Recovery not recession will hit household incomes says IFS

12th September 2011

The prediction is contained in a report compiled by the London School of Economics entitled ‘the Great Recession and the distribution of household income'.

The report, which looked at 21 wealthier countries, suggests that the while government measures softened the impact of the recession real household incomes face a combination of cuts, and erosion from inflation.

Stephen Jenkins of the LSE says: "Our study shows that stabilisation of the household income distribution in the face of macroeconomic turbulence is an achievable policy goal, at least in the short-term. The prospects for the medium- and longer-term are, however, much more worrying, and much greater differences in distributional outcomes will emerge across countries. We're moving from the Great Recession era with relatively broad consensus about what to do to a new era of sharp distributional conflicts between, for example, rich and poor, old and young." 

The report adds that: "Declines in living standards look set to continue until at least 2013-14. If realised, this would mean that average living standards had not grown in well over 10 years, making it one of the worst decades for changes in living standards since at least the second world war."

According to the IFS, the squeeze on living standards will be the result of earnings failing to keep pace with prices, as well as the tax and benefit changes announced by the government to tackle the UK's record peacetime budget deficit.

Here on her BBC blog, Stephanie Flanders seizes on the fact that in the inital stages of the crisis UK household incomes, after tax, grew just as fast between 2007-8 and 2009-10 as they did during the four years leading up to the crisis.

But the chickens are coming home to roost now. Flanders also provides a graph from HSBC which shows that the UK's economy is ten per cent smaller than the consensus forecast of economists made in 2008 and the only developed country to have done worse is Japan which is a 11 per cent smaller than the forecast.

However as City AM reports here, that later this week, the IFS may suggest this week that the 50 per cent top rate of tax is proving counter-productive in terms of generating revenue.

The paper quotes the IFS saying: "Rates above 40 per cent push high earners to avoid paying by moving abroad or by resorting to a range of legal steps to reduce their tax bill, the think-tank said ahead of Wednesday's release of its Mirrlees review of the tax system."

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