Rishi Sunak will end the public sector pay freeze for million of workers and increase the national minimum wage in the budget on Wednesday, though economists warned the measures would not compensate for inflation rises and cuts to universal credit.

The chancellor is set to confirm that the yearlong “pause” on public sector pay, which affected 2.6 million teachers, police and civil servants during the pandemic, will be lifted as the economy recovers from the pandemic.

On Monday he also confirmed that the UK’s national living wage will rise from £8.91 to £9.50 an hour for workers aged 23 and over from April, a 6.6% increase, meaning a pay rise for millions of low-paid workers after ministers accepted the Low Pay Commission’s recommendation.

The announcements mean about 7.5 million people could see their pay rise – about 5.7 million working in the public sector and 2 million on minimum wage, though there is some crossover. Just under half of public-sector workers were affected by last year’s freeze, with exemptions for NHS workers and those earning less than £24,000.

Sunak imposed the controversial public sector pay freeze in November 2020 and it came into force in April. At the time, he said, it was unfair for millions of workers to get a rise while many of their private sector counterparts were being furloughed or losing their jobs.

But with wages in many sectors rising, and the prime minister using his party conference speech to highlight the prospects for a “high-wage economy”, that argument no longer applies.

“The economic impact and uncertainty of the virus meant we had to take the difficult decision to pause public sector pay,” Sunak said, announcing the end of the freeze. “Along with our Plan for Jobs, this action helped us protect livelihoods at the height of the pandemic. And now, with the economy firmly back on track, it’s right that nurses, teachers and all the other public-sector workers who played their part during the pandemic see their wages rise.”

The Treasury briefed that the minimum wage increase represents a hike of about £1,000 a year for a full-time worker. But calculations by Labour found that those affected by the £1,000-a-year cut in universal credit, the rise in national insurance and the freeze in the income tax personal allowance will still be £807 worse off from April.

They are also likely to feel the pinch from a rise in gas and electricity prices when the energy price cap is reviewed in the same month.

The Institute for Fiscal Studies (IFS) thinktank agreed that the minimum wage increase would not offset cuts to benefits. Tom Waters, senior research economist, said: “While this boosts earnings for full-time minimum wage workers by over £1,000 a year, those on universal credit will see their disposable income go up by just £250 because their taxes rise and benefit receipt falls as their earnings increase.

“Minimum wage workers are most heavily concentrated around the middle of the household income distribution – not the bottom – often because they live with a higher-earning partner. That means that the minimum wage is a very imperfect tool to offset cuts to benefits, which are much more targeted at the poorest households.

“Rising inflation will also blunt the real-terms value of this minimum wage hike – and of course while prices are rising now, the increase in the minimum wage won’t kick in until April.”

The two government announcements are seen by the Treasury and No 10 as putting the focus back on higher wages over government support. Sunak is also likely to confirm that the government is targeting a rise in the national living wage to more than £10 by the time of the next election, a pledge that would match Labour’s.

Bridget Phillipson, Labour’s shadow chief secretary to the Treasury, said the offer was “underwhelming” and would work out at £1,000 a year less than Labour’s plans for a minimum wage of at least £10 an hour for people working full time. “Much of it will be swallowed up by the government’s tax rises, universal credit cuts and failure to get a grip on energy bills,” she said.