The policy advocates holding down pay in certain areas of the country, based on the flawed economic logic that it will encourage local enterprise.
The union says the figures do not properly reflect the make-up of the labour market and its private sector comparators in each region.
For example it glosses over the fact that the public sector has a higher proportion of highly qualified and female workers and that the pay gap between men and women in the public sector is narrower.
The government's evidence does not mention the word 'skills' once and fails to recognise that specialist civil and public servants operate in national and international labour markets, not regional ones.
Prospect fears that if they face pay cuts, it will simply encourage them to move jobs and regions, exacerbating existing skills shortages in lower-paying regions.
Deputy general secretary Dai Hudd said: "The Cabinet Office should be ashamed to have produced such poor quality evidence in support of a policy that has devastating implications for large parts of the UK and their local economies.
"Introducing regional pay would take a further £1.7bn out of people's pockets, if pay were reduced by 1 per cent. All this is money that people would be spending in their regional economies, supporting their local shops, businesses and enterprises. Neither does the budget have anything else to say about growth," he added.
Prospect believes that Wales would be hardest hit, where the Cabinet Office evidence claims that there is a public sector pay premium of a staggering 18 per cent.
"Once more, ordinary people are the victims today. Rather than kickstart the economy, today's measures will make things even worse for our members, who are already enduring a perfect storm of pay freezes followed by pay caps, increased pension contributions and job cuts."
Click here to read Dai Hudd's Guardian Public Leaders Network opinion piece.
Earlier this year, Prospect warned that linking public sector pay more closely to local labour markets was a tired old rehash of ideas that didn’t work in the 1990s and certainly won’t work now.