Osborne is planning to cap public sector pay rises to one per cent in 2016 and 2017 – two years beyond the current pay freeze.
An extra 310,000 public sector job losses are also expected as the Treasury strives to make sure it hits its target of eliminating the deficit within five years, and cutting debt as a proportion of GDP by 2015.
The chancellor also said that national public sector pay deals could be scrapped, depending on a consultation on allowing regions to set pay rates that are more in line with the local private sector market.
A report on the subject from national pay bodies is due next July.
The Office for Budget Responsibility expects yesterday’s announcements to involve a fiscal tightening of £8.3bn in 2015/16 and of £15.1bn in 2016/17.
As a result the ratio of debt to GDP is projected to fall from 78 per cent in 2014 to 77.7 per cent in 2015.
The Trades Union Congress (TUC) warned the measures mean “we are locked into permanent austerity”.
Further cuts raise the prospects of further strikes.
“The government has alienated its entire workforce who are coming together in unprecedented unity to take a stand against such unfair treatment,” said the TUC’s Brendan Barber.
However, a report published today from think-tank Policy Exchange argues public sector workers are still paid 8.9 more than their private sector counterparts, despite the pay freeze.
“These figures highlight that discussions on the public sector are focussing on the wrong thing,” said Policy Exchange’s Matthew Oakley.
“Unions are striking despite generous pay and extraordinary pensions.”