Rachel Reeves will remain as chancellor until the next general election, Keir Starmer has insisted, as he warned the Treasury would be “ruthless” over public spending cuts to help meet the government’s fiscal rules.

The Treasury is looking for billions of pounds of savings from departmental budgets to balance the books at this summer’s spending review, after another difficult day for the economy that saw the cost of government borrowing rise and the value of the pound fall.

Starmer said that Reeves was “absolutely right” to take a tough approach to public spending after a bruising week in the markets and concern among some Labour MPs over her plan to get the economy back on track.

“Yes, we will be ruthless, as we have been ruthless in the decisions that we’ve taken so far,” the prime minister said at the launch of the government’s artificial intelligence action plan in east London.

“We have got clear fiscal rules, and we are going to keep to those fiscal rules, and that’s why the chancellor was absolutely right in the words that she chose to describe the approach that we will take.”

It came as a new YouGov poll put Reform UK within one percentage point of Labour, with the Conservatives pushed into third place. The data, collected over the weekend, had Labour on 26%, Reform UK on 25% and the Tories on 22%.

In a speech to the Institute for Government next week, Darren Jones, the chief secretary to the Treasury, will warn cabinet colleagues that they will be expected to undertake sweeping reforms to public services as part of the spending review. He is expected to say: “I don’t accept the idea that we should just keep spending more for poor outcomes. Taxpayers, and the users of public services, deserve better.

“We therefore won’t settle for doing things the same and hoping for a different outcome – we’ve seen that play out, with a £22bn black hole in the public finances, and public services on their knees. We have to do things differently – and we will.”

Among the changes ministers believe are needed are significant reductions in the £300bn a year welfare budget, with the annual cost of support payments for people with disabilities and health conditions currently forecast to soar 60% by 2029.

“Nobody credibly believes the welfare bill is sustainable,” a government source said. Another added: “The obvious route for any chancellor is to look at welfare. It’s not just a moving target, it’s a constant one”.

Whitehall officials have been drawing up plans, expected to be published in the spring, that build on the Get Britain Working white paper, to amend work capability rules that could save the Treasury £3bn.

One former Whitehall source said that among the options presented by the department would be the potential for a lower benefit option for claimants who are sick or disabled but could work in some circumstances.

A similar option was abolished by the Conservatives in 2017, which some experts believe means more people tend to be judged as having severe incapacity – which gets a higher award. Officials are also exploring tightening the rules around what proof is needed to get payments.

A more radical option still would be to examine the case for means testing personal independence payments (Pip), which helps disabled people with extra living costs and can currently be awarded regardless of income.

The proposals risk triggering a backlash from Labour MPs and disability campaigners who fiercely criticised the Conservatives when they announced a similar overhaul of Pip last year.

One source said there was “no political bandwidth” to make cuts to pensioner benefits, worth £150bn of the total welfare bill this year, after the fallout over the government’s decision to cut the winter fuel payment.

Other options to make savings include increasing the number of civil service redundancies. In the summer the government rejected the previous target of cutting 66,000 civil service roles – but more than 10,000 jobs are expected to be slashed, first revealed by the Guardian last year.

But one Whitehall source said there was a possibility of going further. There are 513,000 full-time civil servants in central government, up sharply from a recent low of about 380,000 in 2016.

Downing Street officials have said any new spending reductions across departments would “never be at the levels you could describe as austerity”, which Reeves and the prime minister have both previously ruled out. However, the level of cuts on the cards has worried Labour MPs.

Reeves faces the possibility of having to make steep spending cuts by March to avoid being judged by the Office of Budget Responsibility to have breached her fiscal rules. She has already ruled out increases to either borrowing or taxes.

She has faced intense pressure after yields on UK government bonds rose again when markets opened on Monday, reaching a decades-long high. Rises in the cost of borrowing are thought to have wiped out the chancellor’s £10bn fiscal headroom.

Although much of the increase is driven by global economic factors and a difficult fiscal inheritance, it also reflects decisions taken at the budget in October that took the tax burden to record levels and increased public spending by £72bn over the course of this parliament.

The UK currency is also in focus after the turmoil in the bond markets. Sterling fell by a cent, or 0.8%, against the dollar to a low of $1.21 on Monday, the lowest since the start of November 2023.

Despite speculation over her future, the prime minister’s official spokesperson confirmed that Reeves would remain in post right up to the next general election. “He has full confidence in the chancellor and he’ll be working with her in the role for the whole of this parliament,” he said.

After his speech, Starmer said he had “full confidence” in Reeves and that she was doing a “fantastic job”. He declined, however, to say whether she would still be his chancellor by the end of this parliament.

The prime minister also warned that turning the economy around after more than a decade of Conservative rule was always going to take time.

“We never pretended, nor would anybody sensibly argue, that after 14 years of failure you can turn around our economy and public services before Christmas,” he said. “Before the election, I said it is not going to be possible to do this in six months. It’s going to take time.”