• Fall in spending power as bad as 1870s depression
• OBR attacked for bullish economic forecasts
Base rates are expected to remain at 0.5% when the Bank of England's interest rate setting committee meets this week amid predictions that real incomes will fall for the fourth year in a row – the first time that has happened since the 1870s.
Roger Bootle, Deloitte's economic adviser, says in his latest quarterly review that an expected rise in inflation to above 5% this year, tax increases and public sector job losses will lead to an "all but certain" fall in household incomes.
A fall in real incomes by 2% was certain this year, he said – the equivalent of £780 a year per household. Incomes would not start rising again until the end of next year and were unlikely to get back to their 2007 peak before 2015, ensuring Britain would register four successive drops in spending power for the first time since the first "great depression" in the 1870s.
"An additional reason to be pessimistic about the outlook for household incomes is the deepening fiscal squeeze," Bootle said. "Admittedly, there have recently been some not insignificant tax giveaways, including the rise in the personal income tax allowance. However, the net effect of this year's direct tax changes will still be to reduce household incomes.
"Real incomes do not provide the definitive picture as to the health of households' finances. But taking a broader look at households' finances arguably leaves the position looking even worse. I think that this year will see falling real earnings, falling real house prices and rising unemployment."
Raising interest rates, as some hawks on the Bank's monetary policy committee have urged, would risk even tougher conditions.
Bootle criticised the government's Office for Budget Responsibility for being too optimistic about the ability of households to run down their savings to support their spending when "the saving rate is historically low and, in the medium-term at least, needs to rise". The OBR has remained among the more bullish forecasters despite figures showing the economy stalled over the last six months.
A string of poor economic figures has undermined arguments for a rise to tackle inflation. A weak bounce back in GDP growth during the first quarter, plummeting consumer confidence and persistently high unemployment will persuade the monetary policy committee to resist calls for a rate rise on Thursday, economists said. The freeze on rates – which has lasted for more than two years – is now expected to last until the autumn or even next year as government spending cuts trigger a steep rise in public sector job losses and low economic growth. The chancellor, George Osborne, is known to welcome any delays in raising rates as a counter-balance to the austerity measures he has championed.
MPC member Andrew Sentance, who stands down at the end of the month, will argue for a 0.5 percentage point increase in the base rate to cap inflationary rises should he maintain his stance from previous meetings and more recently a string of hard-hitting speeches.
The consumer prices index measure of inflation rose to 4.4% in February before falling back to 4% in March. Producer prices, which indicate the impact of higher import costs on manufacturers and other industries, have reached 14.3%.
Sentance, along with Martin Weale and Bank chief economist Spencer Dale, have argued for a rise in recent months to bring inflation back to the Bank's target of 2%, but faced determined opposition from a majority of committee members including Bank governor Mervyn King.
Meanwhile, a report from Lloyds Banking Group said a survey of 200 businesses revealed the first increase in business confidence this year. It found a majority of businesses were confident the economy would rebound, the highest margin since May 2009.
"This is the first time this year that British business confidence, as measured by this survey, has gone up," it said. "54% of businesses said they were more optimistic than three months ago, up from 45% in March, compared to a quarter of businesses that were less optimistic.
Trevor Williams, Lloyds' chief economist, said it was too early to say if the upward trend could be sustained and followed a weak set of survey results for the first three months.
"The survey is signalling a disappointingly weak first half, which suggests a higher probability of BoE base rate hike later in the year," he said.