Household incomes in UK 'may return to 2004 levels'

Children on swings
Image caption Child poverty fell during the Labour government's tenure but not by as much as targeted

Households in the UK may be facing the biggest drop in income for 30 years, a leading economic think tank has warned.

Average income could fall 3% this year, the steepest drop since 1981 and taking households back to 2004-5 levels.

The Institute for Fiscal Studies said average take-home incomes actually rose during recent recession due to low inflation and higher social benefits.

But IFS analysis suggests the long-term effects of the recession and higher inflation will squeeze incomes.

Lower wage increases and the corrosive effect of rising inflation mean that it is "entirely possible" that income this financial year (2010-11) will return to levels of six years ago, the policy group said.

IFS research economist Wenchao Jin said: "The figures tell a story of pain delayed, but not pain avoided."

The comments echo those of Bank of England governor Mervyn King who has repeatedly warned households that they face a significant cut in their spending power.

On Wednesday Mr King suggested households should be braced for another double-digit rise in energy bills, possibly pushing inflation to 5% by the end of the year.

The IFS analysed newly-released data for the financial year 2009-10, the last year of the Labour government.

While the study shows average incomes rising faster than inflation in 2008-10, it says in the 2010-11 fiscal year they may have undershot.

The IFS also said child poverty had fallen but not by enough to meet the old Labour government's target.

Tony Blair's administration said it would halve child poverty by 2010, but the IFS said that it would only have fallen by a quarter.

Ms Jin said: "Average living standards rose over the recent recession, likely to be driven by large increases in benefits and tax credit rates.

"However, this type of growth cannot be sustained in the long term, and the outlook for incomes in 2010-11 is considerably bleaker, with the long-term effects of the recession on living standards delayed rather than avoided."

Lagging benefits

The data, from the Department for Work and Pensions, showed median incomes rose 1% above the rate of inflation in 2009-10, after also having risen above inflation the previous fiscal year.

The IFS attributed a large part of this "surprising" result to the way in which benefits are calculated.

Benefits are indexed to inflation with a lag of several months.

As inflation fell during the recession, it meant that benefits rose each year much faster than the then-current inflation rate.

But during the last fiscal year the effect was reversed - inflation took off rapidly, whereas benefits continued to be indexed to the earlier, lower inflation rate.

Other data showed that earnings undershot inflation by 3.8% during the first 11 months of the year.

The IFS said that if its forecast of a 3% fall in median incomes in 2010-11 was correct it would be the biggest such fall since 1981 and would bring the median income back down to its level of 2004-05.

In March, a study by the IFS and the BBC said that median incomes in the UK had fallen by 1.6% a year between 2008 and 2011.

Poverty rates

In the new report, the institute also looked at the Labour government's record on reducing poverty in the UK.

Relative poverty rates for the elderly and children did fall during Labour's 13 years in government - thanks largely to benefits rising above the rate of inflation - and are now at their lowest levels since the 1980s.

But among working-age adults without children, poverty has risen to new highs.

It also found that overall income inequality had not improved, remaining near its highest level since records began in the 1960s.

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