Chancellor Alistair Darling admitted today that the recession was far deeper than he had predicted and announced a public sector pay squeeze to help pay off spiralling national debt.

The Chancellor said public sector workers face a 1% pay cap from 2011, a move which provoked union fury.

Fat cat bankers also face a crackdown with a new one-off tax on big bonuses.

Mr Darling laid out plans to slash spending from 2011 – after the General Election – as he admitted the economy would shrink by 4.75% in 2009 compared to his April Budget estimate of 3.5%.

He also said the public finances were deeper in the red with a deficit of £178 billion this year compared to the £175 billion he had predicted.

But he insisted in his Pre-Budget Report that the economy would start growing by the end of the year and next year would grow by between 1% and 1.5%.

Shadow chancellor George Osborne immediately accused Mr Darling of having "ducked" the crucial decisions to get public finances back on track.

"They have lost all moral authority to govern today."

"Every family in the country is going to be forced to pay for years for this Prime Minister's mistakes.

He added: "No one will ever believe a word they say on the economy again."

The Chancellor predicted that British business would benefit as global demand picked up.

He declared: “So I am confident that the UK economy will start growing by the turn of the year.”

But, justifying his decision to postpone some major cutbacks, he went on: “Recent market reaction to financial problems in Dubai highlights just how fragile world confidence remains.

“So while I am confident that the UK economy is on the road to recovery, we can’t be complacent.

“And we must continue to support the economy until recovery is established.

“To cut support now could wreck the recovery – that’s a risk I am not prepared to take.”

Despite increasing his deficit estimate he pledged to reduce it as the economy recovers, predicting it would fall to £96 billion in 2013-14, slightly lower than forecast in April, and £82 billion in 2014-15.

But there were widespread jeers from Opposition MPs when the Chancellor said his announcements were being made “from a position of strength”.

The Chancellor angered unions by announcing plans to cap public sector pay rises to 1% for two years from 2011.

He said that contributions from the state to the pensions of teachers, local government and health workers and civil servants would be capped, saving £1 billion a year.

Workers will have to make a greater contribution to pensions, with those earning over £100,000 paying more.

The Government said the senior civil service pay bill would be cut by up to £100 million over three years and any new government appointment over £150,000 and all bonuses over £50,000 would require Treasury approval.

Brendan Barber, general secretary of the TUC, said a centralised pay cap on public sector staff was unfair and inefficient and would damage long-established independent review systems.

“What we need is a fair tax system to make sure that those who did so well out of the boom years make a proper contribution, rather than expecting public sector workers, many of them low paid, to pay the price.”

Mr Darling gave a boost to pensioners announcing a 2.5% increase in the state pension next year.

And there was laughter from MPs when he announced a cut in bingo duty.

He confirmed that VAT will return to 17.5% on January 1 but added: “I have no other changes in VAT to announce.”

As expected Mr Darling announced a levy on big bank bonuses.

Banks face a special one-off levy of 50% on any individual discretionary bonus above £25,000.

He said: “This will be paid by the bank not the bank employee.

“Anti-avoidance measures will be introduced with immediate effect.

“High-paid bank staff will of course also have to pay, as usual, income tax at their top rate on any bonus they receive.

“On a cautious assumption, which includes our expectation that some banks will rein back bonuses, this one-off levy is expected to yield £550 million.

“This additional money will be used to pay for the extra measures, already announced, like help for the young and older unemployed to get back into work.”

He also announced a freeze in the £325,000 inheritance tax allowance.

Mr Darling also confirmed a raft of heavily trailed green measures including a scrappage scheme for inefficient boilers.

From April, people with a home wind turbine or solar panels who plug their excess power into the national grid, will receive on average £900 a year, tax free, he said.

And electric company cars will be exempt from company car tax for five years, the Chancellor announced.