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Approximately one-quarter of the working-age population, encompassing individuals between 16 and 64, are currently unemployed. Caring responsibilities and health issues are the predominant factors cited by those who express a desire to work.
Given a four-year mandate and a substantial majority, the Labour government might have been anticipated to invest in a long-term strategy aimed at facilitating the reintegration of individuals with health challenges into the workforce, potentially on a part-time basis. While requiring initial investment, such an approach could have yielded significant long-term savings.
Instead, driven by a determination to avoid a repetition of the fiscal instability seen with the previous administration, the government pursued rapid savings measures. This strategy ultimately proved problematic, precipitating a significant policy reversal to avert a widespread internal rebellion.
This situation raises critical questions, not only regarding the day-to-day management of government affairs but also concerning the overall trajectory of the administration’s national renewal strategy.
The government has consistently asserted that its proposed “welfare reform” initiatives, outlined in the March Green Paper, are intended to facilitate the return of individuals to employment.
The majority of anticipated savings were projected to stem from stricter eligibility criteria for Personal Independence Payments (PIP), which are allocated to support individuals facing additional costs associated with disabilities, irrespective of their employment status.
Independent analysts have questioned whether a greater proportion of the savings should have been redirected to assist individuals with health issues in their gradual reintegration into the workforce, perhaps through part-time opportunities.
Such support could encompass potential employer subsidies, particularly to incentivize the hiring of younger individuals, enabling them to contribute through taxes rather than relying on long-term benefits. This approach could simultaneously address labor shortages, representing a mutually beneficial outcome.
Dissenting voices within the Labour Party argued that the initial cuts were primarily intended to address budgetary shortfalls, driven by the Chancellor’s self-imposed borrowing restrictions. A central criticism was that this constituted an emergency cost-cutting exercise.
It is true that the Chancellor’s budgetary calculations were impacted by increased borrowing costs, partly attributable to external economic factors. These cuts were implemented to compensate for this budgetary gap.
The welfare reform plan, designed to achieve £5 billion in annual savings by 2029-30, was instrumental in enabling Chancellor Rachel Reeves to meet her “non-negotiable” borrowing targets.
Indeed, when the Office for Budget Responsibility (OBR), responsible for monitoring government spending plans, indicated that the proposed measures would not generate sufficient revenue, Reeves announced further welfare cuts during the Spring Statement.
The primary objective was to secure funds to address the projected budgetary deficit.
Sources indicate that the welfare reform plan was expedited for this precise reason. However, it did not constitute a comprehensive welfare reform program designed to address the structural challenge of escalating health-related benefit claims.
The former Conservative Welfare Secretary, Iain Duncan Smith, resigned from his position nearly a decade ago, deeming a similar proposal to reduce disability benefits “indefensible.”
He maintains that such cuts should be integrated into “a wider process” aimed at identifying the most effective means of allocating resources to those in greatest need.
“Top slicing never works,” he stated, referring to strategies that extract savings from the welfare budget without corresponding reform.
At its core, the perceived issue lies in the current welfare structure’s binary nature, which fails to adequately accommodate a growing segment of the population capable of engaging in at least some form of employment.
This inflexibility, characterized by ministers as a “hard boundary,” inadvertently encourages individuals to declare themselves entirely unfit for work, potentially leading to complete dependence on welfare programs, particularly Universal Credit Health (UC Health), rather than facilitating a gradual return to employment.
For some leading experts, this constitutes the primary driver behind the rise in health-related welfare claims. While the pandemic may have accelerated this trend, it originated approximately a decade ago.
The proportion of the working-age population claiming incapacity benefits had fallen below 5% in 2015; it currently stands at 7%.
The pandemic period exacerbated this increase due to heightened health concerns and the streamlined approval of claims without in-person assessments. These claims also increasingly pertained to mental health issues.
One former minister, who requested anonymity, stated that the system has effectively broken down.
