Britain has been warned that its austerity programme is likely to be self-defeating in a UN-backed report that says the policies adopted by many advanced economies since the financial crisis are leading to a downward economic spiral.
Fiscal austerity combined with efforts to make labour markets more competitive have backfired because they have left households with too little disposable income to generate the domestic demand that will get economies moving again, according to the UN Conference on Trade and Development (Unctad)
The report notes that wages as a percentage of gross domestic product are contracting in many advanced economies, with Britain among the nations showing the most stark decline. While UK wages accounted for 70.6 per cent of GDP in 1975, that had fallen to 62.6 per cent by 2010, the largest drop of any advanced economy except the US.
“The overall conclusion is that the world is stuck,” said Heiner Flassback, head of Unctad’s division on globalisation and development strategies.
The report comes amid a growing wave of support, including from much of the UK business community, for some increase in investment spending by governments to help boost demand.
Mr Flassback noted that although the UK appears to be gaining employment even in the face of austerity, much of it is either self-employment or part-time work which may not deliver sufficient income to allow household consumption to grow.
“The issue is the growing split between earning from labour and earnings from capital,” Mr Flassback said, adding that nations need to adopt wages policies that guarantee take-home pay rises in line with productivity.
The report says austerity programmes such as Britain’s reinforce the growing income inequality among industrialised nations which has been gaining pace for the past 30 years.
“A fundamental policy reorientation is needed, recognising that healthy and inclusive growth will require a stable expansion of consumption, and investment in productive capacity, based on favourable income expectations of the working population and positive demand expectations of entrepreneurs,” the Unctad report said.