'Five years of zero growth' for incomes of poorer households

Poorer households are facing a five-year period of zero growth in their incomes after inflation is taken into account, according to a new report from a respected economic think-tank.

Planned cuts to benefits and tax credits mean that incomes for those near the bottom of the income ladder will remain constant in real terms over the period between 2015/16 and 2020/21, while those near the top enjoy an increase of 2.3% a year above inflation, said the Institute for Fiscal Studies.

And the think-tank forecasts in a new report that the proportion of children in relative poverty will rise by eight percentage points and those in absolute poverty by three percentage points by 2020/21, almost entirely as a result of increasing hardship among families with three or more children who are hit hardest by benefit cuts.

Meanwhile, average households will see real income boosted by 1.5% a year over the period, which the IFS described as "unspectacular by historical standards".

The squeeze on poorer families follows two years in which strong employment growth and rock-bottom inflation have seen real boosts in the value of incomes at all levels of society, found the IFS.

Between 2013/14 and 2015/16, real growth in incomes, after inflation, was 4.1% towards the bottom of the scale, 4.9% for average households and 3.2% for those near the top, the think-tank estimated.

In this relatively benign period for incomes since 2013/14, the IFS estimated that 400,000 children, 300,000 working-age adults without children and 200,000 pensioners were lifted above the absolute poverty line - defined as £389 a week for a couple with two children, before housing costs, or £186 for a single person with no child.

The IFS report found that "income inequality will rise significantly over the course of the current Parliament", as earnings outstrip rises in benefits which are pegged to inflation.

One quarter of the predicted increase in inequality was blamed on planned cuts to working-age benefits, which the IFS forecasts would reduce incomes in lower-income households by 3% in 2020/21 while having "little or no effect" on the incomes of the higher-income half of households.

However, the IFS said that even after this half-decade of stagnant incomes for poorer households, overall income inequality will be virtually unchanged between 2007/08 and 2020/21, with incomes towards the bottom of the wealth spectrum projected to be 8% higher over the 13-year period, compared to 8.9% towards the top.

James Browne, one of the authors of the report, said: "Following an historically slow recovery in living standards after the recession, stronger growth in household incomes at all income levels over the last two years will have been welcome news.

"For some, particularly the better-off and pensioners, this is likely to continue over the next five years as earnings and state pensions grow more quickly than inflation. But the prospects are not so good for others, including large families with low incomes, who will bear the brunt of planned benefit cuts."

A Government spokesman said: "Living standards are now growing beyond pre-crisis levels and IFS analysis today predicts household incomes growing across the board, with young adults seeing particularly strong income growth.

"The IFS also say absolute poverty is falling with strong rises in employment helping incomes at the bottom of the distribution keep pace with those at the middle - and this is even before the new National Living Wage comes into effect this April.

"But as the Chancellor has said, we need to show resolve in delivering reforms to improve our productivity which is the only way to deliver sustained rises in living standards. At a time of global economic turbulence and heightened risk this means we must stick to the plan to build our resilience and deliver economic security for working families."

Shadow chancellor John McDonnell said: "This report highlights how this recovery is truly built on sand, as gains over the past few years from low inflation due to the falling price of oil will be offset by the policy of this Tory government over the next five years.

"When you read through the detail of this report the alarming figures are that by the end of this Tory Government one in four children will be living in relative poverty with a rise to 2.6 million children living in absolute poverty.

"As the report clearly states, the Government's planned tax and benefit changes are a major reason for these rises in relative and absolute poverty over the next five years."

Child Poverty Action Group director of policy Imran Hussain said: "The Prime Minister has promised an all-out assault on poverty but we're facing a full-blown child poverty crisis as a result of Government tax and benefit policy choices which have prioritised tax cuts for richer groups rather than help for low-income families."