01 November 2017

A new report from the Institute of Fiscal Studies (IFS) has revealed that seven years of austerity has not accomplished its aim of reducing public spending.

In fact, the proportion of national income diverted to public spending is now at around the same level it was under the Labour government of 2008, the report showed.

"As national income fell between 2007–08 and 2009–10, public spending increased sharply as a share of national income while government revenues fell. Since then, most of the increase in spending has been unwound, such that it in 2017–18 it was 0.5% of national income greater than it was in 2007–08 (6.1% less 5.6%). This is an important fact. Seven years of cuts have served merely to return public spending to its pre-crisis level as a share of national income," the report said.

The IFS highlighted the growing problem of poor economic productivity and the deleterious effect this has on growth, warning: "Any substantial downgrade to productivity forecasts would easily dwarf the other factors affecting borrowing and lead to the medium-term outlook being worse than in March."

The report concluded that "given all the current pressures and uncertainties – and the policy action that these might require – it is perhaps time to admit that a firm commitment to running a budget surplus from the mid-2020s onwards is no longer sensible."

The Institute of Employment Rights recommends that governments adopt a 'virtuous circle' approach of raising wages in order to raise consumer demand and thus effect economic growth. Our experts warn that continuing with a framework of labour law that encourages employers to offer low-waged and low-skilled jobs leads to a growing proportion of the population that is dependent on the state subsidising their poor wages with housing benefits and other welfare support, such as through Universal Credit. Indeed, the Social Mobility Commission recently found that most people on low incomes are unable to find sustainable work at a higher wage.

Furthermore, we argue that the low-wage, low-skill sector is damaging economic productivity. Many experts from across the political spectrum have now warned that in order to raise the productivity of the workforce, employers must be encouraged to invest in training and research and development. We argue that the best way to achieve this aim is to reinstate sectoral collective bargaining, through which employers' associations and trade unions agree minimum labour standards to be applied across entire industries, covering wages and conditions, but also training and apprenticeships.

This model discourages employers from competing on a race to the bottom on employment rights and instead to invest in the quality of their products and services, including through upskilling their staff.

Read more about our proposals in our Manifesto for Labour Law