The chancellor, Rishi Sunak, is preparing to announce a renewed squeeze on public sector pay in next week’s government spending review in response to the economic shock of the coronavirus pandemic. Government sources said an announcement on pay restraint would be part of the mini-budget on Wednesday, as part of plans to launch a Whitehall savings drive to tackle record levels of government borrowing incurred during the crisis. The fresh round of belt-tightening for public servants – many of whom were at the forefront of the government’s response to the pandemic – is likely to contrast sharply with Boris Johnson’s generous four-year settlement for the armed forces. The prime minister told the Commons on Thursday he wanted the UK to be Europe’s leading naval power, and said the budget increase would help to equip the Ministry of Defence with swarms of drones, and “directed energy weapons”. At the same time, Johnson also repeatedly declined to confirm whether the government would abide by its manifesto commitment to maintain overseas aid spending on the world’s poorest people at 0.7% of national income. Leaders of nearly 200 charities have written to the prime minister, urging him to ditch a plan to cut the target to 0.5%. With the prime minister committed to spending in key areas including defence and green technology, Sunak has been scouring the budget for potential savings. In an argument reminiscent of the austerity-era wage freezes imposed by the Conservatives after the 2008 financial crisis, Sunak is expected to argue that public sector earnings should move into line with the private sector, where pay has come under severe pressure as the British economy battles through the deepest recession in history. It is understood that NHS staff, including doctors and nurses, will be exempt from the renewed period of restraint to avoid triggering an angry public backlash as a result of the frontline role played by healthcare workers during the pandemic. However, unions warned a renewed pay freeze elsewhere would still come as a kick in the teeth for staff after Boris Johnson had promised to bring austerity to an end before the 2019 election, and as millions of key workers continue to keep the country going through the health emergency. Frances O’Grady, general secretary of the TUC, said: “Freezing their pay is no way to reward key workers for their service. Unions will fight for the proper pay rise they have earned. Working people must not bear the burden of the crisis.” Dave Prentis, the general secretary of Unison, said key workers across the public sector remained at the heart of the fight against Covid. “The government must do what’s right next week and announce the wage rise staff have more than earned. Anything less risks destroying morale when the entire country is counting on them,” he said. The imminent launch of the chancellor’s savings drive comes as government spending soars in response to the pandemic, with more than £40bn spent subsidising the wages of up to 9.6 million workers through the furlough scheme. An extension in the wage subsidy plan until the end of March is expected to cost billions of pounds more, on top of more than £210bn spent on the government’s emergency response to Covid since the pandemic began. Official figures due to be published alongside the spending review by the Office for Budget Responsibility, the government’s economics forecaster, are expected to show a surge in borrowing to more than £400bn this year as the economic fallout from the crisis takes it toll. With spending to cushion the economic blow, and tax receipts falling off a cliff as lockdown restrictions put business activity in the deep freeze, this would represent a budget deficit more than twice the size of that incurred because of the 2008 financial crisis. The government spends more than £200bn a year employing more than 5.4 million people in jobs across the public sector, with the majority working in education and health. Sources said the Treasury was expected to highlight official figures showing that public sector workers benefited from a 7% “raw pay premium” over their private sector counterparts last year. Sunak is believed to consider the analysis from the Office for National Statistics to be important because it highlights that an average public sector worker earns more than in the private sector even after accounting for personal characteristics, job type and skills. However, research from the Institute for Fiscal Studies showed that public sector pay is 1.5% lower than in 2010 after inflation, and among the lowest levels relative to private sector earnings in decades. It said this had probably exacerbated difficulties with hiring workers and retaining existing employees. The basis for a three-year pay freeze on public sector pay that could be considered by Sunak is outlined in a report published by the Centre for Policy Studies, a rightwing thinktank, in a report on Friday. Making the case for public sector pay restraint, the CPS said as much as £23bn could be saved through a three-year freeze on workers’ pay. An option to allow wages to grow by only 1% per year – similar to the policy deployed by George Osborne as part of his austerity-era cuts to Whitehall budgets – would save more than £11bn, it said. Robert Colvile, the director of the CPS, was among the lead authors of the 2019 Conservative manifesto. The CPS has also recently called for the government to abandon a manifesto pledge to raise the minimum wage and to scrap the triple-lock on pensions, which could both also feature at the spending review. Employee representatives warned freezing pay would have a damaging impact on government plans to hire thousands of staff for key roles across the public sector after an exodus during the past decade of austerity if the new restrictions are broad-based. Kevin Courtney, joint national secretary of the National Education Union, said the government had committed to raise the starting salaries of teachers to more than £30,000 a year by 2022. “We would be very concerned if there was a move away from this position. It would be completely unreasonable. They were doing it due to problems with teacher recruitment, and those problems will be back with a vengeance after the pandemic,” he said. Rehana Azam, national secretary of the GMB trade union, said plans to impose pay restraint to balance the books would come as millions of pounds was being paid to companies with close links to government ministers. “Billions are being wasted, flowing out of Treasury into the pockets of their chums. Some people are benefiting from the pandemic while our workers are working throughout it. “It’s dangerous territory for the chancellor if he imposes pay restraint as a way of offsetting the cost of the pandemic. We’re not through it, we’re still in it. Does he really want to do this when people’s morale is so low. When people have lost loved ones and people they’ve worked with, is now the time to kick them even more? I don’t think it would go down well.”