UK faces sharpest drop in income since 70s

THE SHARPEST drop in living standards since the three-day week will see the average family income fall by nearly £2,500 in just three years, the country’s leading economic forecaster has warned.

As about two million people went on strike over public-sector pension reforms yesterday, the Institute for Fiscal Studies said household incomes will crash by 7.4 per cent between 2009–10 and 2012–13 thanks to inflation and the impact of austerity measures.

About 300,000 workers walked out in Scotland yesterday – forcing the closure of all but 33 of the country’s 2,700 council-run schools and the cancellation of thousands of hospital operations and appointments.

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And some of the world’s biggest central banks announced a programme of co-ordinated action designed to support the global financial system yesterday, a move which saw stock markets rise.

But in its bleak assessment, after Chancellor George Osborne spelled out six more years of gloom for the British economy earlier this week, the IFS warned the current slump in family incomes is “matched only by the falls seen between 1974 and 1977”.

Households this year are experiencing the biggest one-year fall in disposable income since the end of Second World War, the IFS said.

For an average couple with no children the crash will mean a fall of around £1,800 in their annual income. A family with two children can expect an average fall of £2,500.

These “extraordinary” drops will ensure that, by 2015, people’s incomes will be back to levels not seen since the early 2000s. On the IFS’s figures, the entirety of the boom of the 2000-2007 period, which saw standards of living increase markedly, is set to be wiped out by the effects of the financial crash.

Only after that period is the economy expected to be back to growth of more than 3 per cent, with the hangover from the financial crash and the credit crunch finally beginning to subside.

In his autumn statement on Tuesday, Mr Osborne painted a bleak picture of further job losses in the public sector and pay cuts, saying the country could “not afford” to keep things as they were.

He also conceded that Britain may yet tip back into a fresh recession if the eurozone crisis is not resolved soon.

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Extraordinary measures were announced yesterday to try to head off the global debt crisis, with the US Federal Reserve, the European Central Bank, the Bank of England and the central banks of Canada, Japan and Switzerland working together. This will make it cheaper for banks to buy US dollars, which they hope will ultimately help businesses and households access finance more easily.

Stock markets rallied on the news, in the hope that the global show of support may ease fears of a sovereign debt storm sweeping away the eurozone.

But a further warning of the instability came as it emerged that Hector Sants, head of the Financial Services Authority, has told some of Britain’s biggest banks to prepare for a break-up of the eurozone.

The comments were made during a private meeting with senior executives from Standard Chartered, RBS, Santander UK, Lloyds Banking Group, Barclays and HSBC.

The impact of the financial crunch is already being felt by households, the IFS said yesterday, backing up a report by the Office of Budget Responsibility (OBR) which found that households were being hit not just by cuts to public services, but by an “inflation shock” and by global rises in prices in food, oil and other commodities.

Having studied the OBR report, the IFS said yesterday that average household incomes would fall by 7.4 per cent between 2009 and 2013.

That period included the three-day week of early 1974, when commercial consumption of electricity was limited by then Conservative government. During that period, incomes fell by 7.5 per cent.

Disposable income – measured as the cash that families have left over to spend – will fall by 4.7 per cent over the same period.

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IFS director Paul Johnson said the drop was “easily the biggest three-year drop since records began in the mid 1950s”.

Figures supplied by the IFS showed the full damage of the crash on incomes. In current prices, and adjusted for inflation, an average couple with no children can expect their income to drop from £23,660 in 2009 to £21,892 in 2013.

For a family with two children, their average income will fall from £33,124 in 2009 to £30,732 in 2013.

Mr Johnson said: “Again we are running out of superlatives to describe just how extraordinary are some of these changes. Our own estimates suggest that real median household incomes will be no higher in 2015–16 than they were in 2002–03, more than a decade without any increase in living standards for those in the middle of the income distribution.”

The IFS also warned that Tuesday’s mini-budget – which proposes to cap tax credits for families and children, will mean that working households on low incomes will be disproportionalet hit by the drop in living standards. Mr Johnson said that this would “lead to an increase in measured child poverty.”

Across the UK yesterday, schools were closed and hospital operations cancelled as the biggest mass walk out in a generation took place.

Prime Minister David Cameron, however, described the action as a “damp squib”, insisting it was “wrong” for people to have gone out on strike when negotiations on the public sector pay deal are ongoing.

The IFS gave backing to the government yesterday, arguing that even after the reforms to public sector pensions, workers will still have pensions “substantially more generous than those enjoyed by private sector workers.”

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However, the IFS was less generous about Mr Osborne’s plans to extend public sector austerity to 2017, beyond the next election, without saying where the cuts would come from.

Mr Johnson added: “One begins to run out of superlatives for describing quite how unprecedented that is. Certainly there has been no period like it in the UK in the last 60 years. The scale of the additional cuts is itself substantial.”

In Brussels for talks with EU counterparts on the eurozone crisis, Mr Osborne said the government’s decision to cut spending and raise taxes had helped Britain avoid the problems seen in heavily indebted countries such as Greece and Italy.

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.

Yvette Cooper MP, Labour’s shadow home secretary, said: “The IFS has confirmed what parents up and down the country already know – that the government is taking most from families with children, at a time when budgets are already under incredible pressure.”

She added: “We know that women’s incomes will be hit particularly hard by new announcements this week – especially the £1.3 billion claw-back in tax credits and the increased public sector job losses. The Tory-led government’s plans are hurting ordinary families up and down the country, yet it is increasingly clear that they are not working.”

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