More than 400,000 public service workers - including nurses, doctors, teachers and police officers - will not receive pay rises for the next 12 months, NSW Premier Gladys Berejikian announced on Wednesday.
Joining treasurer Dominic Perrottet, she said the decision "has not been taken lightly" and was designed to put "every spare dollar we have" into health spending.
Under the decision, it will also mean no job losses within the public service for 12 months, Ms Berejiklian said.
"Nobody will be forced out of a job in NSW public service," she said, but said she could not rule out government job cuts further own the track.
"As difficult as this decision is, our decisions would be more difficult down the track if we do not take this decision today.
"It's the least worst option."
The Premier said the pay freeze was about providing job security and certainty, and supporting the 90 per cent of people in the state who do not work for the government.
Mr Perrottet said the decision would be applied to each public sector agreement as they come up throughout the year, but would not unwind existing agreements.
He also said the decision would put the government's focus onto job creation and was for "the greater good", given more than 200,000 jobs were lost in the state in April.
"This is not about the budget," he said.
"This is not about savings. This is about creating jobs right across the state."
Asked how she thought nurses and police officers who had been at the front line of the pandemic would feel at not receiving expected wage rises, Ms Berejiklian said she was grateful for their work.
However, she said it was up to the whole state to bear the burden of the economic shock caused by the coronavirus shutdown.
"Please work with us in the next 12 months, and just don't have a pay rise for the next 12 months," she said.
"I appreciate that what we're asking today is unprecedented for our government, but we're living in unprecedented times."
She said the $3 billion saved from freezing wages would be spend "on health and jobs".
"They are our priorities, they are our only priorities," she said.
Earlier, NSW Health confirmed that the two schoolchildren who tested positive in Sydney's east were the only new cases detected in the 24 hours to 8pm on Tuesday.
A 10-year-old student at Moriah College in Queens Park was confirmed with COVID-19 and is now recovering at home.
A total of 28 students and three teachers were identified as close contacts from the school, which has been closed for deep cleaning.
Also yesterday, COVID-19 was confirmed in a 12-year-old student at Waverley College, where 44 students and 10 teachers were identified as close contacts.
Contact tracing and further investigations are underway in both cases, NSW Health said.
Ms Berejiklian told the media it was a "very big coincidence" that the two schools, both in Sydney's eastern suburbs, reported coronavirus cases yesterday.
"It's a very big coincidence that two students in close proximity happened to get it when we've had very low numbers of students actually getting it," Ms Berejiklian said on Today on Wednesday morning.
"It was absolutely the right time to go back to school and unfortunately this will be the new normal during the pandemic ... [but] just because this happens in two schools with one student doesn't mean we shut down the entire system."
The two new cases brings the total number of cases in NSW to 3,089 - which is fewer than yesterday, as five previous cases have been excluded from the total.
There were 7,617 tests carried out, compared with 4,621 in the previous 24 hours, and there are now 2,663 people in NSW who have recovered from COVID-19.