‘Incomes set to outstrip inflation’

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Published: Monday 24th November 2014 by The News Editor

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Average incomes in the UK are set to rise faster than inflation this year, after falling by around 5% in real terms following the 2008 financial crash, according to new research by a respected economic think tank.

The Institute for Fiscal Studies said that the median average income will rise by 3.1% to £459 a week – £23,868 a year – in the 2014/15 financial year, outstripping CPI inflation by 1.2 percentage points, with a similar rise predicted for 2015/16.

This means that by 2015/16, average household incomes will be back at 2010 levels but still 3% below 2007, taking inflation into account. The picture is less rosy when the less-favoured RPI measure of inflation is used, with incomes remaining virtually static in real terms over the coming years.

But the report found that the rise in average real-terms incomes will not be enough to halt an increase in poverty, with an additional 900,000 children and 900,000 working-age non-parents falling into absolute poverty between 2012/13 and 2020/21.

The report repeated earlier warnings from the IFS that “it does not seem possible under current policy” for the Government to meet its legally-binding target to bring the number of children in absolute poverty below 5% and the number in relative poverty below 10% by 2020/21.

The IFS projections that 24.5% of children (3.5 million) will be in absolute poverty and 20.9% (3 million) in relative poverty in 2020/21 are slightly less bleak than in a similar study earlier this year, when the figures stood at 27.9% and 22.5% respectively.

But they still represent an increase compared to current estimates of 23.2% in absolute poverty – defined as living in households with less than 60% of the 2010 average income, adjusted for inflation – and 20.3% in relative poverty – defined as living in households with less than 60% of current average income.

The increase in poverty is in part explained by changes in Government tax and benefit policies since 2010, with measures like next April’s increase in the income tax personal allowance to £10,500 and the extension of tax-free childcare helping middle and higher-income families more than the poorest, the report found.

But it said that the introduction of Iain Duncan Smith’s Universal Credit, to replace a range of benefits, will be “poverty-reducing” and should slow down the rate of increase in people living in poor households after 2015/16.

If the tax and benefit system had remained unchanged since 2010/11, some 600,000 fewer children would have been in poverty by 2015/16, the report found. However, the IFS stressed that it was highly likely that any incoming government would have been forced to introduce tax and benefit changes after 2010 to rein in the deficit.

Meeting the goals set out in the 2010 Child Poverty Act does not seem possible under any “plausible” scenarios for UK tax and benefit policy over the remainder of the decade, said the IFS, repeating its call for the Government to consider setting more realistic targets.

Published: Monday 24th November 2014 by The News Editor

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