George Osborne will come under new pressure to tackle the scourge of low pay, as a former senior adviser to David Cameron calls for all employers to be forced to pay the living wage as a way to combat poverty and boost the economy.

Before his first all-Tory budget on Wednesday, in which he will spell out how to cut £12bn from the social security bill, the chancellor is expected to sweeten the pill by offering help to low earners through the tax system, and by pressuring or incentivising employers to pay higher wages. But writing in the Observer, Rohan Silva, who worked with Cameron at No 10 from 2010-13, says the time has come to tell all employers to pay the living wage – an hourly rate well above the minimum wage.

The living wage, paid by 1,600 UK employers, is £9.15 an hour in London and £7.85 elsewhere, whereas the national minimum wage is £6.50.

Silva, now running his own small business in London, says the capital is thriving but is threatened by two problems that afflict the economy: a chronic shortage of housing, and poverty. “There is one simple thing we can do: make the living wage a requirement for London jobs, as well as across the UK,” he writes. “At a stroke, this would boost salaries, support families and improve the quality of life for millions of people.”

He says it is “ridiculous” that some organisations claim they cannot afford to pay the living wage. “If a small business like mine can do it, there’s no excuse for the multinationals and public sector behemoths.”

Osborne is expected to use the budget to cut tax credits and housing benefit, two of the costliest elements of the social security budget apart from pensions, which the prime minister has promised to protect. Inside No 10 and the Treasury, as well at the Department for Work and Pensions, headed by Iain Duncan Smith, there is a desire to end a system whereby employers are in effect subsidised, via the tax credit system, for employing people on low wages. Instead, the aim is that companies should boost wages.

Silva said the system was absurd. “What we should be doing is cutting tax credits and spending the money on lowering the tax burden on companies so they can pay more to their employees.”

Gavin Kelly, chief executive of the Resolution Foundation thinktank, said that moves to boost pay, while welcome, would not be enough to offset the massive anticipated cuts to support for working families.

“The government is right to talk about boosting pay and productivity, and any policy action in the budget is eagerly anticipated. But this will not be enough to counterbalance the £12bn of welfare cuts also planned,” he said.

“Reductions in tax credits and other benefits will be heavily concentrated on low-income working families, while the gains from stronger wage growth, even if it were to arise, would be widely spread. Given the scale of the expected cuts, it would take heroic pay rises for low-income families to earn their way back to their current position any time soon.”

Frank Field, the former Labour welfare minister and new chairman of the Commons work and pensions select committee, said the government should cut national insurance contributions for companies that agreed to pay the living wage. He also called for the Low Pay Commission to be given a greater role in advising ministers on which sectors in the economy could afford to pay their employees the higher rate.

“Just as schools are not being allowed to coast, employers should not be allowed to coast either,” he said.

The chancellor will also use the budget to stop higher earners from claiming taxpayer-funded subsidies for their social housing rent.

He will say that, from 2017-18, those on incomes above £40,000 in London and £30,000 in the rest of England who live in housing association and local authority properties – representing 9% of all social tenants in England – will be charged a market rent. Higher-income social tenants benefit, on average, by over £3,500 per household from reduced rent. This includes more than 40,000 social rented tenants with household incomes over £50,000 a year; and a further 300,000 with incomes above £30,000 a year. This so-called Pay to Stay policy will raise up to £250m a year in 2018-19.

Osborne will set out the planned path for total public spending over the next five years as he seeks to meet his pledge to move the public finances back into surplus, though the detailed breakdown of which departments will face cuts will not emerge until the autumn spending review.

As Britain’s weak productivity continues to put the brakes on recovery, the Treasury has also been working on ways of boosting output, including through infrastructure projects, and what Osborne calls his “northern powerhouse” scheme, to devolve decision-making powers to cities outside London.

He will raise the inheritance threshold to £1m to allow married couples to pass on their family home, clamp down on tax avoidance, and is expected to lift more minimum-wage earners out of income tax.