The big squeeze: warning over incomes as Britain goes on strike

Families with children will be worse off in 2016 than 14 years earlier, analysis of George Osborne's autumn statement finds

the Guardian,

Thursday 1 December 2011

High inflation, cuts and the longest period of wage stagnation on record will see the spending power of the average British family plummet over the next five years, a leading thinktank warned on Wednesday.

An Institute for Fiscal Studies analysis predicted that average incomes, adjusted for inflation, will fall by 3% this year and further in 2012. The director of the IFS, Paul Johnson, said: "In the period 2009-10 to 2012-13, real median household incomes will drop by a whopping 7.4% – a record matched only by the falls seen between 1974 and 1977."

As up to 2 million public sector workers walked out in protest against changes to their pensions, and signs emerged of a potentially damaging rift within the Liberal Democrats in the wake of George Osborne's autumn statement, the thinktank warned that families with children will be worse off in 2016 than they were 14 years earlier as they cope with more than a decade of austerity.

The IFS's warning and the strikes came as The oil price shocks of the 1970s forced the then Labour government to survive on IMF handouts and push through steep spending cuts and public-sector wage freezes. But wages recovered their previous spending power within four years.

the world's major central banks announced joint emergency measures to stop the international financial system from freezing up, and pushing the global economy into another recession. The measures included cutting emergency interest rates on dollar loans to cash-strapped European banks.

A Downing Street spokesman said the emergency measures were necessary because the markets were under extreme strain. "We are experiencing a credit crunch and that central bank action is about trying to mitigate the effects of that credit crunch," the spokesman said.

Not since the Callaghan government of the mid-70s have families come near to suffering a similar loss of income as the one now predicted to hit Britain over the next five years, the IFS said.

Lower income groups, it confirmed, will bear the brunt of the government's latest cuts, outlined by George Osborne on Tuesday. The chancellor's autumn statement signalled that the deteriorating economic outlook meant that there would be two more years of austerity than originally planned in his March budget.

Anti-poverty campaigners said the IFS figures showed that the coalition had shifted the burden of paying for the deficit on to the most vulnerable.

Alison Garnham, chief executive of the charity Child Poverty Action Group, said: "The IFS analysis confirms that the chancellor's new tax and benefit measures are a takeaway from low-income families with children to those at the middle and top. It is particularly perverse to reduce incomes of the lowest-paid working families by reducing tax credits when this is the group the government claims it wants to help through improved work incentives."

The IFS analysis of the UK's current economic woes, and the coalition's reaction to them, both suggest that real median household incomes – where higher wages and salaries are adjusted to account for higher prices – will be no higher in 2015 than they were in 2002. A couple with no children typically enjoyed a weekly income of £437 in 2002 but by 2015 that will have dropped in real terms to £433. For a couple with two children the weekly income falls from £612 in 2002 to £606 in 2015. In the nine years since 2002 the cost of living has increased 30%.

The IFS analysis showed the unemployed and pensioners living on state benefits would do better than working families after benefits were linked to the 5.2% rise in inflation. Johnson said: "Failure to index some elements of tax credits, and the reversal of decisions to increase child tax credits in real terms, will leave some poorer families worse off and will lead to an increase in measured child poverty."

The IFS based its estimates for the squeeze on incomes on forecasts from the Office for Budget Responsibility, the independent watchdog that oversees Treasury spending plans and which published its own outlook for the economy alongside Osborne's statement.

It blamed a repeat oil price shock for most of the cuts in real incomes suffered by UK households. High energy prices were the largest single element fuelling an inflationary spiral that left many families worse off.

TUC general secretary Brendan Barber said there was an "unprecedented crisis" in living standards. "You can't build a sustainable economic recovery on the back of people getting poorer," he said.

"Rather than further hammering consumer confidence with public sector pay caps and cuts in working tax credits, the government needs to put greater emphasis on wage-led growth, starting with a fairer tax system where everyone – including the super-rich – pays their share."

Shadow home secretary Yvette Cooper said the IFS report revealed the poorest 30% of households would lose more than three times as much as the richest 30%.

Official data this week showed UK families' weekly spending fell last year to the lowest in real terms for at least seven years. They cut back on spending on leisure to try to pay for housing, energy and transport costs. One of the big pressures facing households is high inflation, which has left most people worse off in real terms.

Pay growth for workers in Britain hit a record low between 2010 and 2011, according to official data last week. Pay was up just 0.4% on a year ago in terms of gross weekly earnings, meaning that incomes are tumbling in real terms, given that inflation stands at 5%. The Office for National Statistics also said the gap between Britain's highest and lowest paid workers had widened dramatically over the past year.

The IFS said one group whose incomes "are certainly being squeezed" is public sector workers. Its analysis suggests that the two years of on average 1%-a-year pay rises in the public sector to follow the current two-year pay freeze would be enough to wipe out the estimated pay gap between men in the public sector and private sector.

The thinktank puts the gap between public and private earners at 4.3% for men, taking into account education, age and qualification levels. For women the public sector premium is 10.5% and for both men and women it stands at 7.5%.

The IFS also looked into differences in public sector benefits across the UK. "Looking at pay alone, public sector workers appear, on average, to do relatively badly in London and the south-east and really rather well in some other areas including Wales and the north of England," Johnson said. The findings echo Osborne's move on Tuesday to ask public sector pay review bodies to look into how pay can be made more responsive to local labour markets.

Following forecasts for contraction at the end of this year and barely any growth next year, Osborne was forced to concede on Tuesday that the UK risked falling into recession. The resulting strain on the public finances led the chancellor to pencil in two more years of substantial cuts.

"That will extend to six years the period for which total spending will have been cut year-on-year," said Johnson. "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."