Pain. But no gain.

Unemployment hits 2.6 million, Bank of England slashes growth forecast – and Osborne will have to raise borrowing to even higher levels than Labour planned

Government borrowing is expected to rocket to levels higher than was envisaged by Labour, despite George Osborne's deep spending cuts.

On a day when youth unemployment rose to a record 1.02 million, figures slipped out by the Treasury revealed how the Chancellor's deficit reduction plan has been blown off course by anaemic growth levels and high jobless figures. Labour claimed the pain of £40bn of cuts and tax rises had not been worth it.

The Treasury analysis of independent City forecasts showed that net public borrowing is now expected to rocket to £412bn over the next few years. This is more than £100bn higher than the £303bn total projected by the Office for Budget Responsibility (OBR) a year ago, after the government-wide spending review. Crucially, it also dwarfs the £389bn four-year total OBR forecast based on the plans of Alistair Darling, his Labour predecessor, which the Coalition argued was much too high.

The OBR's official borrowing forecasts will be published on 29 November, alongside Mr Osborne's autumn statement, but are unlikely to be very different from those of the City analysts. A Treasury source insisted last night:"If we had followed Ed Balls' plan B for bankruptcy we would be right up there with Italy and Greece. Our economy is being impacted by the eurozone which would have affected the previous Government's plans as well. Recent figures show our borrowing is on course."

But having to borrow more than Labour planned would be an embarrassing setback. Rachel Reeves, the shadow Chief Treasury Secretary, said the Treasury document showed the Government's strategy had backfired badly. "Trying to go too far and too fast has failed: it choked off the recovery and pushed up unemployment well before the eurozone crisis and we are now in a weaker position," she said. "It's a tragedy for the one million young people out of work and the thousands of businesses that have gone bust, but it's utterly self-defeating on the deficit too."

Mr Osborne will unveil a "go-for-growth" package likely to include help for the young jobless; relief for companies that are heavy energy users; and a scheme to underwrite the deposits of home-buyers to boost the housing market. There were renewed fears of a "lost generation" after the number of 16 to 24-year-olds seeking work increased by 67,000 in the three months to September to the highest total since comparable records began in 1992, with a jobless rate of 21.9 per cent, also a record.

Overall unemployment rose by 129,000 in the last quarter to 2.62m, its highest since 1994 – a jobless rate of 8.3 per cent, the highest since 1996. To compound the gloom, British Gas, mining firm Rio Tinto Alcan and Clydesdale and Yorkshire banks announced a total of almost 1,700 job cuts.

A political row erupted after Chris Grayling, the Employment Minister, dismissed the one million figure as "a bit of a distraction" because it included almost 300,000 young people in full-time education. Admitting the statistics were "bad news," he insisted: "They are, I'm afraid, the consequence of what we are seeing in the eurozone."

But senior Liberal Democrats adopted a conciliatory tone. Vince Cable, the Business Secretary, said: "It is a very serious problem. We don't want to get into a position where a significant number of young people can't get into the labour market because they haven't got an employment background. We have to help them."

Lord Oakeshott, a Lib Dem peer, said: "It is ridiculous to blame this rise in unemployment on the crisis in the eurozone. All economists know unemployment is a lagging indicator so this is the result of what has been happening in our economy over the past year."

Labour seized on Mr Grayling's remark, saying, "only an out-of-touch Tory minister" could describe one million young unemployed as a distraction".

Today David Cameron will unveil a £250m vocational training scheme. He said: "I know times are tough – especially for young people – who are trying to get their foot in the door and launch their career." In a speech in London, Ed Miliband will outline Labour's plans for "a new economy that works for all."

Case studies: Faces of the dole queue

"I'd go for 30 jobs a week, but so far have had no luck whatsoever"

Justine Bark, 37, Chesterfield

I've been a jobseeker for just over two years. Before that I did a variety of jobs. Now, in an average week I'll apply for up to 30 jobs. Often there are hundreds applying for each position. I work voluntarily as a welfare rights adviser and have two children. It's a struggle. I'm told by the Government there are jobs out there – you're just not looking hard enough. On Friday, there were only 14 jobs advertised in the Chesterfield area. After one interview, I was told the Government funding for the position had been cut. The Government ought to take responsibility. It's no good putting more people on the unemployment queue.

Justine has been supported by Derbyshire Unemployed Workers' Centre, which provides independent welfare rights advice and campaigns for the rights of those who are unemployed, on a low income or sick, injured or disabled by their work

"I left college two years ago, and have been out of work ever since"

Antony Walker, 19, Wednesbury, West Midlands

When I was growing up I thought it would be easy to find a job, but now it's hard and I'm struggling. I left college two years ago and have been out of work ever since. I apply for a job nearly every day. Most don't reply. I want to go into mechanics, which I studied for. I live with my mother. If I had a job, I'd get my own place. All I'd ask the Government to do is to put more jobs out there. I'm on a Prince's Trust course now, doing work experience at a fire station, which is great for my CV. Not many of us who left education two years ago have work.

"I want young people to find work, but I also don't want to be a burden"

Peter Pternitis, 64, Sheffield

I've been unemployed for two years, since my business closed. We couldn't afford it. The banks wouldn't move on loan negotiations. Now I'm looking for any job. I still work voluntarily for the council. Employers are not interested – they want young people. I'm not disheartened – I want to see the young people getting jobs. But I'm very keen to work. We don't want to be a burden to the state. After closing the business I went to the job centre to get the allowance to keep me going and I've been pushed on to the pensions credit system. My wife and I are surviving, but we don't have luxuries.

"I want a full-time job, but companies think I'm too old to employ"

Peter Martin, 54, Ross-on-Wye

Despite being qualified and having experience, applying for relevant roles has resulted in no reply or "this is not quite right for you". I used to run a marketing agency in Singapore. I've not been earning much for 15 years, pursuing an entrepreneurial dream and also caring for my mother, who had dementia. But there is a watershed in terms of age. Inevitable, perhaps, but not pleasant to experience."