The IFS sees growing inequality being mainly down to the welfare freeze

When Theresa May came into office she promised to govern for those who had been left behind - for the "just about managing" families.

But what if the very policies Mrs May is implementing are about to make life for those very families even tougher?

That's one conclusion from the Institute for Fiscal Studies' latest look at the state of household incomes - and their prospects over the coming years.

Some of the IFS's revelations will be vaguely familiar (though no less depressing) to those who follow the subject: that in five years' time earnings will be £5,000 lower as a result of the ongoing squeeze; that pensioners will see continued sharp increases in earnings while working age families will see far smaller rises; that inequality, having fallen for some years, is about to start increasing.

What's striking is their explanation for some of these trends, and this is what is likely to concern Mrs May most.


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As we all know, the Government is committed to freezing working age tax credits, a policy which has already come into action, but will continue in the next few years.

It is also still committed to increasing the state pension rapidly thanks to its "triple lock" policy. Those policies have already had some stark effects on Britain's economic landscape: pensioners now earn more, after housing costs are borne in mind, than working age households.

All the same, when you look back over the past decade or so, the Government's interventions in the labour market have actually tended to reduce inequality.

Image: The post-crash slowdown in earnings growth is the worst for 60 years, the IFS says

So while the well-off saw their pre-tax earnings increase faster than those at the lower end of the income spectrum, a combination of higher taxes for the wealthy and comparatively generous benefits and tax treatment for low earners have mitigated the widening of the gulf.

Not any more.

According to the IFS, were it not for Government policies, the bottom 10% of the earnings spectrum would see their incomes rise by 2.7% in real terms over the next five years.

Image: Philip Hammond delivers his Budget next Wednesday

But when you factor in those policies - primarily the welfare freeze - their real incomes will instead fall by 0.5%.

When you apply the same analysis to those in the top 10% of the population - comparing pre-reform pay with pay after those Conservative reforms, their real pay change increases from a rise of 8.4% to 9.3%.

In other words, inequality - which was already going up as a result of changing dynamics in the labour market and economy - will increase even faster as a direct result of government policy.

Something for the Prime Minister and Chancellor to mull over as they put the finishing touches to next week's spring Budget.