Squeeze on cost of living will be worst since 1920s

The typical British household's annual income is £365 a year, or 1.6 per cent, lower than it would have been without the recession – with the very wealthiest households down by £2,230, a 3.8 per cent shortfall for them.

Research commissioned by the BBC from the Institute For Fiscal Studies also reveals that the poorest tenth of the population saw their real incomes fall by 2.1 per cent compared with where they might have been in more normal times, a drop of £182 a year.

No group is better off, although some have, so far, seen some positive contribution to their incomes from changes to taxes and benefits, although those are still outweighed by the losses they have suffered in the rest of their incomes. These falls are classified as loss of employment and working hours; reduction in savings incomes as the Bank of England radically slashed interest rates; and a serious erosion in the purchasing power of wages and salaries as inflation has outstripped them, especially in the private sector.

The BBC/IFS research suggests that the current squeeze on living standards across the income scale will indeed turn out to be the longest since the 1920s, as the governor of the Bank of England, Mervyn King, recently said.

Overall, households are about 6 per cent worse off than they might have expected to be had there been no recession and had incomes risen in the normal way – an average 1.6 per cent improvement each year has been the prevailing norm since 1961. Families with children saw average income fall by 1.1 per cent, or £233 a year. They would usually have expected income to rise by £1,060 a year.

However, it is fair to add that many householders with mortgages on tracker or variable interest rates have seen a substantial benefit from the Bank's policy of ultra-low rates, and that the reduction in overall incomes has been very unevenly shared; those who have managed to stay in work, even with stagnant wages, have fared far better than those who have lost jobs.

The Coalition's claims to fairness won backing from the study. Referring to the top few per cent of earners, the IFS declares: "It is clear that the higher percentiles of the income distribution will see their incomes fall by the most."

The IFS offer two main reasons for this progressive tendency. First, richer households are more reliant on income from earnings and savings interest than those lower down the income scale who receive a greater proportion of their income from the state. Second, whereas tax and benefit changes over this period have increased the incomes of those at the bottom, the tax rises that were introduced in April 2010 by Labour, such as the new 50p top rate, will hit the very rich hardest, and the increases in national insurance rates this year reinforce that trend.

Paul Johnson, the IFS director, said further tax rises and cuts to benefits would will tend to further reduce household incomes.

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