HAVING promised last week to return to the subject “If Britain is doing so well, how come it doesn’t feel like it?”, first aired here on February 27, I had not expected a gift from the Institute for Fiscal Studies.

The IFS, as many will have seen, produced figures — based on government statistics — showing that average real household incomes, after taxes and benefits, fell 0.2% in 2003-4 compared with a year earlier. This was the first annual drop since 1992 and, as the Treasury’s reaction has made clear, about as welcome to Gordon Brown as another invitation from Tony Blair to dine at Granita.

The figures, which showed in graphic terms the impact of Labour’s post-election tax hike during this parliament, were also a reminder of the probable consequences of further increases (denied by the chancellor) during the next.

To be fair to the government, not everything in the figures was bad. Median, as opposed to mean, incomes rose 0.5% during the year in question. The difference between the two, as every schoolboy knows, is that the mean is simply the arithmetic average of all incomes, while the median is in the middle of the income distribution, with an equal number of households above and below.

The IFS exercise also shows the Blair government in a relatively good light compared with its predecessor, led by John Major (1990-97). Under Labour, mean after-tax real household incomes have grown by an average of 2.5% a year, compared with just 0.8% under Major. The recession of the early 1990s took its toll. But mean incomes grew faster, 2.9% a year, under Margaret Thatcher (1979-90).

How does this fit in with our story of an economy that does not feel as good as it should after 50 quarters of growth and with unemployment at its lowest for three decades? And how does it square with the latest evidence of retailing woes and a cooling housing market? There were two elements to the political calculation underlying Labour’s tax hit highlighted by the IFS. The hit, in the form of the higher National Insurance contributions announced in 2002 but implemented in 2003, was judged by Labour to be saleable as a price worth paying for extra spending on the NHS (although the money went into the general public spending pot). It was also thought it would be forgotten, as a one-off, by 2005.

Whether or not a permanent tax hike should ever be viewed as a one-off hit is debatable, but even after its maximum impact had passed, another force was taking over. The Bank of England, having cut interest rates to a modern low of just 3.5% in July 2003, began to hike them in November of that year, and continued to do so until last August.

These things take time to feed through, but a large part of the explanation for the absence of any genuine feelgood factor is the cumulative impact of this and other tax hikes and higher interest rates, albeit from a low base. Tied to this, however, are some longer-term “downers”, some of which leave people with a feeling of mere disquiet, and some of which create outright misery. Feedback from readers, for which I am grateful, has confirmed which of these are most important.

Pensions/financial insecurity

Britain’s occupational pensions were the jewel in the crown in 1997, and the envy of Europe. Eight years later, after Brown’s tax raid, the bear market and the apparent revelation to actuaries that people were living longer, and the spell has been broken. Trust, most obviously squandered in the case of Equitable Life and companies that have failed and left beneficiaries penniless, has been dissipated, as has access to many final-salary schemes. Without trust, pensions are nothing.

Tie that to the general loss of public confidence in even the most solid names in financial services, a legacy of mis-selling and inept management of funds, and it is hardly surprising people do not look forward with confidence.

Borrowing fit to bust

The jury is still out on whether public borrowing will fall in line with the Treasury’s projections. It clearly has already significantly overshot and is making people understandably nervous about their future tax bills. We should not be surprised by this; the great classical economist David Ricardo predicted such an effect. It is also true, however, that there is a lot of nervousness about private borrowing. That £1 trillion (£1,073 billion to be precise) of consumer debt has its counterpart at the micro level. Everybody, it seems, knows somebody who is about to be made bankrupt by credit-card or mortgage bills. That overstates it a great deal, but it explains why many think this long upturn has been built on sand.

Explore Economics

• Pre-Budget Report 2008

• Budget 2009

• World Economic Forum

• The Times MPC

Times Recommends

• C&G axed - 1,660 jobs to be lost
• UK house prices rise 1.1% as buyers return
• Mixed reaction to US banks repaying bailouts