Britons are £128 a year worse off on average than they were in 2008, according to a report that reveals household incomes were hit harder in the wake of the financial crash than official figures have revealed.

The New Economics Foundation said figures used to calculate GDP, which is adjusted to take account of rising prices, failed to include essential items that affected the cost of living over the last 10 years.

The report argues that tax increases pushed through by former chancellor George Osborne as part of the coalition government’s austerity measures were excluded from the calculation of GDP.

It adds that the impact of the falling pound, especially since the Brexit vote, has been underestimated in GDP calculations, while rising housing costs were also excluded.

Real living standards graph

Alfie Stirling, the foundation’s chief economist, said official GDP figures showed that average incomes per head of population had recovered in 2015 to reach their pre-crash level. But this was only possible due to the limited scope of the inflation measure used by the Office for National Statistics.

“Official statistics suggest average livings standards returned to 2008 levels in 2015. But when calculated to reflect the true costs of living, our analysis has shown that a combination of the depth of financial crisis, austerity and the vote to leave the EU has meant that average living standards are in fact still yet to recover pre-recessions levels,” he said.

He added that a fresh measure taking into account these extra costs would show that incomes were hit harder in the recession that followed the crash due to VAT rises and were slower to recover over the following 10 years as the slide in sterling made imports more expensive.

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“By this measure, and on average, the UK population is still poorer than it was more than a decade ago – something that would be entirely unprecedented in the modern records,” he said.

Recent economic data has shown the UK struggling to cope with Brexit uncertainty and a global slowdown in trade that has dented manufacturing growth. Annual Wage rises have remained strong at 3.8% but the economy is expected to only narrowly avoid a recession over the coming months as the 31 October Brexit deadline nears.

The ONS publishes annual figures for GDP per head, which divides the UK’s total income by the population. The figure is then adjusted by the “GDP deflator” to estimate whether individuals are better off each year after inflation is taken into account.

Many economists have become disenchanted with GDP as a measure of economic success and switched to using GDP per head, which has grown more slowly after taking into account the UK’s rapidly expanding population.

But Stirling said the measure of GDP per head also used the GDP deflator, meaning that “the official data doesn’t appear to bear out the lived experience”.

The shadow chancellor, John McDonnell, said the report showed that price rises had eaten into wages, restricting the growth in living standards and keeping people worse off than they were in 2008.

“It is clear from this report what most people already knew, that nearly a decade of austerity has created an economy of depressed incomes and living standards, low pay, long hours, insecure work, with low investment, low productivity and low growth.”

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The TUC’s head of economics, Kate Bell, said the depression that followed the 2008 financial crash was unprecedented.

“Working families in the midst of the longest wage squeeze for 200 years know the economy isn’t working for them. We need a new deal for workers so they get a fairer share of the wealth they create,” she said.

Earlier this year the TUC published a report showing that the average worker lost £11,800 in real earnings in the 10 years from 2008. It argued that cost of living increases and benefit cuts had a bigger impact on average wages than the Treasury claimed.

The ONS uses the consumer prices index, which is a broader measure of inflation than the GDP deflator, to calculate the impact of rising prices on weekly wages. Earlier this month, figures showed that the average workers total pay packet was worth £502 per week in the three months to July, still below a peak of £525 in February 2008.

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However, weekly pay only relates to full-time employees and is not an internationally comparable figure, unlike GDP per head, which is used by the World Bank, the International Monetary Fund and the OECD to judge an economy’s success in raising living standards.

ONS head of GDP, Rob Kent-Smith, said: “While GDP is an internationally understood and well-used measure of the size of the economy, some people would argue that it is not a good metric for measuring social welfare.

“At ONS we have been developing and publishing other measures of well-being which better capture changes in people’s economic circumstances.”

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Last month, the OECD said GDP per head was flawed and restated that its own version, real household income per capita, was more closely linked to every day household costs.



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