The government was today accused of waging war on public services as the chancellor, George Osborne, announced a two-year public sector pay freeze and a crackdown on public sector pensions.
The pay freeze, which applies to all public sector workers earning £21,000 or more, will save £3.3bn a year by April 2015. To mitigate accusations of unfairness, Osborne promised an extra £250 for the 1.7 million public sector staff earning less than £21,000.
Osborne also promised to ensure that senior salaries are more closely linked to those of the lowest earners.
Will Hutton, executive vice-chair of the Work Foundation, has been asked to draw up plans for fairer pay so that those at the top of public organisations are paid no more than 20 times the salaries of those at the bottom.
The chancellor confirmed measures to reduce the cost of public sector pensions would be in place by next year. "We need to do something about the spiralling costs of public sector pensions," he said, citing figures from the Office for Budget Responsibility showing that the funding shortfall between contributions and pensions paid out will have reached £10bn by April 2016.
An independent commission, chaired by former Labour minister John Hutton, will conduct a review of public service schemes. An interim report will be published in September and final recommendations in time for next year's budget.
Osborne said: "Many millions of people in the private sector have in the last couple of years seen their pay frozen, their hours reduced, and their pension benefits restricted.
"They have accepted this because they knew that the alternative in many cases was further job losses.
"The public sector was insulated from these pressures but now faces a similar trade-off. I know there are many dedicated public sector workers who work very hard and did not cause this recession – but they must share the burden as we pay to clean it up."
He added: "The truth is that the country was living beyond its means when the recession came. And if we don't tackle pay and pensions, more jobs will be lost. That is why the government is asking the public sector to accept a two-year pay freeze."
Dave Prentis, general secretary of Unison, said that the budget was the most draconian in decades.
"This budget signals that the battle for Britain's public services has begun with the government declaring war," he said. "Public sector workers will be shocked and angry that they are the innocent victims of job cuts and pay freezes.
"Freezing public sector pay when inflation is running at 5.1% and VAT is going up will mean a real cut in living standards for millions of ordinary workers and their families already struggling to pay rising bills."
John Philpott, chief economic adviser at the Chartered Institute of Personnel and Development, said curbing public sector pay would not improve the public finances a great deal.
"In the short term, while a pay freeze will stop the public deficit getting any worse, it will do little to help the deficit get any better," he said.
The CIPD says the budget measures will lead to 725,000 job losses in the public sector by 2015. With average redundancy payouts in the region of £17,000-£18,000, the potential cost to the public purse could be extremely high, Philpott said.
He also warned of the damaging effect on attracting and keeping staff.
"The government needs to be wary of the dangers of a prolonged squeeze on public sector pay. Keeping the lid on pay for year after year would cut costs at the expense of severe public sector recruitment and retention difficulties," he said. "This would harm the quality of public service provision as public sector employers would have to make do with lower quality staff, while history suggests that periods of tight pay restraint are subsequently followed by periods of significant public sector pay inflation when earnings are raised to competitive rates."
The pay freeze will not affect public sector workers equally. For council workers, the announcement is particularly galling as a pay freeze this year means that local authority employees will now not receive a pay rise for three years.
In contrast, teachers will not be affected until 2011.
Michael Gove, the education secretary, confirmed that teachers' three-year pay deal would be honoured in full and that they would still receive a pay rise due in September, the last instalment of that three-year deal.