Chancellor Jeremy Hunt is considering cutting inheritance and business taxes while squeezing benefits payments by billions in his autumn statement.
Mr Hunt said on Friday that there is a need to “reform our welfare system” as he said the “priority” for Wednesday’s financial announcement is helping firms.
But he is also considering slashing inheritance tax, which would be bound to draw criticism for supporting the wealthy while others struggle with the high cost of living.
Conservative former chancellor Lord Clarke said the move may please MPs on the Tory right who are clamouring for tax cuts, but others would find it “appalling”.
Typically ministers use the September figure for inflation when uprating working-age benefits, which would mean a 6.7% hike.
But Mr Hunt has not ruled out using October’s far lower figure of 4.6%.
Asked about the possible move in an interview with the BBC, the Chancellor said: “We will always be a compassionate Conservative government but part of how we make our economy successful is by making sure companies like this company can find the staff they need.
“Nearly a million vacancies across the economy, so we do need to reform our welfare system.”
Sources said a decision on the figures is yet to be made.
Ministers have already announced a fresh welfare crackdown amid efforts to get people back into work under a toughened sanctions scheme.
Free prescriptions and legal aid will be cut off for benefit claimants who are deemed fit to work and do not seek employment.
There are hopes the final forecasts from the Office for Budget Responsibility will give Mr Hunt more “fiscal headroom” than expected to make tax cuts when he receives them on Friday.
The Chancellor said he wants firms to be the focus of any tax cut he may offer, during a visit to the ITM Power manufacturer in Sheffield.
“In terms of tax cuts you’ll have to wait and see but I will say the priority is helping businesses like this to succeed,” he told the BBC.
The options for cutting inheritance tax – which is charged at 40% on estates of more than £325,000, with an extra £175,000 towards a main residence passed to direct descendants – include reducing it by 50%, 30% or 20%, according to The Times.
The Tories are said to then be considering making abolishing it entirely an election manifesto pledge next year, which could cost £7 billion a year in the short term.
However, the Institute for Fiscal Studies forecast that the amount that the tax raises could rise to more than £15 billion by 2033.
Lord Clarke told Times Radio: “Well, it’s not the tax cut I would choose. Indeed, I’m not sure he’s got any room for tax cuts.
“And choosing inheritance tax at the present time might appeal to the Conservative right, but it leaves them open to the most appalling criticisms when inflation and the state of affairs is making poorer people in this country very vulnerable indeed, giving tax relief to those families that are lucky enough to have members of it with capital above the limit through inheritance tax and pay any significant amount of tax on the inheritance.
“And I’m not sure that the economic and financial state of the country justifies it.”
Labour leader Sir Keir Starmer said he would wait to see what is in the autumn statement before commenting on any plan to cut inheritance tax.
“We’ll have to wait to see what the Government says in its autumn statement. What I want to see is a serious plan for growth,” he told broadcasters during a visit to Scotland.
Meanwhile, Mr Hunt also said he would “love” to see a Tesla factory opened in the UK and has spoken to Elon Musk about the prospect.
“I would love to have a Tesla factory in the UK anytime. Let’s be clear, that is a fantastic company,” the Chancellor told the BBC.
Mr Hunt pointed to £2 billion from a new £4.5 billion fund for manufacturers being earmarked for the automotive industry.
“I spoke to Elon Musk about this and he said it’s not about the support. It’s about the environment and he loves London because there’s so much tech going on and Tesla is essentially a tech company, so let’s see what happens,” he added.
The comments came ahead of the White House accusing the owner of the X social media platform of repeating a “hideous lie” about Jewish people.
White House spokesman Andrew Bates said: “We condemn this abhorrent promotion of antisemitic and racist hate in the strongest terms.”
