The measure is expected to save £3.4 billion a year by 2012/13. The Government has already proposed pay awards "in the range of up to 1%" for key public sector workforces not already in multi-year deals for 2010/11. However, the Chancellor said that the "special circumstances of the armed forces" would be recognised.

The announcement has provoked angry reactions from the trade unions. Brendan Barber, general secretary of the TUC, said the a centralised pay cap on public sector staff was "unfair, inefficient and will damage long-establised independent review systems". The PCS union warned that capping pay would "undermine morale and entrench low pay in the civil service".

And Gillian Hibberd, president of the Public Sector People Managers' Association (PPMA), told Employment Intelligence that, although the PPMA supported the need for reform of reward in the public sector:

". .  . this has to be achieved in a realistic way. The proposals for long-term pay restraint may act as a drain on public sector talent and will do nothing to attract people into the most difficult and sensitive roles such as children's social work. The announcement amounts to a long-term, sustainable pay cut across the public sector and I fear the long-term impact this will have."

Charles Cotton, reward adviser at the Chartered Institute of Personnel and Development, also has concerns. He said:

"We would have preferred a 1% cap on the public sector pay budget as a whole, to better allow managers to increase pay rates for key jobs where there are shortages and for those who are high performers, while freezing them where there is no market reason."

The Chancellor also announced that the state contribution to pensions for teachers, local government and NHS workers and the civil service would be capped by 2012, saving a further £1 billion a year. He said: "Public sector workers will make a greater contribution to the increasing value of pensions, with those earning over £100,000 paying more."

The Government has already proposed a pay freeze for 2010/11 for groups including senior civil servants and judges. Earlier this week, the Government outlined its plans to review senior pay across the public sector and cut the cost of the senior civil service in its Putting the Frontline First: Smarter Government report. This was confirmed by the Chancellor, who said: "The senior civil service will take the lead with a cut in its paybill of up to £100 million over three years."

There are some, however, who think the Chancellor's "tough choices" have not gone far enough. Richard Lambert, the CBI's director-general, said: "We applaud the Government's courage in beginning to tackle the thorny issues of public sector pensions and pay, but it is only a start."