The economic emergency caused by coronavirus has only just begun and there will be “lasting damage” to the UK, Chancellor Rishi Sunak said as he set out his Spending Review.

Official forecasts showed the UK economy was expected to shrink by 11.3% this year, the worst recession for more than 300 years.

The Chancellor told MPs that the Office for Budget Responsibility did not expect the economy to return to its pre-crisis levels until the end of 2022 and the damage was likely to last.

The “long-term scarring” would mean that in 2025 the economy will be around 3% smaller than expected in March.

Mr Sunak said: “Our health emergency is not yet over. And our economic emergency has only just begun.

“So our immediate priority is to protect people’s lives and livelihoods.”

The OBR forecasts show a recovery is expected over the coming years, with growth of 5.5% forecast next year as coronavirus restrictions are eased, then 6.6% in 2022, 2.3% in 2023, 1.7% in 2024 and 1.85 in 2025.

The Government will borrow an eye-watering £394 billion this year, equivalent to 19% of Gross Domestic Product – the highest recorded in peacetime.

Although borrowing will subsequently fall, the national debt is forecast to reach 97.5% of GDP in 2025-26.

“This situation is clearly unsustainable over the medium term,” Mr Sunak admitted.

While Mr Sunak continued to allocate large sums to tackling the ongoing emergency he confirmed there would be restraint in pay awards for public sector workers and a cut in overseas aid.

The Chancellor said he “cannot justify a significant, across-the-board” pay increase for all public sector workers in the circumstances.

Over a million nurses, doctors and others working in the NHS will get a rise but pay rises for the rest of the public sector will be “paused” – except for the 2.1 million workers earning below the median wage of £24,000, who will receive an increase of at least £250.

The cut to the aid budget sees the Government reneging on a legal pledge and manifesto commitment to spend 0.7% of national income on development assistance.

Mr Sunak said: “Sticking rigidly to spending 0.7% of our national income on overseas aid, is difficult to justify to the British people, especially when we’re seeing the highest peacetime levels of borrowing on record.”

Instead of the existing target, Mr Sunak said 0.5% would be spent in 2021, around £10 billion.

The Government faced condemnation from charities and criticism from senior Tories about the move.

But Mr Sunak insisted that “at a time of unprecedented crisis government must make tough choices” and promised that spending would return to 0.7% “when the fiscal situation allows”.

According to the OBR forecasts, unemployment is set to soar to 7.5% in the second quarter of 2021 – with 2.6 million people out of work – falling to 4.4% by the end of 2024.

The Chancellor set out a nearly £3 billion Restart programme to help get people back into work.

For those in work, the national living wage will increase by 2.2% to £8.91 an hour – lower than the £9.21 rate previously expected from April 2021.

Mr Sunak said £280 billion was being spent on the coronavirus response this year.

Next year some £55 billion was earmarked for public services dealing with the crisis, including an initial £18 billion for testing, personal protective equipment and vaccines.

Despite the dire national finances, total departmental spending will be £540 billion in 2021-22, a £14.8 billion rise in cash terms.

Over this year and next, day-to-day departmental spending will rise, in real terms, by 3.8% – the rate in 15 years.

The Scottish Government’s funding will increase by £2.4 billion, Wales will receive  £1.3 billion and there is £0.9bn for the Northern Ireland Executive.