LONDON (Reuters) - Household incomes in Britain have suffered their sharpest three-year squeeze since the early 1980s, according to a leading independent thinktank.
The Institute for Fiscal Studies calculates that the average household has seen a 1.6 percent drop in income since 2008, accounting for inflation. That contrasts with the previous 50 years during which household income typically rose by 1.6 percent a year in real terms.
The analysis highlights the fragility of Britain’s economic recovery just days before the government announces its annual budget.
The government has embarked on the toughest public spending squeeze in a generation and on Monday confirmed plans to freeze the pay of all but the lowest paid public sector workers.
“This represents the first time that incomes have fallen over a three-year period since the three years from 1990 to 1993, and the biggest three-year drop in real living standards since 1980-83,” the IFS said.
The IFS said the drop was driven by a combination of lower employment, lower interest on savings income, tax changes and lower real earnings.
The government on Monday accepted recommendations from the Pay Review Body that public sector workers earning less than 21,000 pounds receive a flat pay rise of 250 pounds for 2011-12.
Those earning more will have their pay frozen for two years. The settlement covers teachers, prison officers, the armed forces and the health service and is intended to save the government 3.3 billion pounds per year.
Unions say the government is making ordinary people pay for a recession that was triggered by bankers’ excessive risk-taking.
The weakness of the consumer sector — which may be further squeezed by the government’s four-year austerity programme — is one reason why the Bank of England has left interest rates at a record low 0.5 percent despite inflation running at double its 2 percent target.
A separate survey on Monday showed British households suffered the biggest deterioration in their finances this month for two years.
“The pressure on households and current evidence of weakening consumer spending is something the Bank of England needs to think very carefully about as it agonises over whether to raise interest rates,” said Howard Archer at IHS Global Insight.
Editing by Catherine Evans