The average annual income for families in Britain has fallen by ₤1,300 (us$2,500), says a report published Wednesday. According to the Times, the report shows “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.”

According to the report’s author, Charlie Elphicke,

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

Perhaps the most disturbing aspect of the report, though, is that it highlights how unprepared Britain is for an economic downturn. According to the Times:

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

Although the government may put off tax increases for now, it only delays the day of reckoning. In the long run it will actually worsen public finances by increasing the national debt burden and upping debt payments.

Britain has been living beyond its means both nationally and individually, and as the Times indicates, the financial stability of the average Briton has rapidly eroded. Trends indicate there is much worse to come. It is not just rising taxes and housing costs that are ripping pocketbooks, it is escalating food, fuel and public transportation costs as well.

But perhaps most ominous of all is the fact that the deteriorating financial condition of British households occurred during a period of general economic growth. It used to be that family finances improved during economic expansions and shrunk only during slowdowns.

With recession looming and the good times over, things may be about to get much more difficult for the average taxpayer. “Squeezed” will probably be an understatement.