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Osborne hails incomes 'milestone'

George Osborne has said the economy has reached a "major milestone" after a respected think-tank found average household incomes are back to the levels they were before the financial downturn.

The Institute for Fiscal Studies (IFS) projections suggest median or middle household incomes in 2014/15 have reached the same levels as in 2007, although they are still more than 2% below their 2009/10 peak.

But the recovery in living standards has been much slower than after previous recessions and changes to spending patterns suggest that people think their income prospects have taken a permanent hit, it warned.

Younger people, people on higher incomes, and people without children tend to have come off worse than those in other groups in recent years, according to the findings.

The IFS said the slow recovery in incomes has been a "remarkable feature" of the recent downturn and this comes on top of slow income growth in the years before the recession. The net result is that middle incomes in 2014/15 are less than 3% higher than they were a decade earlier.

Across the UK, the typical middle income household without children had an income of £461 a week in 2014/15, which is £5 a week more than a year earlier and around the same level as 2007. But in 2009/10, middle income households had an average income of £473 a week in 2014/15 prices.

The Chancellor said the report showed Britain was "fundamentally in a better position than it was five years ago" but "the job isn't done".

But Labour said the IFS study confirmed that working people were worse off than they were in 2010.

IFS director Paul Johnson told BBC Radio 4's Today programme: "The most remarkable thing is less that incomes fell - incomes always fall during and after recessions. The thing that's really different this time to what happened in the 1980s and 1990s recessions is they have taken an awfully long time to recover.

"It is astonishing that seven years later incomes are still no higher than they were pre-recession and, indeed, in working-age households they are still a bit below where they were pre-recession."

Between 2011/12 and 2014/15, middle incomes grew by 1.8%. In the first three years of recovery in the early 1980s, middle incomes grew by 9.2%, and during the same recovery period in the 1990s it was at 5.1%.

Weak earnings growth has been a key reason for the slow recovery in living standards, while tax increases and benefit cuts, which have been put into place as part of the deficit reduction plan, have also squeezed incomes, the report said.

The report also highlighted evidence in spending patterns that households consider the downturn to have permanently affected their income prospects.

Consumption per person of "non durable" items such as food and fuel was 3.8% lower in autumn 2014 than it was in early 2008. But at the same point after the 1980s and 1990s recessions, consumption of non durables was 14.4% and 6.4% above pre-recession levels respectively.

The report said: "This might reflect households' perceptions that their income prospects have been permanently damaged by the crisis and that a significant cut to their spending is therefore required."

The report also looked at how different groups are faring as the recovery takes hold.

Andrew Hood, an author of the report, said: "The young have done much worse than the old, those on higher incomes somewhat worse than those on lower incomes, and those with children better than those without."

The IFS said large falls in real earnings have had a bigger effect on wealthier households, while poorer households have been hit harder by the rising cost of living. Lower income households tend to dedicate a higher share of their income to food and energy costs than those who are more well off.

While ultra-low mortgage rates, as the Bank of England base rate has remained at its historic 0.5% low, have helped to ease the pressure on home owners, poorer households have been less likely to benefit as they are less likely to own their property, the report said.

There are also differences between households with and without children. Median average income among households with children is estimated to be 0.4% higher in 2014/15 than in 2007/08, while for households without children it is still 3.8% lower than before the financial crisis.

The difference is mainly said to be due to earnings from the labour market making up a smaller proportion of household income for households with children than for those without.

The report found that while the median average income of people aged 60 and over is projected to be 1.8% higher in 2014/15 than in 2007/08, the figure for 22 to 30-year-olds, who have been particularly hit by falls in real earnings and the employment situation, is estimated to be nearly 8% lower.

The Chancellor told Today: "We have reached a major milestone today in the British recovery with incomes back to where they were before the crisis.

"But it is not the end of the journey. We've got to secure a truly national recovery and we mustn't put the progress we have made at risk by abandoning the plan that has got us this far."

He acknowledged that "the poorest in society and the young in society suffer most when the economy fails".

"They are the first victims of failure in economic policy and they have paid a very heavy price for the mistakes that led to the great recession," he said.

"But if you look at the IFS report today, this is an independent body, and they lay to rest a number of myths.

"They say first of all that incomes have recovered to their pre-crisis levels, so the country is not poorer than it was.

"They actually confirm in this independent report that the richest paid the most to deal with our economic problems, not the least, as you often hear.

"And they also say that rather than inequality increasing, which is often said, in fact inequality has fallen in our country.

"So the picture you hear, particularly from my political opponents, of the British economy is not one reflected in this independent report - indeed quite the opposite.

"What they show is that Britain is growing, that incomes are rising, that the richest have made the biggest contribution, inequality has fallen ... Britain is fundamentally in a better position than it was five years ago."

He added: "If you look at the rate of progress in the report today, if you look at incomes, they should be higher in 2015/16 than they were in 2010/11, so on that measure as well we will have made progress.

"But I am the first to say the job isn't done, that a lot of damage was done to the British economy and there's a huge job to be done continuing to repair that economy, securing the recovery, not putting at risk all the progress we have made."

Shadow financial secretary to the Treasury Cathy Jamieson said: "This report confirms that working people are worse off since 2010. This is set to be the first time since the 1920s that people are worse off at the end of a parliament than at the start.

"Labour's better plan will deliver the rising productivity we need to get sustained rises in living standards for all.

"We need a recovery that reaches kitchen tables across Britain, not one which has left working people worse off."

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