(Bloomberg) -- Chancellor of the Exchequer Rishi Sunak warned the U.K. will suffer its deepest recession in more than 300 years as a result of the coronavirus pandemic, with 2.6 million unemployed, as he set out government spending plans.“Our health emergency is not yet over and our economic emergency has only just begun,” Sunak told Parliament. “So our immediate priority is to protect people’s lives and livelihoods.”In his statement to the House of Commons, Sunak announced:A pause to pay rises for public sector workers in non-health rolesAn increase in the National Living Wage to 8.91 pounds ($11.89) an hourThe economy is expected to contract 11.3% this year, the biggest drop in more than three centuriesThat hit won’t be recovered until later 2022, while long-term scarring means the economy will be around 3% smaller in 2025 than expected in MarchThe U.K. is forecast to borrow a total of 394 billion pounds this year, equivalent to 19% of GDP, and the highest recorded level of borrowing in peacetime historyUnemployment to peak in the second quarter of next year at 7.5%, or around 2.6 million, before falling for the rest of the periodOverseas aid spending will be cut to 0.5% of national income from 0.7%The chancellor’s statement to lawmakers on Wednesday begins the British state’s painful reckoning with the financial consequences of the pandemic, with some tough decisions on how to address a budget deficit ballooning toward a postwar high of 400 billion pounds ($533 billion).With the country on course for the worst slump in economic output in three centuries, and renewed lockdowns threatening further damage, the chancellor focused on support for jobs and the unemployed, plowing tens of billions of pounds into infrastructure spending, and ensuring the health care system can cope with a resurgent wave of infections.How Sunak delivers on his task may set the tone for the ruling Conservative Party’s approach to the fiscal legacy of the coronavirus. While the spending review isn’t a tax event, Treasury-watchers were listening for signals about his plans to return the public finances to a more stable track in the longterm, including hints at future tax rises.The most noteworthy announcement in advance was the biggest uptick in defense spending in three decades: a four-year, 24 billion-pound investment in the country’s armed forces.What to Expect in Rishi Sunak’s Crucial U.K. Spending ReviewWhat Bloomberg’s Economists Said...“He can either emphasize that the government will continue to support the economy next year, or signal he will soon need to start repairing the public finances.”-Dan HansonTo read the full report, click hereA new infrastructure strategy is expected to detail planned projects to deliver on 100 billion pounds of projects pledged over the course of the five-year Parliament that started last December. Sunak also unveiled a new financial institution to help attract private money into such programs.The chancellor has found himself spending in a way that no Conservative chancellor would easily countenance. As of July, costs totaling 200 billion pounds had been racked up or earmarked to tackle the virus and support jobs and businesses through the crisis.More borrowing will be needed. Later on Wednesday, Britain’s Debt Management Office will announce almost 100 billion pounds ($133 billion) of extra issuance for the December-March period, taking the annual total to 482.8 billion pounds, according to the median estimate in a Bloomberg survey of 12 primary gilt dealers.Foreign AidThat’s more than twice the previous record set during the financial crisis -- a tally that would cause borrowing costs to spike if it weren’t for the Bank of England’s bond-buying program that has helped to curb the yield on 10-year bonds by about 50 basis points.The cut in foreign aid spending is likely to dismay some Conservatives who warned it will hamper renewed efforts to display Britain’s global role just as Brexit takes effect. A lawmaker rebellion that could include former ministers including Andrew Mitchell, Tobias Ellwood and Harriett Baldwin might erupt if a change in the law is needed.“Abandoning the 0.7% target for aid would be a moral, strategic and political mistake,” former prime minister David Cameron said, before the chancellor spoke. “I completely understand the need to keep spending under control but the aid budget is already falling because it is linked to the size of our economy. I hope the PM will stick to his clear manifesto promise, maintain U.K. leadership and save lives.”(Updates with details)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.