Family incomes to fall by average of £1,250

by Simon Ward on 04 January 2012  |  15 comments
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A new study forecasts that families will see their incomes drop significantly by 2015-16 due to benefit cut and tax increases.

A new study produced by the Institute for Fiscal Studies (IFS) for the Family and Parenting Institute (FPI) predicts a big drop in family incomes as a result of the Government’s spending cuts and tax rises.

The study says that the average family faces a drop in their household income of 4.2% by 2015-16. Families with two children will lose an average of £1,250 a year. This compares to a loss of income of 0.9%, or £215, for households without children.

And families with three children will lose 6.8% of their income by 2015-16.

The biggest losses for most families will occur during this tax year as cuts in benefits and increases in tax kick in. The cuts include the three-year freeze in the basic and 30-hour elements of the Working Tax Credit, an increase in the rate at which tax credits are withdrawn as income rises and the withdrawal of the family element of the Child Tax Credit from £40,000 rather than £50,000.

The tax rises include an increase in National Insurance contributions and the increase in VAT to 20%.

Young families hard hit

The study says these will particularly affect families with younger children, due to the restriction of the Sure Start Maternity Grant to the first child and the abolition of the baby element of the Child Tax Credit. There is also the more obvious point that families with older children are less likely to use childcare and so will not lose out from the reduction of the childcare element of the Working Tax Credit.

These measures, the study argues, provide less of an incentive for people with children to work.

But it forecasts that smaller families with two children or less, particularly those who own their own home, will see their incomes rise from 2013-14. They claim this is due to these families being on the whole richer and the effect of interest rates rising growing the value of this group’s savings.

Conversely, larger families are likely to face a continued drop in income, as the amount of benefits a family can receive will be capped.

However, the study acknowledges the introduction of the Universal Credit system of benefits from April 2014 will help many poorer families.

The Government responded to the study by saying: "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."

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