Incomes may drop to 2004 levels

Posted on May 16th, 2011 | Categories - News

Soaring inflation and stalled wage increases mean that incomes will fall in the coming year.

Britons may have to contend with a reduction in their average income over the next 12 months.

UK households are set to experience the biggest drop in income for 30 years, according to experts at the Institute for Fiscal Studies (IFS).

The economic think tank has warned that average incomes could fall by 3% this year, marking the sharpest drop since 1981.

In the recent months the short term effects of the recession meant that take-home earnings increased due to low inflation and higher benefits – typical family incomes rose by 1% because benefits were rising much faster than the then-current inflation rate.

However, over the longer term, higher inflation and lower wage increases mean that many British homes may see their incomes fall back to 2004-2005 levels.

IFS research economist Wenchao Jin said: “Average living standards rose over the recent recession, likely to be driven by large increases in benefits and tax credit rates. However, this type of growth cannot be sustained in the long term, and the outlook for incomes in 2010-11 is considerably bleaker, with the long-term effects of the recession on living standards delayed rather than avoided”.

The IFS came up with its predictions after analysing data from the Department for Work and Pensions. The warnings add more weight to the Bank of England governor Mervyn King’s comments that households will experience a significant reduction in their spending power as inflation rises to a possible 5% by the end of the year.