George Osborne has announced public sector pay rises will be frozen at one per cent for the next four years.
The chancellor has further 430,000 public sector job cuts, which he hopes will be balanced out by a rise in the number of jobs in the private sector.
The chancellor used his Budget statement today, the first all-Tory Budget in 19 years, to extend the cap on public sector pay rises which he introduced during the coalition years.
"I know there has already been a period of restraint, but we said last autumn that we would need to find commensurate savings in this Parliament. So to ensure we have public services we can afford, and protect more jobs, we will continue recent public sector pay awards with a rise of 1% per year for the next four years," he said.
The move will anger public sector unions representing teachers, civil servants, NHS staff and others.
Labour's shadow chancellor Chris Leslie said the party would officially support the move. Perhaps mindful that the party's leadership candidates have yet to comment on the Budget, he said he would not "just oppose literally everything". Leslie said he accepted that "pay restraint is sadly necessary over this period".
However backbench Labour MPs were less than happy. Wansbeck MP Ian Lavery said: "Osborne robbing the excellent public sector workers to pay for public services,another 4 years at 1%. Absolutely shocking, highly provocative."
And Stockton North MP Alex Cunnigham said: "Millionaire chancellor puts boot in on public sector workers with 1% pay rise. But I'm sure his rich pals will be okay."
It was also criticised by Ukip's MP Douglas Carswell who said it was "not sustainable".
Budget dislikes 1: public sector pay freeze at 1percent not sustainable
— Douglas Carswell MP (@DouglasCarswell) July 8, 2015
The Lib Dems said public sector workers have already endured five years of pay restraint. "Now Osborne is punishing them for dedication with four more years of pain. A junior police officer on £25,000 faces a real terms cut of £600," the party said in a statement.
The Budget will also result in £17bn in departmental cuts and job losses in Whitehall. Mark Serwotka, the general secretary of the public and Commercial Services union which represents civil servants said: "From delays at the Passport Office to the scrabble to plug gaps on HMRC phone lines, Tory cuts have hit public services we all rely on, and led to the deeply unpopular privatisation plan at the National Gallery.
"More politically-motivated cuts on this scale would devastate services and leave them vulnerable to companies looking to run them for private profit rather than public good."
Osborne used his Budget to introduce a surprise rise in the "living wage", dramatically declaring that "Britain deserves a pay rise".
Hailing a new "higher wage, lower tax, lower welfare" Britain, the Chancellor said from next April everyone over 25 would be entitled to £7.20 an hour - and the figure would rise to £9 by 2020.
Some six million people will see their pay increase as a result - and those currently earning the minimum wage of £6.50 an hour will be £5,000 better off by 2020, he claimed.
Osborne said he was following the Conservative tradition as the party that brought in protections for mill workers during the industrial revolution.
"Taken together with all the welfare savings and the tax cuts in this Budget, it means that a typical family where someone is working full-time on the minimum wage will be better off," Osborne told MPs.
But acting Labour leader Harriet Harman responded by claiming the Budget was "making working people worse off" by cutting tax credits for the low paid and grants for students from poorer backgrounds.