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Rachel Reeves is set to unveil a black hole in the public finances of around £20bn, signalling that tax rises could be on the way.
The chancellor will on Monday set out the results of the spending audit she ordered Treasury officials to produce.
The findings appear to confirm concerns raised during the election campaign by the influential Institute of Fiscal Studies (IFS) which accused the main parties of a “conspiracy of silence” in not addressing the reality of public finances.
Asked by BBC Radio 4’s Today programme this morning whether the black hole is a surprise, IFS director Paul Johnson said: “I don’t think that is really credible at all. There should not be a sense of surprise there is a big issue here.”
He pointed out that cuts in recent years and the way public sector pay has lagged behind the private sector meant that it was clear that public services would need investment.
He warned: “The manifesto words [from Labour] ‘no new taxes on working people’, means that there can be no tax rises at all.”
Ms Reeves and Labour spent much of the election denying claims by the Tories that they would increase taxes by around £2,000 per household but now there could be a series of hikes to try to plug the gap.
In particular, council tax and capital gains tax are thought to be on the radar for increases after Labour refused to rule out raising them during the election.
Ms Reeves’s update will reveal “the true scale of the damage the Conservatives have done to the public finances”, a Labour source said.
The chancellor has been at a G20 meeting of finance ministers in Brazil where she has confirmed the statement will take place on Monday.
But her Tory predecessor Jeremy Hunt, now the shadow chancellor, branded Ms Reeves’ claim “a fabrication”.
He said: “Labour’s claims are nothing but a fabrication – the books have been wide open since the OBR was set up 14 years ago. They show an economy that has turned the corner and a deficit one-third of that left behind by Labour – and not this nonsense the chancellor is peddling.
“The reality is she does not want to take the difficult decisions on pay, productivity or welfare reform that would have meant we could live within our means and is laying the ground for tax rises.
“After Labour promised 50 times not to do this, they will find trust in the new government evaporates sooner than they expect.”
Labour sources did not deny reports that an early assessment has found a nearly £20bn annual gap between revenues and funding commitments, including in areas such as asylum and public sector pay.
The figure could still shift as each department’s spending commitments are assessed before Ms Reeves’ Commons statement.
Any tax hikes to plug the shortfall in spending for essential public services are not expected before the autumn Budget, the date of which Ms Reeves is also set to announce on Monday.
Labour has ruled out lifting income tax, VAT, national insurance and corporation tax, but changes to capital gains or inheritance levies may be on the table.
Asked about the black hole at the meeting of G20 finance ministers in Brazil, Ms Reeves said: “I’ll give a statement to parliament on Monday, but I have always been honest about the scale of the challenge we face as an incoming government, and let me be crystal clear: we will fix the mess we have inherited.”
The Labour source said: “On Monday, the British public are finally going to see the true scale of the damage the Conservatives have done to the public finances.
“They spent taxpayers’ money like no tomorrow because they knew someone else would have to pick up the bill.
“It now falls to Labour to fix the foundations of our economy and that work has already begun.”
As she presents the findings of the audit, Ms Reeves is expected to claim the pre-election plans by Mr Hunt would require significant cuts to already cash-strapped public services.
The chancellor is widely expected to be forced to raise taxes in the Budget to avoid the spending squeeze implied by the existing plans and to meet her fiscal rule to have debt falling as a share of gross domestic product within five years.
Ms Reeves will also respond to the public sector pay recommendations as the government faces having to find money for above-inflation rises.
Reports have suggested teachers and NHS workers could be in line for a 5.5 per cent pay boost, which could cost about £3.5bn more than had been budgeted.
