Rishi Sunak is set to confirm that the “pause” on public sector pay that affected 2.6 million teachers, police and civil servants will be lifted in April, as the economy bounces back from Covid.

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

With wages in many sectors rising, and the prime minister using his party conference speech to highlight the prospects for a “high-wage economy”, Treasury sources said that argument no longer applied.

However, each Whitehall department will have to fund any pay increases from within its own budget, and TUC analysis shows that the pay of many public sector workers has fallen significantly in real terms after years of tight settlements.

The TUC general secretary, Frances O’Grady, said: “In the face of a looming cost-of-living crisis, the government must increase departmental budgets so that every public sector worker gets a meaningful, real-terms pay increase. If ministers don’t give departments the funding to raise pay, they are not ending the public sector pay freeze.”

Recent polling carried out for the TUC by YouGov found 27% of public sector workers said the government’s pay policy had made them more likely to quit.

NHS staff and public servants earning less than GBP24,000 were exempted from the pay freeze, but it covered 2.6 million other public sector workers, including teachers, firefighters, the armed forces and police.

Sunak will set out the funding for each individual department as part of a three-year spending review, which he will deliver alongside the budget on 27 October.

The defence minister Tobias Ellwood has already said he hopes the armed forces will be given a pay increase of “more than 1%” from April. Local government workers have been offered 1.75% – well below the rate of inflation – which has been rejected by unions.

Sunak is also expected to announce April’s increase in the “national living wage” (NLW), after the low pay commission has produced its final report in the coming days. The commission advises the government on how to reach the target set by George Osborne of lifting the NLW to two-thirds of median earnings by 2024.

In March, it mooted GBP9.42 as the rate likely to be necessary, based on wage forecasts at the time – but since then pay has been growing robustly, and some experts believe a higher figure is likely. The current rate is GBP8.91.

Johnson seized on the promise of a higher wage post-Brexit economy earlier this month as petrol shortages afflicted forecourts up and down the country and businesses in sectors including hospitality and retail complained of difficulties recruiting staff.

However, Sunak has made clear he is concerned about the risk of inflation getting out of control if wages rise without improvements in productivity – from better skills and investment in new technologies, for example.

“That is something that we’ve discussed in this country together and have collectively decided that’s not the right model going forward,” he told reporters during International Monetary Fund (IMF) meetings in Washington this week.

“We want to move to a higher-wage, higher-skilled economy. Now obviously that will take time, and we would want to make sure that is accompanied by increases in productivity, so it’s not inflationary.”

A Treasury source said Sunak was concerned about the risks of rising inflation, which could lead the Bank of England to increase interest rates and potentially push up the cost of servicing the government’s debt. “It’s something that he has had his eye on for a long time now,” the source said.

UK inflation measured on the consumer price index was 3% in August, up from 1% in March.