The Institute for Financial Studies is predicting that households will be almost 20% worse off by 2021

Britain is in the midst of the weakest growth in living standards in at least 60 years, with low income families faring the worst, a leading thinktank has warned.

Weak earnings growth, together with changes to taxes and benefits, will lead to a rise in inequality by 2021-22, according to the Institute for Fiscal Studies (IFS). In a new report on living standards, poverty and inequality, the IFS says incomes for the average family will not grow at all over the next two years.

The IFS calculated that average household incomes will be 18% lower in 2021-22 than could have been reasonably expected in 2007-08, before the global financial crisis took hold of the economy. It means a childless couple would be about £5,900 a year worse off than they might otherwise have been, rising to £8,300 for a couple with two young children.

The IFS said it amounted to the most sustained slowdown in income growth since comparable records began in 1961. Campbell Robb, chief executive of the Joseph Rowntree Foundation, which funded the report, urged the chancellor Philip Hammond to announce measures to support struggling families in next week’s budget.

IFS warns of biggest squeeze on pay for 70 years over Brexit Read more

“These troubling forecasts show millions of families across the country are teetering on a precipice, with 400,000 pensioners and over one million more children likely to fall into poverty and suffer the very real and awful consequences that brings if things do not change.



“One of the biggest drivers of the rise in child poverty is policy choices, which is why it is essential that the prime minister and chancellor use the upcoming budget to put in place measures to stop this happening. An excellent start would be to ensure families can keep more of their earnings under the universal credit.”



If benefit cuts are implemented as planned, the poorest 15% of the population are likely to have lower incomes in five years’ time as a freeze in benefits and universal credit – which on average will be less than the benefits it replaces – take their toll.

“Looking forward, we expect the fall in inequality since the recession to be reversed,” the IFS said. The thinktank pointed to lower working-age benefits, which mainly affect less well-off families, as one of the key reasons why the gap between the rich and poor is expected to rise.

Economists have warned that household finances will come under increasing pressure this year as inflation rises but wage growth remains weak. The sharp fall in the value of the pound since the Brexit vote is starting to feed through to the headline rate of inflation, which rose to 1.8% in January, the highest level in more than two years. It is expected to rise further in the coming months, hitting about 3% in early 2018.

Meanwhile the latest official figures on wages showed pay growth slowed unexpectedly to 2.6% in the final quarter of 2016, despite record rates of employment.

Responding to the IFS report, a spokesperson for the Treasury said: “We are taking action to support families with the costs of living by cutting taxes for millions of working people, doubling free childcare for nearly 400,000 working parents and introducing the “national living wage” – a significant pay rise for the lowest earners. More people are now in work than ever before with living standards also forecast to rise over this parliament.”



Separate figures from the Office for National Statistics showed that the number of children living in UK households where no adult is working has fallen to its lowest level since recent records began two decades ago, at 10.7%.

Facebook Twitter Pinterest Damian Green said Conservative policies had given more parents the opportunity to find work. Photograph: Dinendra Haria/Rex/Shutterstock

Damian Green, the work and pensions secretary, said: “More parents now have the opportunity to find work and enjoy the dignity and security of having a regular wage.

“We will continue to build on this success as we roll out universal credit to all parts of the country – ensuring that it always pays to be in work.”

The IFS said average pensioner incomes are likely to rise twice as quickly as those for the rest of the population, if earnings growth projections from the Office for Budget Responsibility (OBR) – the Treasury’s independent forecaster – prove correct. By 2021-22, average pensioner income is likely to be 24% higher than it was in 2007-08, the thinktank said.

Pensioner incomes have benefited from real growth in the level of the state pension, people staying on in employment at older ages, and a change in the composition of pensioners, with the newly retiring tending to have larger private pension entitlements than previous cohorts of pensioners.

Child poverty is projected to rise from 27.5% in 2014-15 to about 30% in 2021-22, returning to its pre-recession level. The IFS said the rise was explained by tax and benefit reforms planned for this parliament, particularly the cuts to working-age benefits,.

Andrew Hood, an author of the report and a senior research economist at the IFS, said: “Weak earnings growth combined with planned benefit cuts mean that the absolute poverty rate among children is projected to be roughly the same in 2021-22 as it was in 2007-08. In the decade before that, it fell by a third. Tax and benefit changes planned for this parliament explain all of the projected increase in absolute child poverty between 2014-15 and 2021-22.”

Pensioner poverty, however, is projected to fall from 13% in 2014-15 to 11% in 2021-22.



Tom Waters, a research economist at the IFS, said the impact of the financial crisis would still be felt in the years ahead: “Even if earnings do much better than expected over the next few years, the long shadow cast by the financial crisis will not have receded.”

The OBR will produce an updated set of forecasts for the economy and public finances to coincide with the budget on 8 March.