It never rains...but it pours on the poor and families.

12 September 2011

rain warningActually, it is more windy than rainy here today, but those cheerful sorts over at the Institute for Fiscal Studies (IFS) figured that what everyone needed on a grim Monday morning was a new report about how bad everything has got, and how bad it’s going to stay, particularly for poorer households and families with children, who will be most affected by post-recession tax and benefit reforms.

This latest recession is apparently the worst for over sixty years, and as part of a new cross-country study the IFS have now seen fit to capitalise this Great Recession in a new report that looks at living standards in the UK and how they compare around the world.

The report uses quite a lot of long words but essentially says that “UK households were relatively insulated from the immediate impacts of the Great Recession", owing to the welfare system and Governmental financial support, although “much of this protective effect was concentrated on households in the bottom half of the income distribution.”

However, as we enter the new age of austerity, with words like “cuts”, “deficits” and “lack of funding” bandied about everywhere, household incomes now look set to be squeezed for a considerable length of time as governments attempt to repair their public finances. The report found that, in 2010-11, earnings, state benefits and tax credits all fell in real terms (ie after accounting for inflation) in the UK. IFS researchers estimate that this is likely to have led to a fall in household income of 3.5%, the largest single-year drop since 1981, and meaning we are all going back to 2003/04 in financial terms.

The IFS conclude that most of the impact of the Great Recession on UK living standards was not felt until after the ‘official’ end of the recession, but that “the pain was most definitely delayed rather than avoided.” The IFS have previously warned that the end of economic pain was not nigh, and they reiterate their findings that living standards look set to continue to decline until at least 2013/14.

And if capitalising Great and Recession were not dramatic enough, the IFS are claiming the projections would mean the UK had experienced one of the worst decades for changes in living standards since at least the Second World War. Those who were around for Rationing may disagree. Slightly

However, the IFS report also looks at who is worst affected. Planned tax and benefit reforms in the post-recession period have reduced total net household income by about 5% by 2014/15. Policy changes hitting households include the rise in VAT to 20%, changes to the way benefit increases are calculated and a series of aggregate cuts to tax credits and Housing Benefit. These cuts to welfare spending are expected to save the Government £18 billion per year in total by 2014/15, but it is those with the lowest incomes are set to lose the most from these reforms as a percentage of income- the bottom fifth of the population will lose at least 6% of their lowest incomes.

The report also shows that families with children are to be hit harder by these reforms than other family types, on average, owing largely to the freezing of Child Benefit and the reforms to Child Tax Credit and the childcare element of Working Tax Credit. The IFS also predicts that child poverty will rise in each of the 3 years between 2010/11 and 2013/14, and that it will be about 2 percentage points higher in 2013/14 as a result of the tax and benefit reforms planned by the current Government.

In fact, it seems the only winners at the moment are, surprisingly, pensioners. A contributing factor is that annual increases in the Basic State Pension will become more generous. Hence, unlike for families with children, tax and benefit reforms look set to continue to favour pensioners.

Melodramatic or no, it certainly seems to be the case that those who thought they were OK during the worst of the recession are now finding that this may not be the case. And if the economists are right, we may have to wait another 2-3 years until the light is switched back on at the end of the tunnel.

Happy Monday.

TOPICS:   Economy

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