Figures calculated by the Institute for Financial Studies (IFS) for the Family and Parenting Institute (FPI), an independent charity, show that families with children will be on average £1,250 worse off each year by 2015/16. The predicted drop equates to an average fall in household income of 4.2% per year over the next five years.
Households without children are predicted to see a smaller fall in household income of £215 per year, equivalent to 0.9%.
In an effort to help reduce the size of the deficit the coalition government have already increased VAT to 20% reduced housing benefits and tax credits, frozen child benefit and changed the rate at which many benefits rise to be in line with CPI (Consumer Prices Index) rather than RPI (Retail Prices Index). It is these changes, along with a general fall in incomes, which will cause the drop in household incomes.
The greater fall in incomes for households with children is likely to lead to accusations that families are taking an unfair share of the burden.
The FPI agree, with Katherine Rake of the charity saying: “This research confirms that families with children are shouldering a disproportionate burden.”
She continued: “This disparity is largely driven by a package of benefit reforms which have affected families with children.”
“As a result of the changes being introduced between January 2011 and April 2014 families are set to lose more than pensioner households and working-age households without children.”
The government however pointed out that it is taking steps such as cutting fuel duty and increasing personal allowances to help relieve the pressure on families.
A government statement said: “The prime minister acknowledged that families are facing difficult times so the government has taken practical steps to help them, cutting fuel duty, freezing council tax and cutting income tax for millions.”
The statement continued: “The chancellor also confirmed working-age benefits will go up by 5.2% in April and increased the child element of the Child Tax Credit in line with inflation.”
The government also emphasised the proposed new Universal Credit scheme, which will be phased in from October 2013.
Whilst both the IFS and FPI acknowledged that the new Universal Credit scheme will help to protect the income of the poorest families, it is clear that for most families the changes to the tax and benefit system will leave them worse off in years to come.
The FPI figures show that families with three or more children, families with children under the age of five and people living in rented accommodation will be the hardest hit.
As a result of the government’s changes the FPI argue that a further half a million children will be living in absolute poverty.
The following table shows just which families will be hardest hit over the years to come.
Source – Institute for Fiscal Studies/Family & Parenting Institute
Financial experts also point out that older generations are seeing their household income fall.
Despite changes introduced by the coalition government to increase the State Pension in line with the higher of earnings, inflation or 2.5%, many pensioners have a proportion of their income fixed. High inflation over recent months has had a negative effect on fixed incomes, permanently eroding the buying power.
In addition many pensioners take an income from their savings, which have been hit by all time low interest rate. Not only has income from savings fallen in monetary terms, but what interest has been received is unlikely to have kept pace with inflation; for much of 2011 even the best savings interest rates did not beat inflation.
Would be pensioners, nearing retirement, have also been hit by lower Annuity rates which have resulted from falling gilt yields. An Annuity rates comparison over the last six months shows that Annuity rates have fallen by around 11%, leaving people retiring now with permanently lower incomes.
Whilst cuts to benefits and allowances might hurt family finances, the older generations are clearly also affected by the continued economic downturn, high inflation, low interest rates and falling Annuity rates.
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