Average income back to pre-recession levels

But the recovery in living standards that began in 2011–12 has been much slower than after the three previous recessions, with median income growing by less than 2% between 2011–12 and 2014–15.

These are among the main findings of a new IFS Election Briefing Note on living standards published today, funded by the Nuffield Foundation.

Thanks to an improving labour market and falling inflation, IFS said real median household income grew by 1.1% in 2014–15, returning it to around its pre-recession (2007–08) level.

Real household incomes continued to grow slowly during the recession of 2008 and 2009, in part due to temporary fiscal stimulus measures. Median income then fell by 4.0% from peak in 2009–10 to trough in 2011–12.

It is almost certain that incomes would have fallen significantly under any government according to IFS which said it would therefore be misleading to attribute all trends in living standards before May 2010 to Labour and all trends since then to the coalition.

Falls in income have been larger for higher-income households according to IFS. This is largely because real earnings fell significantly after the recession, while social security benefits were initially largely protected. Since 2012–13, middle-income households have done better than low- and high-income households, in line with the distributional impact of recent tax and benefit changes.

But low-income households have faced higher inflation. This is mostly due to changes in the period up to and including 2009–10. Low-income households were hit harder by rising food and energy prices, and benefited less from falling mortgage interest rates. When this is taken into account, changes in real incomes between 2007–08 and 2014–15 look similar across most of the distribution.

“After large falls, and a historically slow recovery, average household income is now back to around its pre-crisis level,” said Andrew Hood, a research economist at IFS and an author of the report.

“However, the young have done much worse than the old, those on higher incomes somewhat worse than those on lower incomes, and those with children better than those without.”

Robert Joyce, a senior research economist at IFS and fellow author of the report, added: “The key reason living standards have recovered so slowly has been weak earnings growth.

“In the long run, policies that boost productivity, and so increase real earnings, are likely to have a bigger impact on living standards than changes in tax and benefit rates.”