Fall of 0.8% is biggest drop since 1977, says Office for National Statistics, as rising prices curb spending
Britons' take-home pay fell for the first time in three decades after prices rose faster than incomes last year, dealing a further blow to the prospect of an economic recovery.
Less than a week after George Osborne, the chancellor, downgraded the UK's growth forecasts for 2011 in his budget presentation, figures revealed that real household disposable income – the total income of Britain's working and unemployed populations after taxes and adjusted for inflation – dropped by 0.8% in 2010, according to the Office for National Statistics (ONS).
The figures also showed that the decline is likely to accelerate to about 2.0% this year and flatten in 2012 as the biggest public spending cuts since the second world war begin in earnest, according to Vicky Redwood, of research group Capital Economics.
"Rising commodity prices and the VAT increase mean inflation is high and outpacing normal pay growth, putting a real squeeze on real earnings," said Redwood. VAT increased by 2.5 percentage points to 17.5% in January 2010, rising again, to 20%, at the start of this year.
Last year's decline in real income is the first since 1981, when it fell by 0.2%, as the country reeled from the recession under Margaret Thatcher.
It is the biggest decline since 1977, when it fell by 2.2%, according to the ONS. In 2009, real income rose by 1.1%.
When challenged to defend his budget and record on the economy in front of MPs at the Treasury select committee, Osborne read out an extract from a letter from the OECD, the influential economic thinktank. "While this budget includes hard measures, we are convinced they are unavoidable in the short term to pave the way for a strong recovery," it said.
There was some better news for Osborne when the ONS revealed its final revision of fourth-quarter economic growth figures showing that GDP had contracted by 0.5%, slightly less than the 0.6% decline reported in the first revision.
It blamed December's arctic weather for the slump, saying that growth would have been flat if not for the cold snap.
However, the repercussions of rising inflation and stagnant wages were further underlined with the release of a separate report showing the first decline in grocery sales, in real terms, since July 2009. In the past month, food retailers have seen their collective annual growth rate dive by more than a third to 2.6%. Inflation is running at 4%, giving the first real-term decline for 18 months, and "demonstrating that shoppers are taking an increasingly gloomy view of 2011 and reining in their spending", according to Kantar Worldpanel.
Edward Garner, of Kantar, said "there are now clear indications that value for money is driving retailer performance" with cheap stores such as Aldi and Lidl surging ahead and freezer centres Iceland and Farm Foods "outperforming" the market.
Howard Archer, chief UK and European economist at IHS Global Insight, said: "I'm not surprised at all by these grocery figures, which carry on a general trend – an increasingly sorry tale across the retail sector.
"People are having their purchasing power squeezed by current inflation levels and muted wage growth, while concerns about the financial squeeze are kicking in and people are increasingly worried about their jobs. A lot of people can't afford to spend so much, while those that can are becoming more cautious. Given that consumer spending accounts for 65% of the economy, this is worrying," Archer added.
Earlier this month Richard Brasher, UK chief executive of Tesco, said consumers were struggling because the "inexorable rise of fuel prices", as well as other rising household costs, add up to a 5% increase in income tax for poorer families. Asda, Argos and Sainsbury's are among a host of other retailers to issue gloomy forecasts in recent weeks.
Meanwhile, further evidence of the income crunch came as Thomas Cook, the travel company, warned that Britain was faring badly in the holiday department.
"Cumulative books remain ahead in most markets, although the rate of booking intake has slowed noticeably in the UK as a result of continued economic uncertainty," said a spokesman for Europe's second biggest travel company.
The latest ONS data also showed that household savings stood at 5.4% at the end of 2010, compared with 5.5% three months earlier, a development interpreted by analysts as evidence that they were struggling to make ends meet.
Chuka Umunna, a member of theCommons Treasury select committee asked Osborne what he would do to try and help households reduce their debts. The chancellor defended himself, pointing to the cut in fuel duty, the freezing of council tax and the increase in income tax allowance.
Ghostly reminder
Government leaving youth on the shelf/This place, is coming like a ghost town/No job to be found in this country/Can't go on no more/The people getting angry
The song Ghost Town, may have given the Specials a No 1 hit the last time Britain's real household disposable income fell, in 1981. But by some measures we're in a deeper economic hole this time round. For a start, the collective decline in disposable income is far greater now – dropping by 0.8% in 2010, compared with just 0.2% in 1981. Furthermore, inflation may have been considerably higher back then – coming in at 11% in 1981, compared with 3.3% last year – but average earnings rose by 13%, against a 2.3% increase in 2010. In 1981, 2.6 million people were out of work, an unemployment rate of 9.6%. In 2010, 2.5 million were out of work, or 7.8% of the larger workforce.