UK Poor Pinched Hardest as George Osborne's Welfare Cuts Bite

Britain's poor are feeling the worst of the income squeeze, and will continue to do so over the next couple of years, as the grip relaxes on the well-off.

At the outbreak of the recession and during the subsequent economic malaise, the poorest had been protected by a benefits safety net, while those living in well-off households were initially stung by suddenly falling incomes.

However, as welfare cuts take hold it is now the poorest who will feel the tightest squeeze until at least 2016, bringing income inequality back to pre-financial crisis levels.

"If the Office for Budget Responsibility's (OBR) macroeconomic forecasts are correct, then most of the falls in real incomes associated with the recession have now happened for middle-and-higher income groups," said Robert Joyce, senior research economist at the Institute for Fiscal Studies (IFS), which compiled the research.

"But much of the pain for lower-income groups is occurring now, or still to come, because these groups are the most affected by the on-going cuts to benefits and tax credits.

"Overall, we expect the period of recession followed by austerity to leave income inequality in 2015-16 about the same, or slightly lower, than in 2007-08."

The IFS said that medium-term falls in income will be spread evenly across all groups. The bottom group of household incomes will have dropped by 3.4% in real terms between 2007/08 and 2015/16, compared to 5.4% in the median income group, and 5.5% in the best off households.

"If anything, incomes will have fallen slightly less towards the bottom than the top," said the IFS report.

UK Chancellor George Osborne has slashed billions off of Britain's welfare bill in his austerity drive to eliminate the structural deficit in public finances.

This has seen a cap on benefit payment increases of 1%, well below stick inflation, which has been above the government's 2% target since the end of 2009.

Housing benefit has also been chopped and the introduction of the so-called "bedroom tax" - a reduction in the welfare payment to those who have spare rooms - is hitting families across the country.

There are 4.3m working and claiming welfare in the UK against around 1.5m job seeker's allowance claimants from those who are unemployed.

Real wages have fallen to a level similar to a decade ago as they continue to be outpaced by price rises. Pay growth in February was just 1%, its slowest rate since records began in 2001. Inflation is at 2.4%.

Osborne said he has no more welfare cuts planned under his austerity programme, with the burden now falling solely on Whitehall departments.