Warning of seven-year squeeze

Average household incomes are set to drop by a massive 7.4% in real terms between 2009/10 and 2012/13, a respected economic thinktank said today.

Following yesterday's autumn statement by Chancellor George Osborne, the Institute for Fiscal Studies said that the median average income was now expected to be no higher in real terms in 2015/16 than it was in 2002/03.

After Mr Osborne yesterday extended his austerity programme beyond the next election, the IFS said public spending is now expected to drop by 16.2% in real terms over a seven-year squeeze lasting until 2017.

"We are running out of superlatives to describe just how extraordinary are some of these changes," the thinktank's director, Paul Johnson, told a press conference in London.

Mr Johnson said the two-year 1% pay cap for public sector workers announced by the Chancellor would effectively wipe out the average "pay premium" enjoyed by male staff over their private counterparts.

But he added that the Government's public sector pension squeeze, which has led to strikes across the UK today, would still leave workers with "substantially more generous" provision on average than in the private sector.

The IFS said that per capita real household disposable income was set to be lower in 2016 than 2006.

By comparison, the worst previous decade on record saw growth of 14%.

Mr Osborne defended his strategy as he visited Brussels for talks on the eurozone sovereign debt crisis with his EU counterparts today, insisting that cuts announced yesterday were designed to allow the Government to protect frontline services.

"We made a choice in this spending review to reduce some welfare entitlements, to cap housing benefits, in order to try and protect the NHS budget and to protect the schools budget," the Chancellor told the BBC.

"There are choices you can make and we have made ours. I think if you look at the record of this Government, we haven't shied away from real decisions."

Mr Osborne said the Government's decision to cut spending and raise taxes had helped Britain avoid the problems seen in heavily-indebted eurozone countries such as Italy, which saw bond yields surge to almost 8% yesterday.

But he warned that a collapse in the single currency area could spill over and cause recession in the UK.

"If the eurozone goes into recession, into a deep recession, then I'm afraid Britain will find it difficult to avoid a recession itself," he said.

"In a way, what's happening in the eurozone is a reminder to Britain that if you don't face up to your problems you have very much worse problems. Britain has taken decisive action, we now need the eurozone to do the same."

Grim figures in yesterday's economic and fiscal outlook from the Office for Budget Responsibility showed the Government is on track to borrow £111 billion more by 2016 than had been expected as recently as March. Unemployment is due to peak at 8.7% next year and GDP growth was downgraded for each of the four years to come.

Mr Osborne responded by announcing a 1% cap on public sector pay rises for each of the next two years, holding down tax credits and bringing forward the planned increase in the state pension age to 67 by eight years to 2026.

At Prime Minister's Questions in the House of Commons, Labour leader Ed Miliband said that yesterday's statement was proof that the Government's economic strategy had failed.

The £111 billion increase in borrowing came on top of more than £40 billion which Mr Osborne had already been forced to add to predictions he made last year, when he promised that the deficit would be eliminated before the 2015 election, said Mr Miliband.

He told David Cameron: "You are borrowing an extra £158 billion to pay for your economic failure.

"The truth is, your plan has failed. You refuse to change course and you are making working families pay the price.

"At the very least, we now know you will never, ever be able to say again 'We are all in this together'."

Mr Miliband said Mr Osborne's "miserable deal" had sliced £1 billion from tax credits, costing a family on the minimum wage a week-and-a-half's pay each year.

OBR figures showed child poverty would increase and unemployment hit 2.8 million as a result of the Government's decisions, he said.

"You are another Conservative Prime Minister for whom unemployment is a price worth paying," said Mr Miliband.

But Mr Cameron insisted that his Government had a "record to be proud of" on poverty, after raising more than a million low-paid workers out of income tax altogether.

He told the Commons that the coalition would "take the country through this storm", while Labour's policies would destroy market credibility and lead to rising interest rates.

"We are being tested by these difficult economic times," Mr Cameron told MPs.

"We will meet that test by getting on top of our debt, getting on top of our deficit."

OBR figures showed that by the end of the Parliament there will be half a million more people in jobs and 90,000 fewer people on the claimant count than when the coalition Government was elected, he said.

PA