Rishi Sunak has rejected criticism that his budget plans to repair the government’s finances after Covid-19 were unrealistic, and insisted a 1% pay rise for NHS staff is fair.

The chancellor said the pay offer, alongside plans for a wider public sector pay freeze, was “proportionate, fair and reasonable” given the damage to the government’s finances caused by the pandemic and as many workers in the private sector have lost their jobs.

Answering questions from MPs on the Commons Treasury committee on Thursday, Sunak said the process was being handled by the NHS pay review body but that it was a government decision to recommend the 1% increase. Ministers have insisted the nation could not afford a higher offer, sparking intense anger across the public sector.

“For a matter of fairness, but also to protect people’s jobs in the public sector given what was going on in the private sector, we set out a targeted approach to public sector pay, which we thought was proportionate, fair and reasonable,” Sunak said.

The chancellor said the plan came “in recognition of the circumstances that we face” with the government’s budget deficit – the gap between spending and receipts – on track to reach £355bn this year.

It comes after Sunak faced criticism that his budget lacked credibility for including plans to spend £15bn a year less on public services from 2022-23 than envisaged before the Covid pandemic.

Mel Stride, the Conservative chair of the Treasury committee, warned the legacy of the pandemic would probably include greater demands on public services, telling the chancellor: “The way I’m looking at it there is a £15bn cut relative to previous plans. I would’ve thought that would be one of the areas where you’d be worrying quite a bit about that.”

However, Sunak insisted it was not a cut, despite it being labelled as such by the independent Office for Budget Responsibility. He said spending was set to rise by 2.1% once inflation is taken into account, which would leave the size of the state by the mid 2020s at historically high levels.

“Spending grows over the parliament and grows in every year. What you’re referring to are changes in forecasts from previous fiscal events. That’s not a cut in spending. Spending is growing over this parliament very strongly,” he said.

However, the chancellor hinted that permanently higher levels of tax may be needed in future to fund public services, despite concerns from backbench Tory MPs that the tax take as a percentage of GDP would rise to 35% – the highest since Roy Jenkins was chancellor in the late 1960s.

“If there are demands on the spending side that are larger, it is reasonable to expect that those have to be paid for. I think most people will understand that,” he said.

Sunak was also forced to defend the government’s record on procurement of PPE and spending on its Covid test and trace programme, in the wake of highly critical reports from parliamentary watchdogs questioning value for money.

“Given we were dealing with a pandemic it was appropriate that we approached this with a degree of flexibility,” he said.

The chancellor insisted making sure taxpayers’ money was spent well was “really important” and that if there were any lessons the Treasury could learn it would do so. However, he added: “Whilst saying that it’s important to remember the context we’re operating under at the time.”