Cabinet ministers have pushed back against planned cuts to their departments in the upcoming budget, with several writing to Keir Starmer to contest them.
Several are understood to have shared their concerns at the likelihood of deep cuts to unprotected departments such as housing and transport.
The Guardian revealed earlier this month that ministers were angry at being asked to draw up billions of pounds in cuts to capital projects despite the chancellor, Rachel Reeves, pledging to invest more to grow the economy.
Reeves is aiming to make £40bn worth of tax rises and spending cuts in the budget, government sources have indicated.
The chancellor told a political cabinet meeting on Tuesday that filling the £22bn funding shortfall that Labour says it inherited from the Conservatives was only enough “to keep public services standing still”.
Reeves is drawing up plans to find £40bn to avoid the real-terms cuts to departments that had been baked in under the last government’s plans.
The chancellor is finalising her first budget, which will be announced in two weeks, and has vowed there will be no return to austerity under this government. She told the cabinet on Tuesday that the UK faced a £100bn funding gap in the public finances over the next five years.
Speaking to reporters on Wednesday, the prime minister’s spokesperson said: “We were honest with the British public, both during the election and since, about the scale of the challenge that we would face.
“One of the first things the chancellor did when we came in was do an audit of the books and found a £22bn black hole that the previous government lied about and covered up.”
Pressed on the government’s budget decisions, the spokesperson said: “I think both the PM and the chancellor have been clear that there are tough choices [and] that we will level with the public about why we have to make them,” saying the pressures were caused by “the £22bn in-year black hole that the Conservatives left”.
In its manifesto, Labour ruled out raising income tax, VAT or national insurance (NI), so ministers are looking for other revenue-raising policies. Among the measures being looked at are raising employers’ national insurance contributions (NICs) and levying NI on employers’ pension contributions.
The government has said its promise not to raise NI applied only to “working people” rather than businesses.
Starmer twice refused to rule out raising NI when interviewed on BBC Breakfast this week. He has repeatedly warned that there are “tough decisions” to be made in the budget on 30 October.
Businesses have said increasing their NICs would be in effect a “tax on jobs”.
Paul Johnson, the director of the Institute for Fiscal Studies, said £40bn worth of tax rises alone would be “extraordinary” and that eventually ministers would need to target income tax if they went down this route.
“If we get tax rises on that scale, that really will be extraordinary – I mean unprecedented,” he told BBC Radio 4’s Today programme. “Forty billion pounds is a big number. You can get there relatively easily actually in terms of the scale of additional spending that will be required down the line.
“Some of that can be covered by slight changes in the fiscal rules, some of that will be covered by some of the tax rises the party is already intending.” But he added that a “significant” amount would still be left over even after these measures.
He told the show: “If they’re looking for £20bn or £30bn of tax rises, in the end, they will have no choice but to do something with income tax.”
Figures published on Wednesday suggested that last month inflation dropped below the Bank of England target rate for the first time since April 2021.
The Office for National Statistics said consumer prices index inflation fell to 1.7% in September, from 2.2% in August.
A Treasury spokesperson said: “We do not comment on speculation around tax changes outside of fiscal events.”
