George Osborne has frozen public sector pay for all those earning more than £21,000 and announced plans for a revised benefits system.

The Chancellor said that the country has been living beyond its means going into the recession and that ‘decisive action’ was required.

He said that 28 per cent of the public sector would be unaffected by the pay freeze although he extended the freeze to two years from the original one year that was predicted.

Osborne also said that a new benefits system will come into force from next year, with greater incentives given to those looking for work.

Benefits will now be linked to the Consumer Price Index (CPI) and not the Retail Price Index (RPI) with the exception of state pensions.

He said, ‘We are wasting the talents of millions and spending billions on it in the process. We will increase the incentives to work and end some one off payments that the country cannot afford anymore.’

Osborne also said that child benefit would be frozen for the next three years while disability benefit would be overhauled.

He added, ‘Everyone across the income scale will make a contribution to making sure the country reduces its debt. It is right that people who are disabled continue to live a life of dignity.

'Three times as many people claim it today than they did when it was introduced. We will introduce a medical assessment from 2013. This will be a simpler process so we can continue to pay it to those with the greatest needs.’