British households have suffered the biggest hit to their finances since the oil crisis of the mid-1970s as the coronavirus pandemic threatens to inflict severe financial hardship across the country.

Against a backdrop of rising job losses four months into the crisis, the Resolution Foundation thinktank said the average household in Britain had suffered a 4.5% drop in income in the month of May, compared with their average monthly income level in the financial year ending March 2020, before the crisis struck.

Despite the government ramping up spending to cushion the economic blow, with 9.4m jobs furloughed on its coronavirus job retention scheme and £9bn of fresh funding for the benefits system, it said income levels for the typical family had crashed back down to 2006-07 levels in a matter of months.

The thinktank said the hit to incomes was bigger than the one families suffered during the 2008 financial crisis. The income of typical working-age households fell by 2.7% as a result of the banking crash little more than a decade ago.

The last time households suffered a bigger immediate hit was in 1974-75, according to the report, when rampant inflation unleashed by the 1973 oil crisis crushed the value of average household incomes – with a drop of 5.1% in a single year.

The Resolution Foundation said ministers providing emergency funds to cushion the economic fallout had prevented a worse outcome, with the study finding that the poorest fifth of households had seen no immediate hit to their income at all during the first phase of the crisis. Without action, the poorest families would have seen their incomes collapse by at least 8%, it said.

The report comes as concerns rise over the threat of a jobs crisis and soaring levels of unemployment this winter, as the government begins to dial down its economic response to the pandemic. The Treasury’s furlough scheme is due to be cut back from the start of next month, before it is closed completely at the end of October.

Last week, the government’s economics forecaster, the Office for Budget Responsibility, warned at least 10% and up to 20% of the 9.4m jobs protected by the scheme could be made redundant when it is closed. The OBR warned unemployment was on track to more than double to levels unseen since the 1980s before Christmas.

Frances O’Grady, the general secretary of the TUC, said the Resolution Foundation report showed continued support was required. “Working people must not pay the price of the pandemic. The government should step in with much greater targeted support to save jobs in hard-hit sectors like retail, manufacturing and aviation,” she said. “The more people we keep in work, the faster we can get ourselves out of recession and get living standards rising again.”

In the report examining the annual state of household finances in Britain, the Resolution Foundation said the financial impact from Covid-19 comes after a decade of stalling improvements for living standards in Britain. After one of the weakest economic recoveries on record following the 2008 financial crisis, workers’ average pay after accounting for inflation only returned to its pre-crisis peak in December, following 12 years of sluggish growth.

It said the decade of lacklustre gains meant the poorest 10th of households in Britain had incomes no higher on the eve of the coronavirus pandemic than in the early 2000s.

Adam Corlett, a senior economist at the Resolution Foundation, said: “The government’s unprecedented policy response has played a critical role so far in protecting millions of households, and particularly the poorest, from the worst of the crisis. But for many the threat of further income falls looms large.”

A spokesman for the government said it had implemented an ambitious package of support for those affected by Covid-19. “This builds on action already taken to support low paid families such as by raising the living wage, increasing the tax-free allowance and uplifting benefits by inflation.”