AVERAGE families have seen their annual income after tax and housing costs drop by £1,300 over the past four years, a report will say tomorrow.

It will show that the rising tax burden under Gordon Brown and the high cost of mortgages and council tax have left Britain’s middle earners severely squeezed.

The report, from the Centre for Policy Studies, a centre-right think tank, entitled Why Do We Feel So Broke?, warns that we are unlikely to find any respite, with tax and household spending continuing to rise faster than earnings.

The situation will probably get worse because of the credit crisis and further increases in tax as Alistair Darling, the chancellor, tries to get to grips with the government’s ballooning budget deficit.

“The combination of stagnating earnings, sharp increases in tax, excessive debt, rising effective interest rates and growing household running costs means that British households are more vulnerable to, and less prepared for, any economic downturn,” Charlie Elphicke, the report’s author, said.

“The government’s increases in taxation and the availability until recently of easy credit is a potentially toxic mixture.”

Calculations in the report, based on official figures, show that the average family saw its income before tax rise from £29,671 in 2003 to £34,200 last year, an increase of more than £4,500, or 15%.

When direct taxes are deducted, the rise is cut to £3,400, or 11%. But the biggest impact on family finances is on household costs, with the average annual mortgage bill up from £3,778 to £7,500.

On top of this, the average council tax bill has risen from £1,069 to £1,321; water, gas and electricity charges are up from £854 to £1,312; and other household costs have increased from £1,332 to £1,648.

The increases in these costs, nearly £4,800 for the average family, is greater than the rise in after-tax income over the period 2003-7, producing a £1,300 reduction in genuine disposable income.

The report also brings home how much worse Labour’s second period in office has been than the first. Over the period 1997 to 2002, average family earnings after tax and household costs rose by more than 28%. Since 2002 they have fallen by 6%.

“Average-earning households have been hit particularly hard,” Elphicke said. “Taxes have been increasing at a greater rate than earnings for some years. This trend looks set to continue.”

Two other leading think tanks, the Institute for Fiscal Studies (IFS) and the National Institute of Economic and Social Research (NIESR), warned last week that taxes would need to rise by between £8 billion and £9 billion if the government is to meet its own fiscal rules. Darling will unveil his budget on March 12.

“Because of the government’s current political difficulties, we do not expect to see a significant fiscal tightening in this year’s budget,” said Robert Chote, director of the IFS. “The government is likely to argue that further bad news on the public finances will be only temporary and that fiscal policy should support monetary policy as the economy slows this year.

“However, recent experience suggests that ‘temporary’ problems in the financial sector can have a bigger and more persistent effect on the public finances than the Treasury initially expects.”

The NIESR, in its analysis, said: “The state of the public finances after a period of strong economic growth is a worry. Taxes would have to rise by £9 billion a year over the period 2008-9 to 2010-11 to meet the ‘golden rule’.”

Both groups think that while Darling will put off significant tax hikes for now, the tax burden will eventually have to rise.

There is no let-up for families in other costs either. While the Bank of England is expected to trim its interest rate from 5.5% to 5.25% this week, the banks have been quietly increasing their loan rates, depriving many people of any benefit.

On Friday ScottishPower, which has customers across Britain, announced a rise of 15% in its gas bills and 14% in electricity tariffs, following other utility firms that announced similar price hikes last month.