Media playback is unsupported on your device Media caption Stephen Hammond: Money in Budget 'for housing and health'

Chancellor Philip Hammond plans to use "headroom" in the public finances to target spending on housing and health, a close friend has told the BBC.

Stephen Hammond - a former transport minister - said the chancellor wants to use next Wednesday's Budget to "attack problems" that contributed to the Tories' poor election performance.

The chancellor said in March he had "headroom" - available cash - of £26bn.

Labour says he needs to tackle what it calls the squeeze in living standards.

Image copyright AFP

The chancellor will lay out the government's financial plans on 22 November.

He is also expected to call for evidence on whether a tax on the use of the most environmentally damaging single-use plastics, such as takeaway boxes and bubble wrap, would help tackle to problem of plastic waste.

'About to turn a corner'

The £26bn was dubbed a "war chest" - designed to help him navigate the economy through Brexit.

Stephen Hammond, who has known the chancellor for more than 20 years, told BBC Two's Newsnight that the chancellor was planning to use the Budget to reach out to voters who had abandoned the Tories.

The party lost its overall parliamentary majority in June's election, with voters in every age group up to their late 40s preferring Labour. Housing was cited as a key concern by younger voters.

Stephen Hammond told Newsnight: "I think what the chancellor will be doing is saying, 'Look it would be silly to throw away all the good work we've done in getting down the deficit level, we're about to turn the corner on debt but yes of course I am listening.

"'In my autumn statement I created some headroom... and I will be looking at what... ways that headroom could be used to attack the problems that so many people have spoken to me about.'"

The former transport minister predicted a strong focus on housing in the Budget.

"I am absolutely convinced that he'll be looking at some housing ideas.

"And there are some really creative ones about looking at loan guarantees for small builders and things in that sort of area. But also he knows that we need to build more social housing and affordable housing. I think he'll be looking at ways he can encourage that."

'A bloodbath'

Nick Boles, a former housing minister, told Newsnight the Conservatives would be writing themselves out of the election script unless they do more to help people without mortgages.

The Financial Times reported last month that about two-thirds of the chancellor's "war chest" may have been wiped out in light of what Treasury officials described as a "bloodbath" in the public finances.

The warnings came on the eve of a report by the Office for Budget Responsibility highlighting poor productivity.

Amid this background, Stephen Hammond predicted that the chancellor would not abandon his reputation as a cautious figure. He said the chancellor would not deviate from his fiscal rule which is to reduce the budget deficit to below 2% of national income by 2020-21.

The former minister said: "It's a bit like running a marathon getting to the last half mile and saying, oh hell - I'll turn round and go back to the start. Philip isn't going to do that.

"It would be absolutely madness to give up on getting the economy and the finances back into a good shape."

Anneliese Dodds, the shadow financial secretary to the Treasury, said the chancellor should outline ambitious plans to tackle income inequality. A government source said the chancellor would adopt a balanced approach on his Budget.