Some Conservatives blame austerity for handing seats to Labour in the general election but the chancellor is reluctant to borrow to match popular policies

Philip Hammond is resisting Theresa May’s demands for an end to austerity amid Treasury concerns that loosening the purse strings will lead to a black hole in the government’s finances.

The chancellor has used discussions with the prime minister since the election to press the case for a cautious approach to the public finances, despite the widespread view among Conservative MPs that seven years of spending cuts and pay restraint handed seats to Jeremy Corbyn’s Labour party.

Hammond has already eased the pace of austerity since moving into the Treasury almost a year ago but is opposed to the idea that his planned planned autumn budget should result in far higher borrowing to fund new spending pledges.

The pressure to ease up comes just as Hammond can trumpet some progress on cutting the deficit – which is the gap between what the government receives in income, such as through taxes, each year and what it spends. For the financial year just ended in March, the deficit was £48.7bn, down a hefty £23.4bn from the previous year. That was also £3bn smaller than forecast at the time of Hammond’s maiden budget in March.

The government’s independent forecaster, the Office for Budget Responsibility (OBR), said in March that the deficit was expected to widen again this year to £55.2bn but then shrink every year over the following four years. The public finances are still expected to be in the red well into the next decade.

John Hawksworth, chief economist at consultancy group PwC, said: “People are certainly fed up with austerity. The political rhetoric is going to change. The question is whether it will be reflected in the hard numbers.”

Carl Emmerson, at leading thinktank the Institute for Fiscal Studies, said any change of tack was likely to take the form of higher borrowing by the government. “We could see more borrowing because of the desire to spend a little more than current plans imply, and because of a lack of desire to put up taxes to pay for it,” he said.

Hammond and May must also consider whether the Conservatives should match Labour spending pledges, like scrapping tuition fees, that proved popular with young voters.

But some economists point out that more spending will not necessarily translate into a much bigger hole in the public finances. Martin Beck, from the consultancy Oxford Economics, believes increasing borrowing to fund more spending or tax cuts would help the economy grow faster, which in turn could speed up deficit reduction.

“There’s a strong case for doing more fiscal loosening,” said Beck. “It could boost demand. It might not be completely self-financing but the idea you wouldn’t get more activity from more spending and tax cuts is silly and higher activity generates tax revenues.”

But Torsten Bell, director of the Resolution Foundation, said it was clear that Hammond took a different view and was unreceptive to the idea of permitting a big increase in the deficit. Bell said one way to pay for spending increases would be to delay some of the more expensive proposed tax cuts – raising the personal allowance, increasing the upper rate threshold and reducing corporation tax – that the government has lined up for the current parliament. Against this backdrop, some of the pressures on the chancellor include:

Public sector pay

The praise for the emergency services for the way in which they responded to the Manchester Arena bombing, the Borough Market attacks and the fire last week in Grenfell Tower has made it much tougher for the government to stick to its 1% pay ceiling in the public sector. If the cap held until its planned end in 2020, public sector workers would be earning less in real terms than in 2004-5, making it harder to recruit and retain staff.

Cost: £3bn for each percentage point increase in public sector pay.

Schools

The government has protected the budget for schools but a growing population means that funding per pupil is set to fall in the four years from 2015-16 to 2019-20. Labour said it would reverse these cuts and the education secretary, Justine Greening, will be pressing Hammond to do the same.

Cost: £4bn to ensure per pupil funding remains unchanged.

Welfare

George Osborne announced £12bn of welfare cuts in his summer 2015 budget as part of his plan to put government finances back into the black by 2020. These included less generous child benefit, a freeze on in-work benefits and restrictions on housing benefit. Some changes have been introduced but most expected savings will occur in the new parliament.

Cost: £9bn to reverse welfare cuts due to come in during the current parliament. £2bn: cost of Labour’s planned social security package.

Tax

The election meant the government had to shelve a number of revenue-raising measures until after polling day. These would have been passed comfortably in the event of the expected large Tory majority but are now at the mercy of a hung parliament. These include the “making tax digital” programme aimed at putting more of the tax system online, restrictions on corporation tax relief and scrapping non-domicile status.

Revenue: £7.6bn in total: £4bn from corporation tax; £2.2bn from making tax digital; £1.4bn from cracking down on non-doms.

Tuition fees

One of Labour’s most popular policies was the pledge to scrap higher education tuition fees and reinstate maintenance grants, and the Tories might face pressure to match it if they are to secure a younger vote that could be the swing demographic in the next general election. Corbyn said he would fund this move by levying a 45% income tax on those earning more than £80,000 and 50% tax on those earning more than £110,000. The Conservatives promised in their manifesto not to raise income tax.

Cost: £9bn

NHS

Spending on the NHS has been ring-fenced since 2010, sparing health from the deep cuts that have affected most other Whitehall departments. Even so, the NHS budget has increased by just over 1% a year on average since the last year of Gordon Brown’s government – just one third of the average annual increase since it was founded in 1948. The Tory manifesto pledged an extra £8bn for the NHS over the next five years, while Labour promised £30bn.

Cost: Around £5bn a year to match Labour’s commitment.