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IFS study: UK household budgets 'face 10-year squeeze'

image captionThe IFS said earnings, state benefits and tax credits all fell in real terms in the UK over the past year

Household budgets could be squeezed for the next 10 years as the impact of tax rises and cuts is felt, the Institute for Fiscal Studies (IFS) has warned.

Its survey suggests families have seen the biggest fall in living standards in 30 years in the last financial year.

It warned those on lowest incomes were likely to suffer a further significant reduction in their spending power.

The Treasury said plans to cut the deficit had maintained low interest rates and helped struggling families.

The IFS cross-country study found that UK households had been relatively insulated from the immediate impacts of the recession, partly because of state welfare systems and increases in state financial support.

It said much of this protective effect was concentrated on households in the bottom half of the income distribution.

But it said earnings, state benefits and tax credits had all fallen in real terms in the UK over the past year.

'Severe consequences'

IFS researchers estimated this was likely to have led to a fall in median net household income of 3.5%, the largest single-year drop since 1981, returning it to its 2003-04 level.

The pain of the recession had been delayed rather than avoided, they concluded.

Robert Joyce, a research economist at IFS and a contributor to the report, said: "The current economic downturn began more than three years ago, and may seem like old news.

"But, as in other developed countries, the most severe consequences of the recession on UK living standards have only just begun to be felt, and will continue to be felt for years to come."

Previous IFS research has shown that the decline in average living standards looks set to continue until at least 2013-14.

There have been a growing number of calls in recent weeks from opposition politicians and some economists for the government to rethink its programme of spending cuts in the light of weak economic growth, not only in the UK, but also in Europe and the US.

Last week, the head of the International Monetary Fund, Christine Lagarde, said the coalition's deficit reduction programme "remained appropriate", but suggested that the government should be ready to adapt, given the current economic environment.

Falling employment

The latest report found that the fall of 6% in UK GDP from peak to trough during the recession lies somewhere in the middle of the international experience.

The Irish Republic, Japan and Sweden had experienced sharper falls, whereas countries such as Canada saw smaller falls.

The rate of employment fell by a good deal less than GDP - by 1.6 percentage points between 2007 and 2009, the IFS said.

Again, this was roughly in the middle of the global experience. Over the same period, the employment rate rose in Germany, was almost unchanged in France and fell by more than four percentage points in the US.