Rachel Reeves is planning billions of pounds in welfare and public spending cuts ahead of her Spring Statement on March 26, it has emerged.
The Treasury is targeting the soaring welfare bill and unprotected government departments after her £9.9bn fiscal headroom has reportedly been wiped out.
The cuts are designed to help plug the gap that has emerged in recent months amid mounting global economic turmoil.
Treasury sources have said that the Chancellor has earmarked "several billion pounds" in draft spending cuts to compensate for the loss of leeway, the BBC reported.
Treasury insiders expect the welfare cuts to target the huge growth in health-related benefits, which is forecast to rise from £65bn to £100bn by the end of this decade.
They said given the rate at which the welfare bill is spiralling, "this is something we would need to do" anyway.
DWP Minister Liz Kendall has promised sweeping changes to the welfare state PA Liz Kendall, Work and Pensions Secretary is expected to outline the welfare cuts in a forthcoming speech.
Kendall has previously said the Government was "turning off the tap to criminals who cheat the system and steal law-abiding taxpayers' money".
Kendall is pushing for welfare reforms aimed at cutting billions from the UK’s benefits bill by the end of the decade. She hopes to convince the Office for Budget Responsibility (OBR) that getting more people off sickness benefits and into work will boost public finances.
As Labour seeks to avoid deep spending cuts or tax hikes, the Treasury and the Department for Work and Pensions (DWP) are negotiating with the OBR to maximise projected savings from the upcoming overhaul of the benefits system, set to be unveiled later this month.
A government source said: "Clearly the world has changed a lot since the autumn Budget. People are watching that change happen before their eyes.
"The UK is in a strong position to weather that change. But, a changing world means we must go further and faster in pushing through the change we promised at the election."
The source added: "Headroom or no headroom, the chancellor is determined to push through the change we need to make Britain more secure and prosperous, with the whole government making that argument in the coming weeks."
Shabana Mahmood, Justice Secretary hinted at cuts to the welfare budget when questioned about the reports today.
Speaking on BBC Radio 4's Today programme, she said: "This is the Labour Party, the clue is in the name. We believe in work. There's a moral case here for making sure that people who can work are able to work and there's a practical point here as well, because our current situation is unsustainable."
She emphasised that millions of people who are out of work "want to be in work".
Shadow Business Secretary Andrew Griffith criticised the Chancellor's approach to the fiscal situation.
He said: "She would not have crushed growth and her budget tax hikes wouldn't have been needed."
Griffith argued that Reeves should have focused on cutting spending "in the first place". He described the planned cuts as "another slap in the face for business".
The Chancellor has previously promised not to increase income tax, VAT or National Insurance contributions directly paid by workers.
Chancellor Rachel Reeves said she was 'still not satisfied' with the level of growthPOOLThe New Economics Foundation cautioned that welfare cuts will mean a "bigger squeeze on living standards for the poorest, undermining the Government's growth mission".
They argued the fiscal rules defining the Government's spending headroom "are entirely self-imposed and can be changed at the flick of the chancellor's pen".
Any deep cuts to the welfare budget would be politically painful for Sir Keir Starmer, who already faces pressure from Labour backbenchers over cuts to international aid spending.
Economists at the Institute for Fiscal Studies warned Reeves has "engineered a trap for herself" with "inflexible, pass-fail fiscal targets".
