Finance minister Jeremy Hunt said he will set out tax rises and spending cuts this week to show Britain can fix its public finances and restore its economic credibility after financial market chaos sparked by former prime minister Liz Truss.
But he said poorer households should be spared much of the pain and cuts to public services would be balanced.
Speaking before announcing a budget plan on Thursday, Hunt said he did not want to aggravate an expected recession but he had to show he could lower a budget deficit which has soared after the Covid-19 pandemic and Russia's invasion of Ukraine.
"You don't want to do things that make any recession that you may be in worse," Hunt told Sky News on Sunday.
"But on the other hand, if you do nothing, if you don't show that we're going to bring our debt down ... interest rates get higher and you get a recession that's made worse."
After a bond market rout triggered by a string of unfunded tax cuts in Truss's "mini-budget" in September, Hunt and Prime Minister Rishi Sunak have warned they will take tough decisions at a time when 10% inflation is already squeezing households.
"We're all going to be paying a bit more tax, I'm afraid," Hunt said.
"We will be asking everyone for sacrifices but ... we need to recognise that there's only so much you can ask from people on the very lowest incomes."
The Sunday Times said Hunt planned to tackle a 55 billion-pound hole in Britain's budget by freezing thresholds and allowances on income tax, national insurance, inheritance tax and pensions for a further two years.
He also intends to halve a tax-free allowance for capital gains and lower the threshold for paying the top rate of income tax to 125,000 pounds a year from 150,000 pounds, it said.
Many lawmakers in his governing Conservatives oppose higher taxes and big increases could revive the tensions in the party.
Asked about spending cuts, Hunt said a strong economy needed good public services and cuts would be made in "balanced way".
Labour finance spokesperson Rachel Reeves said austerity was not the right approach.
"I'm arguing for two things: both fairer choices on taxes, but also crucially, a plan for growth," she told Sky News.
Labour market constraints
Hunt said he would address problems in the labour market that have led to acute shortages of workers for companies.
Pressed on whether Brexit was the reason Britain was the only Group of Seven economy yet to recover its pre-pandemic size, Hunt told the BBC: "I don't think that's the biggest issue ... it's much more to do with other factors in the labour market."
He also said he would set out a long-term plan for energy after Russia's invasion of Ukraine led to a surge in gas prices which has forced the government to spend tens of billions of pounds to shield households from the worst of the surge.
Hunt said it was "very important" the government supported households with a six-month cap on energy bills that is due to expire in April, but unlimited support wasn't sustainable.
The Sunday Times said Hunt was likely to commit 20 billion pounds to extend the cap for six more months, a third of its estimated 60 billion-pound cost in its first six months, meaning bills were likely to rise.
On Saturday, sources said Hunt was considering a big increase in a windfall tax on oil and gas firms and extending it to power generation firms.