A Treasury audit is expected to reveal a £20bn black hole in public spending, Sky News understands.
Chancellor Rachel Reeves is due to give a speech on Monday when she is expected to reveal the state of the public finances and potentially prepare the ground for tax rises in the autumn.
A Labour source told Sky News that 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,” the source said.
“It now falls to Labour to fix the foundations of our economy and that work has already begun.”
During the election campaign, Labour promised not to raise income tax, VAT or National Insurance in the election – which means Ms Reeves could turn to capital gains tax, pension tax relief and inheritance tax as potential options in the budget.
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The chancellor could also change fiscal rules or rework how the debt from quantitative easing is paid off.
Asked about the black hole at a 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.”
Labour’s problem has been compounded by the fact that independent pay review bodies have reportedly told ministers millions of public sector workers should be given a 5.5% increase in pay.
Sir Keir Starmer’s government could need up to £10bn to cover such a pay increase if all public sector workers were given the 5.5% rise, according to Paul Johnson of the Institute for Fiscal Studies.
And speaking to Sky News this morning, Health Secretary Wes Streeting acknowledged “tough choices” had to be made to fix what he called the “works of fiction” of the previous government.
He said the rest of the government was with the chancellor “100%” in her quest to fix the public finances and that he had found “example after example” of “unrealistic timetables” and “unfunded” commitments within his own department.
“There are tough choices to be made in terms of my engagement with the audit of the public finances,” he said.
The health secretary pointed to the programme started by the last government to build 40 new hospitals, which he said contained “totally fictitious timetables” and “unfunded commitments made by the previous government”.
Pressed on whether the black hole could be in the region of £20bn, Mr Streeting said: “Well, that’s for the chancellor to announce in terms of the figure.
“I think what we have been shocked by is the state of in-year challenges in the public finances.
“And I think the Conservatives should hang their heads in shame for it.”
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Asked whether the Conservatives had been “selective with the truth” on the state of the public finances, Mel Stride, the shadow work and pensions secretary who is running to be Tory leader, told Sky News: “Not at all.
“Let’s be very clear about what’s going on here: when Wes Streeting refers to total work fiction he could be referring to what Labour said in the run-up to the general election on taxation.”
Mr Stride said Labour had ruled out raising most taxes during the election despite the fact the “books were open”.
“What they’re doing now is they’re rolling the pitch by saying they’ve suddenly opened everything up, had a look, and it’s all far worse than they ever could have possibly imagined, and therefore we’re going to raise your taxes,” he said.
“They knew exactly where the economy was before the general election. They’re simply rolling the pitch to renege on their promises to the British people come the budget in the autumn – and we will hold them to account for that.”
A Treasury spokesperson said: “The chancellor has commissioned officials to provide an assessment of the state of the government’s spending inheritance which will be presented to parliament before the summer recess.”