“The real trouble is people are learning to game the PIP questionnaire with help from internet sites,” he says. “It’s pretty straightforward to answer the questions in a way that gets the points.”
As he puts it, the UK is “at the extreme of paying people for being disabled” with people getting money rather than equipment such as wheelchairs as occurs in other countries.
For most kinds of mental ill health, in kind support, such as therapies, would make more sense than cash transfers, he argues.
But some disability campaigners have said that being offered vouchers instead of cash payments and thereby removing people’s automony over spending, is “an insult” and “dangerous”.
These pressures can be seen in the nature of the compromise reached.
The planned cuts to Pip payments will now only apply to new claimants from November next year, sparing 370,000 current claimants out of the 800,000 expected to be affected by the changes.
Dame Meg Hillier, Labour MP and chair of the Commons Treasury committee, along with other rebels, have also pointed out that the application of the new four-point threshold for Pip payments will be designed together with disability charities.
It is a fair assumption that this so called “co-production” may enable more future claimants to retain this money.
On universal credit, the government had planned to freeze the higher rate for existing health-related claimants but the payments will now rise in line with inflation. And for future claimants of universal credit, the most severe cases will be spared from a planned halving of the payments, worth an average of £3,000 per person.
However, these calculations don’t take into account the effects of £1bn the government has pulled forward to spend to help those with disabilities and long-term health conditions find work as swiftly as possible. This originally wasn’t due to come in until 2029.
This change does help Labour’s argument that the changes are about reform rather than cost cutting. But this is still not fully fledged radical reform on the scale that is needed to tackle a social, fiscal and economic crisis. The OBR has not yet done the numbers.
The Keep Britain Working review, led by former John Lewis boss Sir Charlie Mayfield, which was commissioned by the government to look into the role of employers in health and disability, has not yet been reported.
In the Netherlands, where a similar challenge was tackled two decades ago, their system makes employers responsible for the costs of helping people back into work for the first two years.
Here, businesses are concerned about the costs of tax, wages and employment rights policies. And there is already a fundamental question about whether the jobs are out there to support sick workers back into the workforce.
The Institute for Fiscal Studies and Resolution Foundation think tanks have estimated the government’s U-turn could cost £3bn, meaning Chancellor Rachel Reeves will either have to increase taxes in the autumn budget or cut spending elsewhere if she is to meet her self-imposed spending rules.
Extending the income tax threshold freeze again, seems a plausible plan There are still a few months to go, so the Treasury might hope that growth is sustained and that borrowing costs settle, helping with the OBR numbers.
It will not be lost on anyone that the precise cause of all this, however, was a hasty effort to try to bridge this same Budget rule maths gap that emerged in March.
Significant questions arise about just how stability and credibility-enhancing it really is to tweak fiscal plans every six months to hit Budget targets that change due to market conditions, with changes that cannot be ultimately enacted.
The idea floated by the International Monetary Fund that these Budget adjustments are only really needed once a year must seem quite attractive today.
And then there are bigger questions left hanging.
Is Britain really fundamentally sicker than it was a decade ago, and if it is, does society want to continue current levels of support? If the best medicine really is work, as some suggest, then can employers cope, and will there be enough jobs?
Or was it the system itself – previous welfare cuts – that caused the ramp up in claims in recent years, requiring a more thought-through type of reform? Should support for disability designed to help with the specific costs of physical challenges be required at similar levels by those with depression or anxiety?
Dare this government make further changes to welfare? And, in pursuing narrow Budget credibility, has it lost more political credibility without actually being able to pass its plans into law?
The government is not just boxed in. It seems to have created one of those magician’s tricks where they handcuff themselves behind their backs in a locked box – only they lack the escape skills of a Houdini or Blaine.
There will be relief that the markets are calm for now, with sterling and stock markets at multi-year highs. But an effort to close a Budget gap, has ended up with perhaps even more fundamental questions about how and if the government can get things done.
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