Poor Worst Hit By Cuts And Recession Due To Impact Of Inflation, Says IFS Report

Poor Worst Hit By Recession In 'Dramatic' Living Standards Fall
Dougal Waters via Getty Images

Poor Britons have seen the biggest fall in living standards due to the recession and are still worse off by thousands of pounds due to the impact of inflation as energy and food prices have soared, a new report has found.

The Institute for Fiscal Studies has concluded in new analysis that Britons' pay packets in 2013 were on average 6% lower than before the economic crisis hit back in 2007.

The IFS' new report, A Green Budget, reads: "The recession has had a dramatic impact on living standards...Given forecasts of weak earnings growth, and further cuts to benefits, it seems highly unlikely that average living standards will have recovered to their pre-crisis levels by 2015–16."

This came as new research by Labour suggested that council cuts are ten times worse in poorer areas of Britain.

Although the IFS report finds that rich households have seen bigger falls in income than poorer households, the effect is nullified by the greater burden of inflation on poorer families as they are worse hit by the rising cost of energy and food.

According to the IFS, energy prices rose by nearly 60% and food prices increased by 30% from 2007 to 2013, both of which are bigger parts of poorer households' spending.

Labour's shadow Treasury spokeswoman Catherine McKinnell warned: "These worrying figures show those on lower incomes have been hardest hit by price rises, particularly food and energy bills.

"And on current forecasts real earnings are not expected to get back to the level they were in the final year of the last Labour government until 2018/19. In other words, working people are worse off under the Tories.

The IFS report also found that workers' pay, after accounting for inflation, will not start to recover from the impact of the recession until 2019 - marking a decade long stagnation for pay packets.

The IFS' forecast showing pay packets could finally rise faster than inflation in 2019

“Looking forward, there is little reason to expect a strong recovery in living standards over the next few years. According to the Office for Budget Responsibility, real earnings are not expected to return to 2009–10 levels until 2018–19," the IFS report reads.

Poorer families will also see pay packets grow slower than rich households. The IFS report forecasts that "nominal income growth will be lower towards the bottom of the distribution".

It adds: "Unless differences in inflation are reversed, this could mean that low-income households will see the largest falls in living standards over the period of recession and fiscal consolidation as a whole."

In response to the figures, Frances O'Grady, general secretary of the Trades Union Congress, said: "The IFS analysis shows that years of recession and stagnation have taken their toll on household finances, with many families thousands of pounds worse off today than they were before the crash.

“Last year’s recovery failed to improve people’s earnings and unless things change, workers across Britain could face a decade of pay stagnation."

Chancellor George Osborne said that while the report showed how much poorer the country was as a result of "Labour's great recession" it also indicated that the fall in household incomes had probably come to a halt.

"Only by continuing to work through our long-term plan will we secure a better economic future for hard-working people. Abandoning it for Labour's plan of more borrowing, spending and taxes will put the recovery at risk," he said.

IFS report author Andrew Hood said: “There have been a lot of claims made recently about changes in different measures of incomes and earnings. Our analysis puts together all the information we have to suggest that real median household income is still more than 6% below its peak, but it looks like it stopped falling this financial year.”

Abi Adams, a co-author, said: “Different types of households have had quite different experiences of inflation over the past few years. Those on lower incomes have typically experienced significantly greater inflation than those with higher incomes. Taking this into account can change our views about how the distribution of living standards has changed. Differential inflation has largely undone what would otherwise appear to be a significant reduction in inequality”.

Before You Go