The “economic emergency” caused by Covid-19 has only just begun, according to chancellor Rishi Sunak, as he warned the pandemic would deal lasting damage to growth and jobs.
Official forecasts now predict the biggest economic decline in 300 years.
The UK economy is expected to shrink by 11.3% this year and not return to its pre-crisis size until the end of 2022.
Government borrowing will rise to its highest outside of wartime to deal with the economic impact.
The government’s independent forecaster, the Office for Budget Responsibility (OBR) expects the number of unemployed people to surge to 2.6 million by the middle of next year.
It means the unemployment rate will hit 7.5%, its highest level since the financial crisis in 2009.
However, fewer jobs are expected to be lost than predicted this summer.
Setting out his Spending Review detailing how much would be spent on public services, Mr Sunak said the government was dealing with an “economic emergency”.
He added: “That’s why we have taken, and continue to take, extraordinary measures to protect people’s jobs and incomes.”
Mr Sunak confirmed that public sector workers – excluding some NHS staff and those earning less than £24,000 – will have their pay frozen next year.
The chancellor said he could not justify an across the board rise when many in the private sector had seen their pay and hours cut in the crisis.
The government has extended its furlough scheme to support jobs and wages until next March.
The shadow chancellor, Anneliese Dodds, criticised the pay freeze.
She said: “Earlier this year the chancellor stood on his doorstep and clapped for key workers. Today, his government institutes a pay freeze for many of them. This takes a sledgehammer to consumer confidence.”
Mr Sunak said the government had already spent £280bn to help support the economy through the coronavirus.
It will spend a further £55bn next year as part of a package of measures to support the recovery. This includes billions of pounds to help people find jobs.
However, Mr Sunak said long-term scarring meant the economy would be 3% smaller in 2025 than expected in the March budget.
The OBR said the coronavirus pandemic had “delivered the largest peacetime shock to the global economy on record”, while recent restrictions across the UK had taken “the wind out of an already flagging recovery”.
It said the UK’s later and longer lockdown this spring meant it had experienced “a deeper fall and slower recovery in economic activity” than some of its European neighbours.
The independent forecaster also warned that tax rises or spending cuts would be needed in future years to stabilise the UK’s growing debt pile.
Richard Hughes, the OBR’s chairman said: “The chancellor will need to find £20bn to £30bn in spending cuts or tax rises if he wants to balance revenues and day-to-day spending, and stop debt rising by the end of this parliament.”