The chancellor is to admit for the first time that taxes will have to rise to cover the costs of increased spending on the NHS.
In a speech on Thursday, Philip Hammond will say that any increases will be done in a “fair and balanced way”.
He will also make it clear the government will stick to its promise to reduce the nation’s debts.
That means there will be little room for extra borrowing to pay for the PM’s promised spending boost.
“We are getting debt down, while investing in Britain’s infrastructure, supporting our vital public services, and helping hard working families across the United Kingdom,” the chancellor will say at the Mansion House in the City.
“And this week, the prime minister announced a five year NHS funding package that will boost spending on health by over £20bn a year in real terms in England alone.
“So, as the prime minister said, across the nation taxpayers will have to contribute a bit more in a fair and balanced way to support the NHS we all use.
“We also confirmed we would stick to our fiscal rule and continue to reduce debt.”
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The admission that tax rises are ahead puts at risk a Conservative manifesto pledge in 2017 that the party had a “firm intention to reduce taxes”.
In the words from the speech released overnight by the Treasury there was no mention of the “Brexit dividend” which the prime minister claimed at the weekend could be used to pay for part of the extra spending on the NHS.
Economists have dismissed the idea that there is a “dividend” from leaving the European Union (EU), arguing that the costs to the economy outweigh any reduction in payments to the EU.
Mr Hammond’s speech will make it clear the Treasury is still committed to reducing the deficit – the amount of money the government spends above the amount it gains in revenues from taxes and investment – to 2% of the value of the economy (gross domestic product) by 2021.
The Treasury has also promised as part of its “fiscal rules” that the country’s overall debts – the total amount it has borrowed – will be falling as a proportion of the overall economy by the same time.
My sources tell me that reducing the nation’s debts – which has yet to happen – is seen in Conservative circles as the “big dividing line” with Labour which the party must stick to.
That means increased taxes will be needed to cover the costs of the NHS pledge.
John McDonnell, the shadow chancellor, has just responded to Mr Hammond’s comments:
“Just 12 months ago Theresa May claimed the only way voters can be sure their taxes won’t rise was to vote Conservative, but it seems Philip Hammond didn’t get the message.
“It is scandalous that the chancellor is still planning to go ahead with billions of pounds in tax giveaways to big business and a wealthy few over this parliament, but now suggests he will raise taxes on low and middle earners at the same time to pay for the Tory made crisis in our health and social care system.
“In contrast, Labour set out a fully costed plan to fund our NHS and public services by ending the Tory tax giveaways to big business, and with a modest tax rise on the top 5% of earners.”