Typical family income is lower than in 2001 (but the worst is over)

THE income of a typical family is lower today than 13 years ago because of the crippling cost of living, warned a leading thinktank last night,

The economists said living standards have ‘fallen dramatically since the recession’ as take-home pay has ‘failed to keep pace’ with expenses.

Average incomes are ‘more than two per cent lower now than they were in 2001/02’ after being adjusted for inflation, said the Institute for Fiscal Studies.

However – in a conclusion which will be welcomed by ministers – the research said the worst is over. Households’ incomes have finally ‘ stopped falling’, said Andrew Hood, one of the report authors.

Since 2008, the cost of two essentials has soared, with energy up 60 per cent and food rising 30 per cent, said the research.

For a couple with two young children, the figures for ‘ real income’ adjusted for inflation are equal to a drop of £765.

In 2001/2, they had an average ‘real income’ after tax of £33,253 a year but this has fallen to the equivalent of £ 32,488 today, according to the IFS.

It predicted that household incomes are ‘highly unlikely’ to return to their pre- crisis levels before 2015, the likely date of the next general election.

This is the latest twist in the key political battleground about the cost of living for millions nationwide, which has been at the heart of Labour attacks on the Coalition.

Last week the Prime Minister cited an official analysis showing take-home wages rising faster than inflation for 90 per cent of people last year.

David Cameron said that while households had suffered from

‘Incomes finally stopped falling

the ‘longest and deepest recession in history’, the rebounding economy was beginning to bear fruit for families. This is having ‘some positive signs in terms of take-home pay’, he added.

His intervention prompted an angry reaction with Labour claiming the figures quoted were misleading. Last night, the Tories highlighted the IFS claim that the richest Britons have seen their income fall faster than the poorest.

While the wealthiest ten per cent have been hit by an income drop averaging 8.7 per cent since the recession, the poorest ten per cent have seen their income fall by ‘only 2.4 per cent’.

Income includes salary and other sources such as benefits, interest on investments or savings and pensions.

But this picture is complicated by the fact that the poorest have been hit harder by cost of living rises. They are more affected by energy and food bills while being less likely to gain from rockbottom interest rates which help homeowners.

For example, nearly 20 per cent of a poorer family’s money goes on food compared to just under ten per cent for the better-off.

Once the different inflation figures are taken into account, the IFS said there have been ‘very similar percentage declines in their real incomes [of the richest and poorest in society].’

Yesterday the Office for National Statistics revealed that ‘real wages’ adjusted for inflation dropped the most in Britain compared to other industrialised economies in the G7.

They dipped by a cumulative 6.1 per cent in the UK while rising in Canada, France and Germany, the ONS said.

Last night, Chancellor George Osborne said: ‘The IFS has made clear just how much poorer the country is as a result of Labour’s great recession.’