All departments will be asked to find "efficiency savings" as new chancellor Jeremy Hunt continues to take apart his predecessor’s disastrous mini-budget.
Hunt said this morning he would reverse "almost all tax measures" announced last month in an emergency intervention aimed at restoring the government's economic credibility.
The chancellor said the planned cut to income tax would be paused "indefinitely" and the universal energy price cap support will now end in April, with future support being offered on a targeted basis.
While Hunt did not give details of his plans to reduce public spending, he said this weekend that difficult decisions would be needed "across the board".
A leaked Treasury letter last week suggested departments could be asked to find savings of around £7bn, to be returned to the Treasury coffers, plus around £13bn to be reallocated to high-priority programmes. The letter, seen by the Sunday Times, outlined plans for capital savings of 10-15% in each department, excluding the Ministry of Defence and funds reserved for Overseas Development Assistance. Departments would also be expected to cut £5bn from their day-to-day budgets, with a 2% minimum target for all departments.
However, spending cuts are now likely to be higher, given today's announcement. Hunt's tax U-turns are estimated to raise £32bn but still leave a £38bn hole in the government finances.
A Treasury statement said: "The government is prepared to act decisively and at scale to regain the country’s confidence and trust. The chancellor stated in his speech that there will be more difficult decisions to take on both tax and spending.
"This means doing what is needed to lower debt in the medium term and to ensure that taxpayers’ money is well spent, putting public finances on a sustainable footing. In light of this, government departments will be asked to find efficiencies within their budgets."
This morning, Hunt unveiled elements of the government's medium-term fiscal plan early to "reduce unhelpful speculation".
"We will reverse almost all the tax measures announced in the growth plan three weeks ago that have not started parliamentary legislation," he said.
"Whilst we will continue with the abolition of the health and social care levy and the stamp duty changes, we will no longer be proceeding with the cuts to dividend tax rates, the reversal of off payroll working reforms...the new VAT free shopping scheme for non-UK visitors or the freeze on alcohol duty rates."
The announcement was intended to steady market jitters by setting out how the government will fund some measures from the "mini-budget", with a full medium-term fiscal announcement still scheduled for 31 October.
The move comes after Treasury officials warned the scheme, set to last two years, would cost as much as £200bn.
Hunt met with Truss at Chequers over the weekend and held further meetings with the governor of the Bank of England on Sunday night.
The chancellor is expected to set out the details in full during a Commons statement at 3:30pm today. He will "bring forward measures from the medium-term fiscal plan that will support fiscal sustainability", the Treasury said.
The government has already been forced to U-turn on its plans to remove the top 45p rate of income tax and overhaul corporation tax, but the moves have failed to steady markets.
Market reactions have been cautiously optimistic since Hunt signalled there would be further alterations to the government's fiscal strategy, with the value of the pound increasing and prices on government bonds improving since markets opened on Monday.
The emergency intervention comes after markets shifted in the wrong direction on Friday following Truss's decisions to sack Kwasi Kwarteng as chancellor and ditch the corporation tax rise.
'Evidence of the panic the government is in'
Senior Conservative MP Mel Stride, who chairs the Commons Treasury Committee, said Hunt's intervention was a "strong start", after saying last week there was a need for a "fundamental restart".
"Surprising markets positively on the upside with an early statement to the House of Commons today is a wide move.
"Message is 'we get what needs to be done and it's being sorted'."
But shadow Treasury chief secretary Pat McFadden said the emergency statement proved "ministers are now terrified of market reaction".
Speaking to the BBC, he said: "It's a testament to how much chaos has been caused by Liz Truss since she became prime minister.
"I think it is evidence of the panic that the government is in and the damage that has been caused over the last few weeks."
Torsten Bell, chief executive of the Resolution Foundation think tank, said the decision to bring forward the announcement was an attempt to lower government debt, and improve the financail situation ahead of the release of independent forecasts at the end of the month.
"It's not just about bringing forward some tax/spend announcements from 31 October - it's trying to reduce how many he has to announce full stop," he said.
"The Office for Budget Responsibility won't have finalised their interest rate assumptions underpinning their government debt interest forecast.
"So pre-announcing tough choices is about hoping that markets reduce rates on government debt [leaving] a smaller fiscal hole to fill on 31 October."