The Prime Minister said yesterdayF he was working through “difficult decisions” with Chancellor Jeremy Hunt after they were warned economic growth is forecast to drop amid fears of a recession.

A day earlier the pair held a meeting on the November 17 budget lasting more than an hour, with the mood being characterised as “sober”.

Treasury sources declined to put a figure on the savings under consideration, but they were believed to be looking for financial headroom of up to £10bn.

Prime Minister Rishi Sunak speaks with patient Brenda Boyling during a visit to Croydon University Hospital in south London. Picture: Leon Neal/PA Wire

Along with the “massive fiscal black hole” forecast as being up to £40bn, they were thought to be targeting up to £50bn of cuts and hikes to fill the gap.

It comes with the Bank of England poised to unveil the biggest hike in interest rates for 33 years next week in efforts to tame inflation.

The key Monetary Policy Committee (MPC) meeting comes amid warnings that spending cuts and tax hikes under Mr Sunak could lead to a deeper and more enduring recession.

Most economists think the MPC is likely to rise interest rates by 0.75 percentage points to 3 per cent at the meeting on Thursday.

It will be the eighth consecutive jump in interest rates by the Bank, but will represent the biggest increase since 1989.

Mr Sunak said he was “confident” they could rectify the “mistakes” of Liz Truss’s leadership, as he focused on bringing down inflation and limiting rises in interest rates.

“The Chancellor has already said, of course, difficult decisions are going to have to be made and I’m going to sit down and work through those with him,” he said during a visit to Croydon University Hospital in south London.

“But what I want everyone to know is that we need to do these things so that we can get our borrowing and debt back on a sustainable path.

“That’s important because it means that we can get a grip of inflation. If we do that, it means we can limit as best as possible the increase in interest rates, which is important.

“But as we do that, I want people to be reassured, we will always do it with fairness at the heart, we will protect the most vulnerable and ensure that we can continue to grow the economy in the long run.”

The financial figures are not expected to be finalised until Mr Sunak and Mr Hunt receive the latest forecasts from the Office for Budget Responsibility.

A Treasury source said: “Markets have calmed somewhat, but the picture remains grim. After borrowing and spending hundreds of billions of pounds due to Covid-19 and for energy bills support, there is a massive fiscal black hole to fill.

“People should not underestimate the scale of this challenge, or how tough the decisions will have to be. We’ve seen what happens when governments ignore this reality.”

The pair delayed the financial statement by more than two weeks from Halloween on Monday as public finances appeared in a worse shape after Ms Truss’s leadership.

Mr Hunt has sought the advice of George Osborne as he sounds out Conservative predecessors over his coming autumn budget.

A Treasury source said Mr Hunt met Mr Osborne, the architect of austerity in the wake of the 2008 financial crisis, in Downing Street on Thursday.

Talks were also said to have been arranged with Kwasi Kwarteng, Mr Hunt’s predecessor whose mini-budget sparked the financial turmoil that forced Ms Truss from office.

Sajid Javid and Lord Hammond were also expected to be consulted.

Mr Sunak and Mr Hunt have refused to commit to the triple lock on pensions, meaning millions could face real-terms cuts in April, as inflation soars past 10 per cent.

The pledge of defence spending increasing to 3 per cent of GDP by 2030 was also under review.

Mr Sunak was also not committing to Boris Johnson’s promise to raise benefits in line with inflation.

The Chancellor has pledged to get “debt falling over the medium term” and has warned of “very, very difficult decisions” being required on tax and spending.

The Institute for Fiscal Studies has warned many departments’ spending budgets are still far below their 2010 levels in real terms, in some cases more than 25 per cent lower, making further savings hard to come by.

Markets have witnessed a decreased appetite for large interest rate hikes globally, with the Bank of Canada increasing its interest rate by 0.5 percentage points, below the 0.75 percentage point rise that had been widely predicted.

Nevertheless, earlier this month, Bank of England Governor Andrew Bailey said it was likely the hike in interest rates could be bigger than the 0.5 percentage point increase to 2.25 per cent seen at the previous meeting.

He said on October 15: “As things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.”

Analysts at Deutsche Bank have said they expect the Bank of England to opt for a 0.75 percentage point rise with a split vote.

Experts at the firm said they expect latest forecasts from the Bank of England, which will also be revealed on Thursday, to show “the economic outlook has deteriorated further”.

They added: “Conditioned on market pricing, the UK economy will likely fall into a deeper and more prolonged recession.”

The Bank will also confirm its inflation expectations for the longer term, which are due to show that the cost of living will be much higher than the central bank’s 2 per cent target next year.

James Smith, developed markets analyst at ING, also had a downbeat prediction for the Bank’s latest economic outlook.

“The new set of forecasts due, which crucially are based on market interest rate expectations, are likely to be dismal, showing both a deep recession and inflation falling below target in the medium term,” he said.

Cost-of-living crisis: Rishi Sunak promises ‘fairness’ as he looks to fund up to £50bn in cuts and tax rises,

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