Poorer households now feeling the brunt of the recession

Poorer households are now suffering the hardest hit in the economic recession due to the benefit cuts being implemented in the years to 2015–16 while well-off families suffered most when the economic downturn began, according to research by the Institute of Fiscal Studies.

The research founds that for those on middle and higher incomes, falls in real income happened largely between 2009–10 and 2011–12 because real earnings fell sharply. For example, income at the 90th percentile grew by 8.0% less than the Retail Prices Index (RPI) over those two years. For those on lower incomes, more dependent on income from the state, falls in real income will happen largely as a result of welfare cuts that began after the initial recession and are continuing up to and beyond 2015–16, says the report.

The IFS says income inequality fell substantially between 2007–08 and 2011–12, but is projected to rise again from 2011–12, almost (but not quite) reaching its pre-recession level by 2015–16.

The IFS projects that falls in income look set to be spread quite evenly across income groups with the average middle-income family likely to be £1,800 a year worse off by 2015.

Robert Joyce, a Senior Research Economist at IFS and one of the authors of the paper, said: “If the OBR’s macroeconomic forecasts are correct, then most of the falls in real incomes associated with the recession have now happened for middle- and higher-income groups. But much of the pain for lower-income groups is occurring now or is still to come, because these groups are the most affected by the ongoing cuts to benefits and tax credits. Overall, we expect the period of recession followed by austerity to leave income inequality in 2015–16 about the same, or slightly lower, than in 2007–08.”

Meanwhile, the BBC is reporting that Labour is not likely to reverse cuts in child benefit brought in earlier this year, despite being opposed to them. It says this is because the money needed would be 23 times the amount that would be saved by removing the winter fuel allowance from better off pensioners, which it announced earlier this week. The cuts, which came in in January affect households where one parent earns over £50K a year.

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