Chancellor George Osborne has said public sector pay rises will be capped at 1% for two years, as he lowered growth forecasts for the UK economy. The number of public sector jobs set to be lost by 2017 has also been revised up from 400,000 to 710,000. Borrowing and unemployment are set to be higher than forecast and spending cuts to carry on to 2017,
For Labour, Ed Balls said the figures showed the chancellor's economic and fiscal plans were "in tatters".
Outlining his plans to MPs, based on economic forecasts from the independent Office for Budget Responsibility (OBR), Mr Osborne told MPs the UK economy was now forecast to grow by 0.9% this year - compared with 1.7% forecast in March and 0.7% next year, down from the 2.5%.
He said the eurozone crisis, a hike in global commodity prices and a new assessment that the UK's economic boom was bigger and the bust deeper than previously believed was to blame.
Borrowing was falling and debt would come down but "not as quickly as we wished". In 2011-12 borrowing is now forecast to be £127bn - up from £122bn forecast in the Budget and, over five years, the government is expected to borrow £111bn more than predicted in March.
But he said, because debt interest payments had dropped, the government would be spending £22bn less over this Parliament on that than predicted.
The OBR forecast that unemployment would rise from 8.1% this year, to 8.7% next year - before falling to 6.2% by 2016. Its earlier prediction that a squeeze on the public sector would mean 400,000 job losses over five years has been nearly doubled, to 710,000 - as a result of extra spending cuts pencilled in for 2015-16, and 2016-17.
The chancellor conceded he would not now be able to eliminate the structural deficit and see national debt falling by 2014/15 as had been predicted. The structural deficit is now predicted to be eliminated by 2015-16, pushing it beyond the next general election.
While the OBR had not forecast a double dip recession - as the economic think tank the OECD did on Monday - the chancellor warned that if the rest of Europe went into recession, "it may prove hard to avoid one here".
But he said the government would meet its budget rules.