Biggest fall in household incomes since 1981

UK households saw their average incomes fall by 3.1 per cent in 2010/11, the Institute for Fiscal Studies (IFS) has found.

It is the largest one-year fall in household incomes since 1981, and the first fall after five years of slow growth. It means that despite rising inflation, incomes are the same as they were in 2004/5.

The IFS said that the delayed effects of the late 2000s recession had reduced living standards.

The large fall is surprising given that incomes had in fact grown during the last recession in 2008 and 2009, when falling inflation and an increase in benefits and tax credits had propped up household incomes, even despite of high unemployment.

Although incomes fell across all households, the biggest fall was proportionally more for higher incomes than lower incomes, leading to a more level income between the two.

Jonathan Cribb, research economist at the IFS, said that the inequality had balanced out as 'those on benefits had their incomes relatively better protected.'

It cited the main reason for falling incomes on a drop in real earnings, as those in work continue to feel the effects of small pay rises or pay freezes. It also blamed the introduction of the 50p tax rate for higher earners.

Elsewhere in the report, it also found that child poverty had fallen but had failed to hit Government targets to halve the number between 1999 and 2011. Although relative child poverty fell by 0.3 million in 2010-11 from the previous year - taking the total to 2.3 million children living in poverty - it had missed targets by 0.6 million.

It measures relative child poverty by the number of children living in households with incomes below 60 per cent of the median, measured before housing costs.

The IFS predicts that households will remain stretched over the next few years as incomes continue to fall.

"Median incomes will have fallen further in 2011-12 and median incomes will be no higher in 2015-16 than they were in 2002-03," the IFS said.