Chancellor Alistair Darling has warned his Cabinet colleagues not to expect any more money for schools, hospitals or transport.
He said people are feeling "squeezed" by rising prices and will not tolerate higher taxes for public services.
He told the Times newspaper that he did not believe there would be a swift improvement in the economy.
The Tories said his hint that borrowing rules might be relaxed dealt a fatal blow to the government's reputation.
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He also suggested that bringing burgeoning public borrowing under control would be politically unacceptable.
"There are a lot of people in this country who feel they work hard, and they're feeling squeezed," he said.
"So every chancellor has to be conscious of the fact that there's a balance to be struck between how much you can spend, and how much people will say, 'OK, if you've another pound to spend, remember me as well."
Earlier, Mr Darling conceded that the Treasury's fiscal rules were under review - saying it was right to allow borrowing to support the economy during a period of uncertainty.
The Tories say this would mean the end of Gordon Brown's reputation for prudence.
The BBC understands that officials are drafting a looser framework, so that the Treasury would not have to break the present borrowing limit of 40% of national income.
The rules were laid down by Mr Brown as chancellor, after Labour came to power in 1997. He promoted them as evidence of the prudent way he was running the economy.
But it is predicted these will be breached as the government faces an Ј8bn tax revenue shortfall, because of the slowdown on the High Street, the housing market stalling and a drop in company profits.
Speaking earlier shadow chancellor George Osborne said: "It's basically the end of the Brown era of economics."
Liberal Democrat Treasury spokesman Vince Cable described news of the Treasury's deliberations as "embarrassing, even humiliating" for the government.
Robert Chote, director of the Institute for Fiscal Studies, said the government should have rethought the rules "before the point at which it looks as though you are just about to break them".
(BBC)
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