© Alan Crowhurst/Getty ImagesInstitute for Fiscal Studies (IFS) says UK median income will fall while absolute poverty is forecast to rise. However, the government's newly announced Universal Credit scheme could reduce both absolute and relative poverty in the longer term.

In the next two years, the U.K. faces the largest drop in income in the last 35 years, according to a report by the economic think tank Institute for Fiscal Studies (IFS).

Median income is expected to fall by around 7 percent, in the period between 2009 - 2010 and 2012 - 2013, as absolute poverty is forecast to rise by 1.4 million.

The report says that the government's newly announced Universal Credit scheme will be able to reduce both absolute and relative poverty in the longer term, bringing just over 1 million out of poverty by 2020.

Around 600,000 children are expected to have dropped below the poverty line by the end of the current three-year period, according to the IFS report - the highest child poverty rates for over 10 years.

James Browne, one of the authors of the report, said in a statement, "The previous government significantly increased spending on benefits and tax credits for families with children, and child poverty fell by nearly a quarter between 1998 and 2009, but this was still not enough for the government to hit its child poverty targets.

"The Child Poverty Act imposes even more stringent targets in a much more constrained fiscal environment. Even if there were an immense increase in the resources made available, it is hard to see how child poverty could fall by enough to hit this supposedly legally binding target in just nine years."

Alison Garnham, chief executive of Child Poverty Action Group, said in a statement: "This devastating report leaves the government's child poverty and social mobility strategies in jeopardy. The government has to stop pretending you can fight poverty or improve life chances by making the poor poorer."

Barnardo's Chief Executive Anne Marie Carrie also responded to the report, saying in a statement, "The government must put in place a robust strategy for ending child poverty, with clear milestones and targets, to ensure that the poorest do not suffer disproportionately from the current public sector cuts."

Speaking on BBC Radio 4's Today program, Universities Minister David Willetts said, "The country is not as well off as we thought.

"There are things we can do. We've tried to hold down fuel duty, freezing council tax, [and] have increased the income tax allowance.

"We've tried to do the things that help, but you can't ignore the basic rules of economics that when you inherit a situation where the economy has shrunk by 7 percent there isn't the money there."