Average incomes fell significantly last year as the effects of the global recession finally began to be felt, research by a leading think tank has found.
The Institute for Fiscal Studies (IFS) has revealed that the average household’s income fell by 3.1% last year, even after tax changes and benefit increases were taken into account.
Despite the recession hitting economies around the world in 2008 and 2009, average incomes in the UK have still been climbing steadily for the past five years.
The increases in income, although small, were put down to falling inflation and higher benefits and tax credits. But last year saw the end of this trend, with household incomes falling to an average of £419 per week – down from £432 the previous year.
Incomes before tax and benefits have fallen by more than 7% since 2007 and 2008, but last year saw the biggest drop since 1981.
“Average private incomes fell by over 7% during the three years to 2010/11, and although net incomes fell in 2010/11 as well, they were cushioned by the tax and benefit system during the recession itself,” said research economist Jonathan Cribb.
“Unless the economy performs much better than expected in the next few years, it looks likely that households’ private incomes will still be below their peak for some years.”
The British economy is currently in the midst of a double-dip recession, as GDP has remained largely static in the face of the worsening eurozone crisis.
The IFS has said that the drop in wages could mean living standards will not reach the same levels as 2002 until 2015.
“The remarkable thing about what’s happening to income levels at the moment is real earnings will probably fall again,” said Paul Johnson, director of the IFS.
“By 2015 our expectation is that average household incomes will be no higher than they were in 2002. A decade-and-a-half of no growth in living standards, certainly unprecedented since the last war.”
The IFS found that families of all income levels have seen their take-home earnings suffer in the past year, but it is richer households that have suffered a proportionally greater setback.
This is due to poorer families being cushioned to some extent by state benefits, meaning their incomes fell less than the average.
If you have found your income being squeezed to breaking point, it can be easy to turn to things like credit cards to make ends meet.
But credit cards can lead to high levels of debt, so invest instead in a prepaid card. These work in the same way as a credit card, but only allow you to spend a pre-loaded amount.