Back to Thatcher era as take-home pay drops

IT WAS a time of high inflation, a Conservative government was in power and householders were facing deep economic uncertainty.

Household incomes are likely to have fallen by the biggest amount since 1981, when Margaret Thatcher was PM, back to the 1985 level - but shopping is dearer

But today's parallels with the early days of the Thatcher government have now become even more apparent - as economists warned that household incomes look likely to have dropped by the largest amount since 1981 over the past 12 months.

The expected 3 per cent slump in average take-home pay in the year from April 2010-11 would leave householders with the same amount in their pockets on pay day as in 2005, the Institute for Fiscal Studies said - despite an unexpected wage increase in the years between 2008 and 2010.

Wenchao Jin, a research economist at the IFS, warned that the long-term effects of the recession on living standards were yet to be felt, as wages failed to keep pace with inflation.

"The figures released today tell a story of pain delayed, but not pain avoided," he said. "The outlook for incomes in 2010-11 is considerably bleaker."

And while wages may be hovering at around the same level as in 2005 - when salaries were still yet to rise further as companies enjoyed a booming economy and unemployment was at a low level ahead of the recession three years later - the price of everyday goods is substantially more expensive today.

The cost of a litre of unleaded petrol has rocketed from around 80p in 2005 to at least 1.32 now, according to figures released last month by the National Office of Statistics, while the price of a loaf of white bread has leaped from 88p to 1.19 over the same period.

The think tank's findings echo the message from official statistics released in March, which showed that household disposable income in 2010 suffered its biggest fall in real terms since 1977, leaving people short of cash to spend on luxuries such as going out, clothing and holidays.

Earlier this week, Bank of England Governor Mervyn King warned householders would find their budgets squeezed even further in the coming months, as he forecast a double digit rise in utility bills and said inflation was likely to reach 5 per cent by the end of the year.

The IFS analysis, based on household income data for 2009-10 released by the Department for Work and Pensions, shows that median incomes continued to grow by 1.6 per cent - following similar sluggish growth the previous year - despite the effects of the recession.

However, the IFS warned that the increases were likely to have "more than unwound" in 2010-11 as the long-term effects of the recession are felt throughout the country and higher inflation erodes living standards.

It said its forecast of a 3 per cent slump in median incomes in 2010-11 would be the biggest such fall since 1981.

Looming public sector cuts are expected to hit the economy hard over the coming year, while sharp rises in utility bills and tax reforms are also expected to affect consumers' spending power.

"Average living standards rose over the recent recession, likely to be driven by large increases in benefits and tax credit rates," added Mr Jin.

"However, this type of growth cannot be sustained in the long term, and the outlook for incomes in 2010-11 is considerably bleaker, with the long-term effects of the recession on living standards delayed rather than avoided."

The IFS said data already available for the first 11 months of 2010-11 showed earnings fell by 3.8 per cent, while its own forecasts pointed to a fall in median incomes of around 3 per cent.

"The trends in earnings and benefits suggest that such a fall is entirely possible," the report added. "And were such a fall to be found in next year's data, it would represent the largest fall in median incomes since 1981, leaving median income close to its level in 2004-05."

Iain McMillan, director of CBI Scotland, said consumers were in a far worse financial position today than in 2005.

"The real spending power in people's pockets is going to come down over the next two years," he said. "Many people's salaries, across both the private and the public sector, have been frozen or reduced. And now, we have very severe constraints in public spending and a very severe pay restraint regime in the public sector, which will make things worse.

"The other factor is that when all of this has been going on, inflation has been rising much faster than the average salary."

He added: "The cumulative effect means that people will have less money to spend now than they did before."

Scottish politicians said the parallels between the Conservative-led Westminster coalition and former prime minister Margaret Thatcher's Tory governmentwere not a shock.

"It is no surprise and no coincidence that under the Tory-led coalition the economic downturn is now hitting ordinary Scots families at levels not seen since the Thatcher era," said Scottish Labour's deputy leader, Johann Lamont. "Under Labour, the average household weathered the recession with incomes rising between 2008-10, but the outcome for this year is bleaker."

SNP MSP Kenneth Gibson added: "The SNP has taken steps to ease the pressure on household budgets with a council tax freeze throughout the last parliament and for the next five years saving average households 1,200.

"We understand the difficulty many on lower incomes are in with rising prices and living costs which is why we have abolished prescription charges, maintained Education Maintenance Allowances and introduced a living wage across government and the NHS."

Work and Pensions Secretary Iain Duncan Smith said: "These figures lay bare the growth of income inequality in the UK which is now the highest it has ever been."

Dog Eat Dog as unemployment soared

The days of big shoulder pads, sharp suits and shouts of "Greed is Good" were still a twinkle in Gordon Gekko's eye. The grim economic times of the early 1980s were far from the lavish and cash-laden days set to be enjoyed later in the decade.

In 1979, the new Tory government, led by "Iron Lady" Margaret Thatcher, inherited an economy with an inflation rate of 27 per cent. Rubbish had piled up on Britain's streets only 12 months earlier in what became known as the "Winter of Discontent".

The public was on the verge of revolt. The trade unions had grown in power over the previous years - a movement the new Prime Minister took no time in attempting to quash. But by mid-1980, things had gone from bad to worse.

Unemployment had reached the unprecedented level of 3 million and did not fall below that figure until 1986. By early 1981, the pound had risen in value compared to other global currencies.

This adversely affected Britain's exports and manufacturing sector, with overseas business opting to go elsewhere, where they could acquire the same goods far cheaper - forcing many companies reliant on overseas trade to lay off even more workers. The high level of unemployment, particularly in inner city areas, caused not only personal hardship, but widespread social problems, sparking riots across the UK in the same year.

As people danced to the beats of Adam and the Ants, left, Britain slipped firmly into recession. Gross Domestic Product fell by 2.2 per cent in 1981.