Millions of public sector workers are set to get inflation-busting pay rises, Rachel Reeves confirmed.
The Chancellor said she was accepting in full the recommendations from independent pay review bodies.
She said this was the “right decision for the people who work in, and most importantly, the people who use our public services”.
Her move was expected to mean a rise of around five per cent for teachers and NHS workers.
Earlier, one of Sir Keir Starmer’s top allies on Monday refused to rule out tax rises at a Budget in the autumn.
Cabinet Office minister Pat McFadden stressed that the new Government would stick to its election manifesto pledge not to hike VAT, income tax or National Insurance.
However, ahead of Chancellor Rachel Reeves announcing how she would fill a black hole in the public finances which could total £20billion, he left open the prospect of a string of other tax increases.
Mr McFadden told BBC radio: “We said during the election that there would be no rises in income tax, VAT or National Insurance.
“Those commitments hold.
“People should not expect announcements about taxation today.
“Today is about setting out candidly the situation that we have discovered and responding with some very necessary and tough decisions about spending.”
His comments left open the possibility of tax rises which may be targeted on the wealthy, including on inheritance tax and capital gains tax.
Ministers claim that the previous Tory administration failed to be open about the full scale of the crisis in the public finances.
Mr McFadden alleged that, for example, the Conservatives’ failed Rwanda scheme would cost £700million not the previously admitted £400million.
The Tories, though, accused the new Government of paving the way for tax rises, which they argued was against the pledges made by Labour in the run-up to the July 4 general election.
Shadow transport secretary Helen Whately said: "Actually while Labour is going out there and trying to tell everybody that it is all so difficult for them, this is just them setting a narrative for tax rises that they want to bring in later on.
"But actually they took over an economy that had the fastest growth in the G7, that had the deficit halved compared to when we took over in 2010, that had historic low unemployment and that had inflation back down at two per cent.”
The scale of the black hole in public spending which the Government has warned of is equivalent to the Tories' pre-election national insurance cuts, a think tank has said.
Paul Johnson, director of the Institute for Fiscal Studies, told BBC Breakfast: "It is very striking that if this problem is about £20billion big that is exactly the scale of the national insurance cuts implemented by Jeremy Hunt just before the election.
"Now, if those cuts were implemented in the knowledge that there was this kind of hole that is not good policy to put it mildly."
The IFS accused the main political parties ahead of the election of a “conspiracy of silence” about the extent of the public finances crisis and the difficult choices that would be needed in terms of increasing taxes, cutting spending or borrowing more.
