Over the long run, the income of the median (middle) UK household has
increased by about 1.6% per year on average after taking account of inflation.
So over a typical three year period real incomes would rise by about 5%.
However, new IFS research published today estimates that in the three years
from 2008 to 2011 real household incomes will in fact have fallen by 1.6%, or
£360 a year. So households are likely to be about 6% worse off than they
might have expected had incomes risen in the normal way.1
 

This represents the first time that incomes have fallen over a three-year
period since the three years from 1990 to 1993, and the biggest three year
drop in real living standards since 1980-83.
 

The overall fall in living standards results from a combination of:
lower employment;
lower interest on savings income;
lower real earnings and
tax and benefit changes.
 

The most important contributory factors are the failure of earnings to keep
pace with inflation and lower than usual interest received from savings.
On the other hand, changes to the direct tax and benefit system over this
period will actually have benefitted the median household. This reflects some
giveaways in 2009 and 2010, as well as the increase in the personal allowance
expected in April 2011.
 

But this pattern varies by income. Tax increases will leave the richest
households worse off. Higher income households are also more reliant on
income from savings interest and earnings, and hence are more affected than
those lower down the income distribution from the fall in interest rates..
Someone in the middle of the richest tenth in society in 2011 will be about
£2,200 less well-off (or 3.8%) than someone in that position in 2008.
Pensioners have been hit particularly hard by the reduction in the interest
rate they receive on their savings. They have also not benefited from a lot of
the targeted direct tax and benefit changes introduced by the previous
government.. As a result we expect median income among pensioners to have
fallen by 2.4% or £460 a year between 2008–09 and 2011–12. This compares
to falls of 1.1% or £230 a year for working-age households with children and
falls of 1.8% or £500 a year for working-age households without children.
 

This research was funded by the BBC and the ESRC Centre for the
Microeconomic analysis of Public Policy at the IFS. James Browne, the author
of the report, said:
 

‘We are used to the real purchasing power of our incomes increasing over
time. It seems likely that in the three years from 2008to 2011 real incomes
will have fallen. With real earnings growth slow, and more tax increases and
benefit cuts to come, household incomes are likely to remain stagnant for
some time to come. Household incomes will probably still be below their
2008 level in 2013. If so this will represent the biggest fall in incomes over a
five year period since 1972-1977’.

http://www.ifs.org.uk/pr/pr_210311.pdf