MPs are demanding an urgent explanation from ministers after being told that £817m allocated for desperately needed affordable housing and other projects in cash-strapped local authorities has been returned to the Treasury unspent.

The surrender of the unused cash has astonished members of the cross-party housing, communities and local government select committee at a time when Theresa May has insisted housebuilding is a top priority and when many local authorities are becoming mired in ever deeper financial crises.

On Monday the committee, which discovered the underspend for 2017-18, will interrogate housing minister Dominic Raab and homelessness minister Heather Wheeler on the issue, before Tuesday’s spring statement by the chancellor, Philip Hammond. He is under heavy pressure from MPs, and the Tory-controlled Local Government Association, to signal extra help for the local authority sector, which has seen budget cuts of around 50% since 2010.

The acting chair of the committee, the Tory MP Bob Blackman, said: “We will be wanting to know why this very large sum has not been spent at a time of great strain on local authority budgets, and why it was not channelled to other spending projects. It does not help those of us who argue that more should be given to local authorities if the chancellor knows money he gave last time has not even been spent.” MPs believe they can argue for more for local authorities because Hammond will announce that unexpectedly high tax receipts have left the Treasury with a windfall of between £7bn and £10bn.

Speaking on Saturday night, the chancellor said the government had gone a long way to put the public finances back in order and was now able to pump more into services, including housing: “We’re making good progress on building the homes this country needs with, last year, a 20-year record high for housebuilding. This is how we build an economy that works for everyone.”

But Helen Hayes MP, a Labour member of the select committee, said it was “astonishing” that money was lying unspent when the number of social homes built by local authorities from government grants had dropped dramatically since 2010. “This is the biggest issue for families up and down the country, including in my Dulwich and West Norwood constituency,” she said. “It is simply astonishing and unacceptable that there is so little urgency being shown.”

For the last 30 years, councils have cut back council housebuilding in the face of severe budget cuts. Local authorities have also been discouraged from building by the government’s “right to buy” scheme, which allows tenants to buy council properties at a 40% discount.

Hundreds of councils have set up their own property development companies to build homes and get around the rules. But progress has been slow, in part because of the threat from ministers that they might extend the right to buy to the new council-owned companies.

Shadow housing minister John Healey said housing and local government secretary Sajid Javid’s department had also failed to spend £220m of funding allocated to affordable housing last year. “Sajid Javid needs to explain why he is selling families short by surrendering much-needed cash for new homes,” he said.“If the secretary of state can’t defend his department’s budget from the Treasury he should give the job to someone who can.”

A housing ministry spokesman said: “We are investing £9bn in affordable homes, including £2bn to help councils and housing associations build social rent homes where they are most needed.

“All of the affordable housing underspend from 2016-17, including £65m returned by the Greater London Authority, has been made available to spend on similar schemes.”

Last week, the National Audit Office estimated that 10% of unitary authorities and county councils have less than three years’ reserves left if they continue to deploy them at current rates, leaving them vulnerable to potential insolvency.

The Tory chair of the health and social care select committee, Sarah Wollaston, said action was needed urgently: “NHS public health and social care need a boost now, but also a long-term plan to provide the funding they need and a clear plan to set out how the money will be raised.”

Labour will counter Hammond’s claim that the public finances are on the mend by calling for an emergency budget to address the funding crisis hitting Tory- as well as Labour- and Lib Dem-run councils.