UP to £18bn of public service cuts could “inflict a new wave of devastating Tory austerity” it has been warned, despite the Chancellor being forced into a humiliating U-turn over his planned tax cuts for the super-rich.

Kwasi Kwarteng reversed his announcement to cut the 45 per cent tax bracket for those earning more than £150,000 in England following widespread criticism, despite Prime Minister Liz Truss insisting the policy would remain intact less than 24 hours before yesterday’s change of heart.

Mr Kwarteng tried to claim the embarrassment was merely “a little turbulence” after his min-budget sparked economic turmoil.

The hostile market reaction led to the pound dropping to its lowest ever level against the dollar since decimalisation, the Bank of England forced into an emergency bond-buying strategy to stabilise pension funds and threats of further hikes to interest rates.

Mr Kwarteng tried to claim on Monday that the policy had “become a distraction”.

The Chancellor also faces a battle with Tory backbenchers over reports that benefits payments will not rise in line with inflation, despite an expectation they would.

On Monday, Mr Kwarteng refused to rule out a new era of austerity to pay for tax cuts.

He said: “You will see what our spending plans are in the medium-term fiscal plan but I’m not going to be drawn into that.”

But concerns have been raised that despite the humiliation, public services are braced for cuts of up to £18bn after Mr Kwarteng confirmed yesterday that budgets will not be topped up in line with soaring rates of inflation.

The Chancellor said that it was the correct move to stick within the spending allocations agreed in 2021, despite inflation more than double the forecast peak of 4% made at the time.

Mr Kwarteng said: “I think it’s a matter of good practice and really important that we stick within the envelope of the CSR (the Comprehensive Spending Review).”

The Institute for Fiscal Studies (IFS) has warned an extra £18bn will be needed in each of the next two years to restore “the real-terms generosity intended”, due to inflation being around 10%.

Last week, Paul Johnson, the director of the IFS, warned the impending cuts were “pretty extraordinary”, adding that “there’s a real problem for schools and hospitals”, warning “it’s going to be a real squeeze.”

Speaking on Monday, Mr Johnson said: “The direct impact of the Government’s U-turn on the abolition of the additional 45p rate of income tax is of limited fiscal significance.

“At a medium-run cost of around £2 billion a year, it represented only a small fraction of the Chancellor’s mini-budget announcements. His £45 billion package of tax cuts has now become a £43 billion package, a rounding error in the context of the public finances."

He added: “The Chancellor still has a lot of work to do if he is to display a credible commitment to fiscal sustainability.

“Unless he also U-turns on some of his other, much larger tax announcements, he will have no option but to consider cuts to public spending: to social security, investment projects, or public services.

“On the latter, the Chancellor has indicated that departments’ cash spending plans that run to 2024-25 will be left unchanged, which amounts to a real-terms cut in their generosity in the face of higher inflation.

"This will squeeze public services, but will not be enough to plug the fiscal hole the Chancellor has created for himself.”

The SNP has warned that despite the U-turn over the tax cut for the super-rich, cuts to public services remain a real threat.

SNP shadow chancellor Alison Thewliss said: "Tory plans to inflict a new wave of devastating Tory austerity – which will consign millions of people to poverty and hardship - puts beyond doubt that independence is the only route to escape damaging Westminster control and get rid of the Tories for good.

"The threat of Tory austerity 2.0 will deliver a hammer blow to households struggling to make ends meet as the Tory-made cost of living crisis spirals out of control.

"Scotland's budget is already worth around £1.7bn less than when it was set in December as a result of inflation. The reality is that this latest round of austerity will deliver yet more cuts and further threaten our vital NHS and public services."

"The Chancellor's remarks that the Tory government intends to pile on further misery by walking their well-trodden road to austerity will further entrench the poverty the Tories have caused.

"The UK Government must rule out a return to another decade of Tory austerity and instead come before Parliament urgently to set out real and targeted support to protect households and businesses."