By Simon Duke
Families are facing a crash in living standards as severe as the 1970s, a leading economist has warned.
A grim cocktail of soaring inflation, tax rises and stagnant wage growth will put a huge strain on household spending power, according to the Institute of Fiscal Studies.
Writing in the Mail today, IFS director Paul Johnson warned that ‘payback time’ has arrived following the recession.
It comes as a study shows that the share of national income going to ordinary workers has fallen dramatically over the past 30 years.
Households have so far been spared the full brunt of the downturn after the Labour government cut VAT and ramped up spending in an effort to prevent an economic meltdown.
But with the Coalition’s austerity cuts beginning to hit home, a brutal day of reckoning is in prospect for millions of families, Mr Johnson said.
‘Lower welfare benefits, lower interest income for savers and higher taxes mean that most of the population will share in the pain,’ he added.
‘We have not seen a period like that since the 1970s when rampant inflation and rising unemployment undermined living standards.’
According to IFS estimates, the average family will have £360 less to spend this year following a fall of ‘at least’ 1.5 per cent in household income compared with 2008.
But with the prospect of years of paltry wage increases, the squeeze is set to intensify. By 2014, household budgets will ‘almost certainly’ remain below 2008 levels after taking account of inflation, and could ‘quite possibly drop’ to the 2002 level, the IFS warned.
With the economy barely climbing out of recession, salaries will continue to lag behind the rocketing inflation rate, which is running at more than twice the official 2 per cent target.
The Bank of England recently warned that the inflation could soon hit levels not seen since the early 1990s following alarming surges in food and energy costs.
Meanwhile, a study found that those in the bottom half of the earnings range have seen their pay as a share of GDP fall by a quarter – while the richest 1 per cent have seen their share shoot up by more than half.
Gavin Kelly, chief executive of the Resolution Foundation, said: ‘If these worrying trends continue in the decade ahead, it casts doubt on whether those on low-to-middle earnings will see their living standards rise in line with economic growth.’