Rachel Reeves is locked in a battle with Wes Streeting over the abolition of NHS England ahead of her autumn Budget.
The Chancellor is resisting demands from Health Secretary Mr Streeting to use more than £1bn from the Treasury’s reserve to fund redundancy payments when the agency is scrapped.
Government sources told The Telegraph the Department of Health had asked for extra funding to allow it to fulfil Sir Keir Starmer’s promise to axe NHS England within two years.
The Prime Minister announced in March that the NHS would be brought back into “democratic control” by abolishing the arms-length body that sits between the department and NHS trusts.
However, Mr Streeting has racked up a potential bill of a reported £1.3bn in redundancy payments as part of the reforms. The Treasury has declined his request for a loan to pay off staff, which could then be repaid by the Department of Health from future savings.