FAMILY incomes are set to fall by £2500 in the next three years as austerity measures take hold and Britain enters its "lost decade", economists warned last night.

The Institute for Fiscal Studies calculated on the back of Chancellor George Osborne's grim autumn statement that by 2016 living standards would be where they were in 2006, meaning that the massive squeeze on households will have wound back more than a decade of rising wealth.

Paul Johnson, the think-tank's director, said he was "running out of superlatives" to describe the scale of the problems.

He estimated that median household incomes would drop by a "whopping" 7.4% in real terms between 2009/10 and 2012/13 – the equivalent of £48 a week for a couple with two children. The average was expected to be lower in 2015/16 than it was in 2002/03.

By then, disposable income per capita would still be less than 2006 levels. The UK's previous worst decade on that measure saw growth of 14%.

Mr Johnson highlighted how quickly the country's position had deteriorated since the Budget in March, when there appeared to be a "fair bit of headroom" for the Chancellor to achieve his target of eliminating the deficit by 2015.

To deal with an extra £111 billion of borrowing by 2016, Mr Osborne had pencilled in two more years of unspecified "substantial spending cuts" amounting to £15bn.

"That will extend to six years the period for which total spending will have been cut year on year," Mr Johnson said.

"One begins to run out of superlatives for describing quite how unprecedented that is. Certainly there has been no period like it in the UK in the last 60 years."

The UK Government is now aiming to cut its expenditure by 16.2% in real terms over the period.

Earlier in the Commons, David Cameron was forced to defend the Coalition's economic strategy after Ed Miliband insisted soaring borrowing and low growth showed its plan had failed.

The Labour leader said Mr Osborne's "miserable" package designed to kick-start the economy had sliced £1bn from tax credits, costing a family on the minimum wage a week-and-a-half's pay each year.

Figures from the independent Office for Budget Responsibility (OBR) showed child poverty would increase by 100,000 and unemployment hit 2.8 million as a result of the Government's decisions, he said.

"You refuse to change course and you are making working families pay the price," the Labour leader told Mr Osborne.

However, the Prime Minister insisted the Coalition would "take the country through this storm" while Labour's policies would destroy market credibility and lead to rising interest rates.

"We are being tested by these difficult economic times," declared Mr Cameron, adding: "We will meet that test by getting on top of our debt, getting on top of our deficit."

OBR figures showed that by the end of the Parliament in 2015 there would be half a million more people in jobs and 90,000 fewer people on the claimant count than when the Lib-Con Coalition was elected, said Mr Cameron.

In Brussels for talks with EU counterparts on the eurozone crisis, the Chancellor explained the Government's decision to cut spending and raise taxes had helped Britain avoid the problems seen in heavily-indebted countries such as Greece and Italy. Yet he warned a collapse in the single currency area could spill over and cause recession in the UK.

"If the eurozone goes into recession, into a deep recession, then I'm afraid Britain will find it difficult to avoid a recession itself," Mr Osborne said.

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