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Household income at 2005 levels - IFS

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Households may have suffered their biggest drop in take-home incomes for 30 years, a leading economic thinktank has warned.

The Institute for Fiscal Studies said that analysis of new official figures suggested it was “entirely possible” that median incomes dropped by 3% in 2010-11.

Such a fall would leave income levels back where they were six years earlier, the IFS said. The IFS’s analysis is based on household income data for 2009-10 just released by the Department for Work & Pensions. It shows that median incomes continued to grow by 1.6% - following similar sluggish growth the previous year - despite the effects of the recession.

However, the IFS warned that these increases were likely to have “more than unwound” in 2010-11 as the long-term effects of the recession are felt and higher inflation erodes living standards. It said that data already available for the first 11 months of 2010-11 showed earnings fell by 3.8%, while its own forecasts pointed to a fall in median incomes of around 3%.

“The trends in earnings and benefits suggest that such a fall is entirely possible,” it said. “And were such a fall to be found in next year’s data, it would represent the largest fall in median incomes since 1981, leaving median income close to its level in 2004-05.

IFS research economist Wenchao Jin said the latest DWP figures “tell a story of pain delayed, but not pain avoided. Average living standards rose over the recent recession, likely to be driven by large increases in benefits and tax credit rates.

“However, this type of growth cannot be sustained in the long term, and the outlook for incomes in 2010-11 is considerably bleaker, with the long-terms effects of the recession on living standards delayed rather than avoided.”

Work and pensions secretary Iain Duncan Smith said: “These figures lay bare the growth of income inequality in the UK which is now the highest it has ever been.

“This gap between the poorest and richest in our society has accelerated over the last five years despite an astonishing £150bn injected into tax credits alone.

“The end result has been to make benefit dependency and worklessness inherent to the UK way of life with middle and low-income earners picking up the bill.

“This underlines the urgent need for our radical programme for Welfare Reform and especially Universal Credit which will make work pay and end the madness of generations living on benefits with no reason to aspire for more.”

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