AVERAGE household incomes have fallen for the first time in almost 15 years, according to new government figures.

The middle classes were hardest hit, with people earning more than £27,000 suffering a 1 per cent fall in their incomes last year.

The disclosures will come as a blow to Labour as it prepares to place the economy at the centre of its election campaign.

A further blow to the Government’s economic track record came as a key high street spending survey dropped to its lowest level since last September.

The Tories last night seized on the figures from the Office for National Statistics, saying that the income drop was a direct result of the taxes Labour had introduced since 2001.

An analysis of the data by the independent Institute for Fiscal Studies (IFS) showed that the average household income after tax and benefits — £21,000 — fell by 0.2 per cent in real terms between 2002-03 and 2003-04 from £409 to £408 a week, or £52 in the year. The last time average incomes fell was in the early 1990s.

But the middle classes, whom Labour is desperate to court, were hardest hit between 2002/3 and 2003/4 by the tax changes. A single-earner couple on £40,000 with one child would have lost £117 per year — a loss of 0.4 per cent. A couple with two earners and two children on a combined income of £60,000 would have lost £841.25 a year — a loss of 1.9 per cent.

The IFS said that the drop was due to the 1 per cent increase in national insurance rates in Gordon Brown’s 2002 Budget and his decision to freeze personal allowances. But it also claimed that above- inflation increases in council tax had reduced average incomes by a further 0.3 per cent.

Andrew Shephard, an IFS research economist, said: “Without the two tax changes and the hike in council tax, average households would have been 0.9 per cent better off.”

The new figures will embarrass ministers today as they hold a pre-election Cabinet meeting at which the economy will be confirmed as the centrepiece of Labour’s campaign.

David Willetts, the Shadow Work and Pensions Secretary, said: “This is a devastating evaluation of what Labour have done to hard-working families. On average, they got poorer last year compared with the year before.”

Tony Blair is widely expected to announce on Monday that the election will be on May 5 and the first seven to ten days will be dominated by a campaign that focuses on Labour’s economic vision for Britain.

The Chancellor, who is back at the centre of Labour’s election effort, and Mr Blair will urge minsiters to exploit to the limit the gaffe by Howard Flight, the former deputy chairman of the Conservatives, suggesting that his party has hidden plans to cut spending.

The ONS figures also confirmed the Chancellor’s determination to redistribute wealth. The income of the poorest fifth of the population grew by 1 per cent between 2002-03 and 2004-05 while the income of the richest 5 per cent fell by 1 per cent.

“The incomes of poorer households were boosted by new and more generous tax credits, while the better-off were hit by rises in income tax, national insurance and council tax,” Mr Shephard said. “This redistributive package has nudged inequality lower, although the Government cannot yet claim that it is definitely on a downward trend.”

The IFS said that pensioner poverty fell slightly but suggested that Labour would miss one of its key child poverty targets.

The ONS figures showed there were 100,000 fewer children in poverty, after housing costs, in 2003-04 than in 2002-03. But the IFS said that to meet its target to cut child poverty by a quarter by 2004-05 Labour would have to ensure a further 500,000 children were lifted out of poverty next year.

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