Established last year by the Labour Government, the GIS paid for 8,500 graduates to be matched with businesses signed up with universities and colleges.
More than a quarter were offered full-time jobs at the end of their internships or set up their own companies.
The decision by Business Secretary Vince Cable comes despite a campaign launched by Deputy Prime Minister Nick Clegg to increase paid internship opportunities for young people.
Supporting a further 5,000 internship placements would cost the Government about £8 million at a time when graduate unemployment stands at its highest level since 1992.
John Walker, chair of the Federation of Small Businesses, which campaigned for the government to reinvest in the scheme said: “The investment needed to keep the scheme going would be more than outweighed by reduced benefits payments and the increased tax-take from those that gain employment as a result of the internship.”
Describing young people as the future of the British economy, he said that as youth unemployment approached the one million mark it was vital that “the government invested in this vital sector so we don’t see a generation of youngsters consigned to the dole queue.”
In the present financial climate, only large corporations can afford to offer paid work experience to students, and rising student debt levels owing to increasing fees and the cost of living mean that fewer graduates can afford to commit to unpaid internships with smaller companies.
The government decision also coincides with the publication of Intern Nation: How to Earn Nothing and Learn Little in the Brave New Economy, which looks at the continuing problem of nepotism in gaining access to the political and business world, with experience and contacts increasingly determining career prospects, while also cataloguing the abuse of free internships.
The TUC, along with youth campaign groups and trade unions, is looking at ways to clamp down on unpaid internships, and is currently developing a national campaign on the issue.
