Britons are saving the smallest fraction of their income than at any time since 1960 as sharply higher tax bills, interest rates and living costs inflict growing pressure on their finances, it emerged yesterday.

Badly stretched households have resorted to aggressive cuts in what they set aside from pay packets in order to keep up their spending habits as falling disposable incomes strain the nation’s pockets, official figures revealed.

In news that highlighted the intense squeeze on spending power faced by families and individuals across the country, the figures showed that the “savings ratio”, the key measure of how much people save from incomes, tumbled to just 2.1 per cent in the first quarter.

The plunge in the savings gauge, which virtually halved from 3.9 per cent in the final three months of last year, drove it to its lowest level since the start of 1960, when Harold Macmillan was Prime Minister, and the Beatles and Elvis Presley topped the charts.

Calculations by Geoffrey Dicks, of Royal Bank of Scotland, revealed that the reality of the savings slump was probably still more severe.

After stripping out a notional boost to incomes from gains in the value of pensions funds, the adjusted savings ratio was in negative territory, at minus 0.8 per cent, for a second consecutive quarter in the first three months of the year.

This marked the first time that this has happened since the national spending spree of the 1988 Lawson boom.

The drastic decline in savings came as households endured a continuing drop in their real disposable incomes, after stripping out the rising cost of living. These fell in the first quarter by 0.3 per cent, on the heels of a 0.1 per cent drop in the previous three months. It was the first such back-to-back quarterly slide in incomes since the beginning of 1998, six months after Labour came to power.

Although the drop in disposable incomes in the final quarter of last year was revised to one of only 0.1 per cent, from the more severe fall of 0.7 per cent previously reported, they remained just 1.1 per cent higher over 2006 as a whole – still the weakest outcome for more than two decades.

Even in the face of this sharp squeeze on spending power, Britons carried on shopping, with consumer spending climbing by 0.5 per cent in the first quarter.

While that was down from 1.1 per cent in the previous three months, households were still forced to both cut spending and ramp up borrowing to pay bills and maintain lifestyles. In the first quarter, households borrowed £14.2 billion, more than in the whole of 2005, Mr Dicks noted.

More recent borrowing data out yesterday suggested that as they struggle with their finances, strapped households are perhaps finally being forced to curb spending as they pile up debt and savings are depleted.

But economists sounded warnings that, with other parts of the economy still in robust shape, the Bank of England was unlikely to be deterred from a likely further rise in interest rates next week. Other data yesterday confirmed that the economy expanded by a hefty 0.7 per cent in the first quarter, sustained by public spending and business investment underpinned by double-digit annual growth in corporate profits.

Payback time

Debt-laden consumers may finally be curbing their readiness to flex their plastic at the shops, Bank of England figures showed. After heavy borrowing earlier this year, borrowers paid back £238 million on credit cards last month, the weakest credit card lending since last August. Mortgage lending in May was also the weakest since February 2006, although approvals of new loans picked up.