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George Osborne given stark warning on cuts’ impact

Institute for Fiscal Studies says chancellor’s plan will cause 10% drop in family living standards

George Osborne’s austerity programme will cut the living standards of Britain’s families by more than 10% over the next three years as those on the lowest incomes suffer most from the tax increases and spending cuts designed to reduce the budget deficit.

A study from the Institute for Fiscal Studies, the UK’s leading experts on the public finances, concludes that the chancellor’s strategy will result in greater inequality and rising child poverty, throwing into reverse progress made in the final years of the last Labour government.

The bleak picture painted by the IFS will be used by opponents of the chancellor’s austerity measures to call for a plan B to generate faster economic growth. There is likely to be further pressure on Osborne on Monday as the head of his independent commission on banking, Sir John Vickers, outlines measures for banking reform.

The IFS analysis, included in a new international study into the impact of the “Great Recession” of 2008-09 on 21 wealthy countries, says the most severe downturn since the interwar years will “cast a very long shadow in the UK”, with the poorest 30% of households especially hard hit.

“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.

“Welfare cuts and tax rises will act to reduce household incomes, and those with the lowest incomes are clearly set to lose the most from these reforms as a percentage of income (with the important exception of those with the very highest incomes). This is likely to increase poverty, other things being equal, offsetting some of the falls in poverty over the past decade.”

The IFS work divides households up into 10 groups (“deciles”) in order to assess the impact of tax changes and benefit reductions. “Taking all family types together, within the bottom nine income decile groups, those with the lowest incomes are set to lose the most from these reforms as a percentage of income … Given that the annual welfare budget is being cut by £18bn, this is perhaps not a surprise.”

The IFS said the poorest families also lose more as a result of the squeeze on public spending. “Losses as a percentage of net income (plus the value of benefits in kind) are between 5% and 6% at the bottom of the distribution, which is similar to the magnitude of the losses for those on the lowest incomes from tax and benefit reforms.”

Osborne has said that the pain caused by deficit reduction will be shared, but the IFS study found that the richest 10% of households will see income cut by just over 4% on average between 2011 and 2014 by tax and benefit changes.

The thinktank said the losses among this decile would be concentrated among the highest 1% of earners, due to the increase in the top rate of income tax to 50% for those earning more than £150,000, and the withdrawal of the personal income tax allowance and less generous pension relief for those earning more than £100,000.

“The percentage loss in the [richest] decile group is higher than in all but the bottom three decile groups, but in fact this is largely driven by tax rises for the very richest (approximately the top 1%). Therefore tax and benefit reforms seem likely to squeeze the living standards of the less well off by more than those on higher incomes, except for those on the very highest incomes. The impact of the upcoming tax and benefit reforms seems likely to be to reverse a substantial part (if not all) of the reductions in … inequality seen during the Great Recession.”

The IFS analysis is included in The Great Recession and the Distribution of Income, published on Monday by the London School of Economics. Professor Stephen Jenkins of the LSE said: “We were surprised at how little household incomes changed in the years immediately after the Great Recession began. This has been the worst macroeconomic downturn in most OECD countries since the Great Depression of the 1930s when there were substantial increases in poverty rates and other significant changes to the income distribution.”

Jenkins added that the outlook now was “more worrying”, and that big differences in income distribution would 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.”

Warning that pain had been delayed but not avoided, the IFS said families with children would be hit harder by Osborne’s tax and benefit changes than other family types on average, with the poorest 10th of households suffering income losses of more than 8% over the next three years. “Recent IFS modelling predicted that child poverty will rise in each of the three years between 2010-11 and 2013-14, and that it will be about two percentage points higher in 2013-14 as a result of the tax and benefit reforms planned by the current government.”

Child poverty is measured by the percentage of children in households where income is less than 60% of the median for the UK. According to the IFS, it fell from 25% in 2000 to 20% a decade later.

The pensions secretary, Iain Duncan Smith, told BBC TV that the chancellor was sticking to plan A to cut the budget deficit, but was looking at other ways to bolster economic growth. “I know George is looking carefully at a whole new raft of things that we could be doing to actually give the economy another push, and another kickstart in the direction of greater growth”. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds