Public sector pay rises are to be capped at 1 per cent for a further year, in a move which unions claim will leave family budgets "at breaking point". George Osborne said that salaries of NHS staff, council workers and civil servants will remain at below inflation levels until at least 2016.
The Chancellor also announced plans to seek "significant" savings through reforming the system of annual rises through pay progression in the public sector. He said such automatic pay rises were difficult to justify given that millions of private sector workers had seen their wages frozen or cut.
The announcement came as 100,000 civil servants staged a one-day strike over pay, pensions and working conditions disrupting courts, government departments and job centres.
The strike by members of the Public and Commercial Services union is part of a long running dispute with the Government and will be followed by a half-day strike on 5 April. The announcement is likely to inflame tensions further.
Unions are particularly aggrieved by the plans to end automatic pay progression where salary increases are directly pegged to years served. The Department of Education has already announced plans to end the scheme for teachers.
Brian Strutton, national officer of the GMB, said: "It is bad enough capping the annual pay rise but now attacking pay progression is outrageous.
"In the private sector people tend to have a rate for the job but in the public sector people start lower and reach the full rate after, typically, five years' service. The other effect is that those who would suffer most from a freeze in increments will be low paid women who tend to have shorter service and not to have reached the full rate for the job."
TUC general secretary Frances O'Grady said Mr Osborne appeared to be "oblivious" to the tough time that millions of public sector workers and their families were having.
"Public sector workers have seen their pay frozen as the cost of living soars and thousands now find themselves earning less than the living wage," she said.
"Family budgets are at breaking point and millions of nurses, teachers, firefighters, council workers and civil servants will have been hoping the Chancellor might ease their pain today, not add significantly to it. The Government also seems set on ditching long-established, easy-to-understand pay progression in the public sector based on increased experience and skills over time."
But Dean Royles, chief executive of the NHS Employers organisation, said even limited pay rises could not be afforded by hospitals. "Even limited to 1 per cent, the public sector pay increase announced by George Osborne this afternoon will add in the region of £500million to NHS annual expenditure when applied across all NHS staff. This is the equivalent of around 15,000 new nurses.
"Despite a headline pay freeze, most NHS staff have been receiving incremental pay increases of around 3 per cent as they climb up through their pay bands. The salary rise announced by the Government last week and confirmed in today's Budget is in addition to these increases."