The number of public sector jobs expected to be lost because of spending cuts has nearly doubled from initial estimates, an economic forecaster warned, as George Osborne delivered a gloomy outlook for Britain's economy.

Some 710,000 jobs are expected to go by 2017, a major leap from the 400,000 initially predicted, the Office for Budget Responsibility (OBR) said on Tuesday.

Robert Chote, the director of the OBR, said the latest figures were based on the government "deepening and extending" its programme of spending cuts for an extra year.

However the forecaster said it expected the public sector job losses to be offset by the creation of 1.7 million private sector jobs by 2017.

The chancellor was forced to acknowledge that he would miss his target of eliminating the UK's structural deficit by the end of this parliament in 2015.

And there was more bad news for Osborne, as the OBR revised its growth prediction down to 0.9% for this year and 0.7% next year.

Speaking in the Commons, Osborne also said he plans to cap public sector pay rises at 1% when a current wage freeze ends.

Many areas of the public sector had been expecting to be able to grant 2% pay rises once the current two year pay freeze expired in 2013.

"In the current circumstances the country cannot afford the 2% rise assumed by some government departments thereafter. So, instead, we will set public sector pay awards at an average 1% for each of the two years after the pay freeze ends," Osborne said.

According to the OBR, overall unemployment will rise from its current level of 8.1% to 8.7 in 2012, before dropping to 6.2% by 2016.

Bob Crow, leader of the Rail, Maritime and Transport union, said the government was engaged in class warfare less than 24-hours before the biggest public sector strike in decades.

"George Osborne has ratcheted up the class war and has made it clear through his attack on pay and employment rights that he wants the workers to keep taking the hit while the rich get richer," he said.

Ian Brinkley, from The Work Foundation, said the OBR's unemployment forecast was "too optimistic" and said Osborne had not done enough to stimulate the economy.

“The chancellor has signalled some of the right long-term priorities – investment in infrastructure, support for enterprise and more help for young people," he said.

“However, there is little that will put demand into the economy in the short-term, and the longer term measures outlined are too small in scale. There is still too much reliance on a spontaneous revival of the private sector.

“There are huge risks this forecast will turn out worse than expected. The OBR’s outlook on jobs and unemployment looks far too optimistic. Unemployment is likely to get higher and remain higher than the forecasts assume.”

In his statement today, Osborne outlined a series of measures that he hopes will stimulate growth in the British economy.

He told MPs that fuel duty rises will be postponed and major investments will be made in small business lending, infrastructure and regional development.

Shadow chancellor Ed Balls said Osborne's economic plan was "in tatters" and called for a change in direction.

"It is clear the chancellor's plan is not working," he said. "The OBR knows it. The markets know it. The IMF know it. We know it."

"But we all know why the chancellor can't change course ... It is because to change course now would mean to admit he's got the key economic judgment of this parliament absolutely, catastrophically wrong."

He added: "I believe we either need a new chancellor or new plans."