'Long shadow' of financial crisis hits incomes

Typical household incomes in the UK will not grow for the next two years due to the "long shadow" of the financial crisis, a report suggests.

In five years' time, median income will be 4% higher than it is now, the Institute for Fiscal Studies predicts.

The recession and tepid recovery mean that from the start of the crisis to 2021, households will suffer the worst income squeeze for 60 years, it says.

They will be £5,000 a year worse off than they might have expected.

Winners and losers

The IFS has produced a report on living standards for the Joseph Rowntree Foundation, which campaigns to reduce poverty.

It suggests, based on official forecasts produced for the government by the Office for Budget Responsibility, that long-term income growth is a relatively slow 2% a year.

"If the OBR's forecast for earnings growth is correct, average incomes will not increase at all over the next two years," said Tom Waters, an author of the report.

"Even if earnings do much better than expected over the next few years, the long shadow cast by the financial crisis will not have receded."

This was generally the result of small increases in wages, low productivity levels, tax and benefit policies and the state of the UK economy.

The squeeze would be felt worst by low-income households with children, he said, owing primarily to the four-year freeze in working-age benefits.

'Teetering on a precipice'

In contrast, pensioners would see their income growing faster than working-age households - a reversal of the position a decade ago.

"Once you account for their lower housing costs and smaller household size, median income is projected to be nearly 8% higher for pensioners than for non-pensioners by 2021-22, having been nearly 10% lower in 2007-08," the report said.

Campbell Robb, chief executive of the Joseph Rowntree Foundation, said: "These troubling forecasts show millions of families across the country are teetering on a precipice, with 400,000 pensioners and over one million more children likely to fall into poverty."

He added: "It is essential that the prime minister and chancellor use the upcoming Budget to put in place measures to stop this happening. An excellent start would be to ensure families can keep more of their earnings under the Universal Credit."

Liberal Democrat Treasury spokeswoman Baroness Kramer also called for the Government to take action in next week's Budget.

"For all the talk about the 'just about managing' we have seen no real help for them," she said.

A Treasury spokesman said: "We are taking action to support families with the costs of living by cutting taxes for millions of working people, doubling free childcare for nearly 400,000 working parents and introducing the National Living Wage - a significant pay rise for the lowest earners."