Business leaders have urged the government to introduce an immediate two-year pay freeze in the public sector and drop “unsustainable” pledges to maintain spending on health and overseas aid.

The British Chambers of Commerce (BCC) said the chancellor faced a “difficult” balancing act in next week’s Budget, but the group warned that more drastic spending cuts will be needed if certain budgets and programmes were protected without justification.

In its Budget submission to George Osborne, the BCC said plans to increase employers’ National Insurance contributions should be reversed and capital gains taxes should not be raised.

An immediate two-year freeze on the total public sector wage bill should also be announced, as well as urgent reform to “rein in” the cost of public sector pensions, argued the Chambers.

Director-general David Frost said: “The right choices would put business growth at the very heart of government policy, but short-term moves on tax or infrastructure spending could hurt business confidence and economic recovery.

“The government must avoid punishing new taxes that negatively affect private sector growth. Short-term revenue gains would be outweighed by longer-term economic consequences, from reduced business investment to lower rates of job creation. If tax rises are unavoidable, they should be targeted at consumption taxes rather than payroll, income or profits.

“As politically unpalatable as it may be, the decision to ring-fence spending on health and overseas aid is unrealistic and unsustainable in the current circumstances. Ring-fencing health will mean deeper and more drastic cuts to important investment elsewhere, without the benefit of clear justification.”