The independent Institute for Fiscal Studies warns of more borrowing, more public sector jobs losses, and more cuts to public spending.
The Chancellor has jumped to defend a Budget that appears to target pensioners and, according to the IFS, may not be as neutral as claimed.
The Chancellor's announcement of freezing pensioners allowances caused widespread anger, but who will be affected by the "granny tax"?
Low wages are causing a "dramatic fall" in post-recession productivity rates, according to economists.
Workers are producing 2.6 percent less an hour than they were at the start of 2008 and 12.8 percent less overall than if pre-crash growth in output had continued, according to the Institute for Fiscal Studies (IFS).
Its research found a drop in real wage levels meant companies were able to take on more staff, while output remained the same. Restrictions in the benefit system mean more people may have been encouraged to find a job while the workforce also has less power to protect wage levels, it added.
Wenchao Jin, a research economist at IFS, said: "The fall in labour productivity seems to have been driven by low real wages and low firm investment. Productivity slowdown has happened right across the economy.
"They have not been driven by a change in the composition of the economy nor by a change in the composition of the workforce".
Robert Joyce, Senior Research Economist at the Institute for Fiscal Studies (IFS) has told ITV News that the 1% benefits cut will affect both those who work and those who do not.
He added that although there will be a greater proportion of people who do not work affected by the cap, the fact that the cuts will hit both those in and those out of work will mean that, "the impact on people's incentive to move in to work will be somewhat mixed."
And that for some people the cuts will mean they are better off out of work.
Commenting on the Institute for Fiscal Studies' report that the "era of austerity" could last until 2018, the TUC claimed it shows Chancellor George Osborne's economic strategy is "failing on all counts".
TUC General Secretary Brendan Barber said:
The UK should be on the road to recovery by now. Instead we could be set for a prolonged period of debilitating austerity well beyond the next election.
The Chancellor should use his Autumn Statement next week to change course. Sadly he looks set to drive the economy even faster in the wrong direction.
Deputy Director of the Institute for Fiscal Studies (IFS) Carl Emmerson said that since the last Budget, the UK's economic outlook has "deteriorated" and Government receipts have "disappointed".
Mr Emmerson suggests that as a result, Chancellor George Osborne might find himself having to "abandon" one of his fiscal targets.
– IFS Deputy Director Carl Emmerson
If much of the additional weakness this year feeds into a permanently higher outlook for borrowing, then in order to comply with his other fiscal target Mr Osborne would need to announce yet more tax rises or spending cuts for the next parliament in next week's Autumn Statement.
In that case the planned era of austerity could run for eight years - from 2010/11 to 2017/18.
A well respected economic think tank has warned that the "era of austerity" could last until 2018 as the Chancellor is forced to extend spending cuts still further into the next Parliament.
The Institute for Fiscal Studies (IFS) said in a report that George Osborne may have to extend the current squeeze on public spending to 2017/18 and find another £11 billion from cuts or tax rises on top of the further £8 billion reduction in welfare spending already discussed.
Under the think tank's "relatively pessimistic" scenario for Britain's economic future - which sees the recent deterioration in growth prospects and tax receipts turn out to be permanent - Mr Osborne will be forced to announce even more bad news in order to meet his "fiscal mandate".
The report comes ahead of the Chancellor's Autumn Statement next week, and the IFS predicts that he is set to miss his other fiscal target - for the national debt to come down in 2015/16.
However, its analysis does not take into consideration the recent change to the way the Government finances interest payments on debt from the Bank of England's gilt purchases, which is expected to make the so-called supplementary fiscal target easier to meet.
Labour's shadow Chancellor Ed Balls has reacted to the IFS Budget briefing:
The IFS has confirmed that George Osborne’s tax raid on pensioners will see nearly four and a half million pensioners losing £83 next year. And people turning 65 next year will lose up to £323 with little forewarning...It’s now even clearer that this was a Budget that asked millions to pay more so millionaires could pay less.
The Institute for Fiscal Studies - The "granny tax" was a surprise because it is the first time in ages a government has taken on pensioners.
"Granny tax" is a modest attack on a group previously protected but Osborne should have given them time to adjust.
Changes to tax bands mean 15 percent of tax payers will be paying higher rate (up from five percent 20 years ago). What does the Chancellor think is the right number?