Lord Mandelson has admitted that Britain faces a decade of public spending cuts even if Labour wins the next election.
The Business Secretary said 10 years of tighter public spending would be needed to deal with the record levels of debt built up by the Government's fiscal stimulus package. It put him at odds with the Prime Minister, who has been reluctant to concede that his party would have to make cuts.
"We will re-balance public finances in the medium term," Lord Mandelson said. "There will be spending choices and a growing need for greater efficiency across the board, and less spending in some programmes."
He refused to say where the axe would fall, but maintained that frontline services would not be hit, promising there would be "sustained investment in schools, police, hospitals and frontline services, including our country's defences". He said that how the two parties chose to deal with the period of tighter finances would be the basis on which the public would make their choice at the next election.
"We will be operating under greater public spending constraints in the coming decade than we have in the last 10 years and that's why we need to respond to it in the way I have described, rather than the way in which the Conservatives have suggested they will set about it," Lord Mandelson added.
His comments have raised suspicions that the Cabinet is split over whether to be more frank about cuts. Both Lord Mandelson and the Chancellor, Alistair Darling, are said to be keen to persuade the Prime Minister to give a more honest assessment of future spending. Mr Darling has already admitted the country will have to be given some idea of the party's spending plans ahead of the election.
George Osborne, the shadow Chancellor, claimed the Cabinet was now "completely divided" on the issue. "Peter Mandelson and Alistair Darling are admitting the Conservatives were right all along and cuts will follow the election. Gordon Brown and Ed Balls, the man he wanted to be chancellor, are refusing to be honest and think they can still take the public for fools," he said. "This cabinet division on such a central economic issue is undermining confidence in the recovery and trust in the Government."
Downing Street denied there was any split between Mr Brown and his First Secretary of State, with a source saying that Lord Mandelson's words had been seen and cleared by the Prime Minister in advance.
Lord Mandelson added that despite his support for the euro, it would be "some years" before Britain was in a position to join the single currency. "The prospects and chances of us joining the single currency early on are not strong," he said.
He also admitted that the party's internal polling reflected the fact that Labour was "without doubt being thoroughly tested", but maintained that there was no enthusiasm among the public for David Cameron and the Tories.Reuse content