Chancellor Rishi Sunak has suggested he could impose a public sector pay freeze in his spending review, but insisted the nation will not see a return to austerity next week.

He is due to announce a multibillion-pound plan to invest in long-term infrastructure projects on Wednesday and fund the fight against the coronavirus pandemic.

And he is understood to be preparing to announce £1.25 billion of new funding for prisons, extra money for police recruitment and that the Government’s 10-year schools programme will approve 50 new schools a year.

Mr Sunak insisted it is not the time to impose tax hikes “in the fog of enormous economic uncertainty”, but he did not rule out capping the salaries of millions of public sector workers.

When we launched the spending review I did say to departments that when we think about public pay settlements I think it would be entirely reasonable to think of those in the context of the wider economic climate

Unions have reacted angrily to the prospect and there is a chance of industrial action if the freeze is confirmed, with Labour saying it would be an “absolute kick in the teeth” for frontline workers.

Mr Sunak told Sky’s Sophy Ridge On Sunday: “You will not see austerity next week, what you will see is an increase in Government spending, on day-to-day public services, quite a significant one coming on the increase we had last year.”

But, while he said that he “cannot comment on future pay policy”, Mr Sunak added: “When we launched the spending review I did say to departments that when we think about public pay settlements I think it would be entirely reasonable to think of those in the context of the wider economic climate.

“I think it would be fair to also think about what is happening with wages, with jobs, with hours, across the economy, when we think about what the right thing to do in the public sector is.”

The Chancellor also declined to commit to an extension of the increase to Universal Credit that was introduced because of the pandemic but is due to end in April.

Mr Sunak insisted he has concerns about the need to tackle the soaring scale of borrowing, but said “there’s an appropriate time” to address it.

“Right now the right economic response is to focus on tackling the virus,” he told Times Radio.

“It wouldn’t be right to try and make them now in the fog of enormous economic uncertainty.”

Frances O’Grady, the head of the TUC confederation of trade unions, appealed to a “sense of fairness” in urging ministers not to impose a public sector pay freeze, which is expected to exempt frontline NHS workers.

“We saw ministers join millions of us clapping firefighters, refuse collectors, social care workers – I don’t think this would be the time to reward them with a real pay cut,” she told Ridge.

“If you want to motivate a workforce when we are still facing a second wave of a pandemic, and we’re going to have a tough winter – we all know that – the last thing you do is threaten to cut their pay.”

Shadow chancellor Anneliese Dodds said a freeze on public-sector pay would knock confidence out of the economy and would “be pitting different groups of workers against each other”.

“To be clear, I do not think there should be that freeze right now. I thinks that’s economically very damaging, it’s an irresponsible choice,” the Labour MP said.

Shadow business minister Lucy Powell said it would be “morally” wrong to freeze the pay of those who supported the nation throughout the pandemic.

“It would be an absolute kick in the teeth for them after what has been a horrendous few months and what will still be a difficult few months to come,” she told Ridge.

In the spending review, Mr Sunak will unveil a £3 billion package to support the NHS in recovering from the pandemic, with the Treasury saying the NHS will get £1 billion to address backlogs by catching up on checks, scans and operations that were delayed by Covid-19.

About £1.5 billion will be used to ease existing pressures in the health service and £500 million will help support mental health services.

Mr Sunak will also detail the much-delayed National Infrastructure Strategy for £100 billion of long-term spending to help tackle the climate crisis and invest in transport.

He will also alter the Treasury’s “green book”, a set of rules to determine the value of Government schemes which is thought to favour London and the south east of England as he seeks to deliver on the Government’s “levelling up” agenda.