on electricity generators, to raise a total of 14 billion pounds next year, Hunt said.

Public spending would grow more slowly than the economy but rise in overall terms, he said. (Reuters)