Approximately one quarter of the working-age population, aged 16 to 64, is currently unemployed. The most common reasons given for this are caring responsibilities and ill health.
Given their four-year mandate and strong majority, it would have been expected for Labour to have a long-term plan in place to assist those with illnesses to re-enter the workforce, even if only part-time. While this may have required upfront costs, it could have ultimately resulted in significant savings.
However, instead of investing in a comprehensive plan, Labour’s desire to avoid a repeat of the Liz Truss mini-budget led them to pursue large savings quickly. This ultimately caused more issues, resulting in the government making a dramatic U-turn to avoid a rebellion from Labour members.
This decision raises important questions not only about the government’s day-to-day management, but also about the overall effectiveness of their strategy to improve the country.
The government insisted that their changes to the welfare system, announced in the March Green Paper, were aimed at getting people back to work. The majority of the planned savings were to come from tightening eligibility for Personal Independence Payments (Pip), which are given to individuals with disabilities to cover extra costs, regardless of their employment status.
Independent experts questioned whether more of these savings should have been used to help those with health issues gradually return to work, such as through employer subsidies. This could have been a win-win situation, as it would have helped individuals find work and also filled job vacancies.
Labour rebels argued that the upfront cuts were simply a way to fill a budget gap caused by the Chancellor’s self-imposed borrowing rules. Their main criticism was that this was a rushed cost-cutting measure.
It is true that the Chancellor’s budget projections were thrown off by unexpected expenses, such as those resulting from US President Donald Trump’s tariffs. As a result, these cuts were made to bridge the gap in borrowing.
The welfare reform plan, which aimed to save £5bn a year by 2029-30, helped Chancellor Rachel Reeves meet her borrowing rules. However, when the Office for Budget Responsibility (OBR) stated that these changes would not raise enough money, Reeves announced additional welfare cuts on the day of the Spring Statement.
Insiders have revealed that the welfare reform plan was brought forward for this specific purpose. However, it was still not a comprehensive reform program designed to address the structural issue of increasing health-related benefit claims.
Former Conservative Welfare Secretary Iain Duncan Smith resigned almost ten years ago, stating that a similar plan to cut disability benefits was “indefensible.” He believes that the cuts should have been part of a larger effort to allocate resources to those most in need.
He argues that “top slicing” (extracting savings from the welfare budget without reform) never works. The main problem is that the current welfare structure is too rigid and does not accommodate a growing demographic of individuals who are capable of working to some extent.
This inflexibility unintentionally pushes individuals towards declaring complete unfitness for work, leading to total dependence on welfare, particularly universal credit health (UC Health), instead of facilitating a gradual return to employment.
For some experts, this is the main reason for the increase in health-related benefit claims. While the pandemic may have accelerated this trend, it began a decade ago.
The proportion of working-age individuals claiming incapacity benefit had dropped below 5% in 2015, but it is now at 7%. The pandemic has exacerbated this trend as mental health issues have increased and many claims have been approved without face-to-face meetings.
A former minister, who wished to remain anonymous, believes that the system has broken down. “The real issue is that people are learning how to manipulate the Pip questionnaire with help from internet sites. It is easy to answer the questions in a way that earns points,” he says.
He argues that the UK is “at the extreme of paying people for being disabled,” with individuals receiving money instead of necessary equipment, such as wheelchairs, as is the case in other countries.
For most types of mental health issues, in-kind support, such as therapy, would be more beneficial than cash transfers, he believes. However, some disability advocates argue that offering vouchers instead of cash payments and taking away individuals’ autonomy over spending is “insulting” and “dangerous.”
These pressures are evident in the compromise that was reached. The planned cuts to Pip payments will now only apply to new claimants starting in November of next year, sparing 370,000 current claimants out of the expected 800,000 who would have been 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 new four-point threshold for Pip payments will be developed in collaboration with disability charities.
It is likely that this “co-production” will result in more future claimants being able to retain these payments.
On universal credit, the government had planned to freeze the higher rate for existing health-related claimants, but these payments will now increase in line with inflation. For future claimants, the most severe cases will be exempt from the planned halving of payments, which would have resulted in an average loss of £3,000 per person.
However, these calculations do not take into account the £1bn that the government has brought forward to help those with disabilities and long-term health conditions find work as quickly as possible. Originally, this funding was not expected until 2029.
This change does support Labour’s argument that these changes are about reform rather than cost-cutting. However, it is still not a comprehensive, radical reform on the scale needed to address the social, fiscal, and economic crisis. The OBR has yet to provide their analysis.
The Keep Britain Working review, led by former John Lewis boss Sir Charlie Mayfield and commissioned by the government to examine the role of employers in health and disability, has not yet been released.
In the Netherlands, where a similar issue was addressed two decades ago, employers are responsible for the costs of helping individuals return to work for the first two years. In the UK, businesses are worried about the costs of taxes, wages, and employment rights policies. There is also a fundamental question about whether there are enough jobs available to support sick individuals in returning to the workforce.
The Institute for Fiscal Studies and Resolution Foundation think tanks have estimated that the government’s U-turn could cost £3bn, meaning that Chancellor Rachel Reeves will either have to increase taxes in the autumn budget or make cuts to other areas of spending if she is to meet her self-imposed spending rules.
Extending the freeze on the income tax threshold again seems like a plausible solution. There are still a few months until the budget, so the Treasury may be hoping for sustained economic growth and stable borrowing costs, which would help with the OBR’s analysis.
It is worth noting that the root cause of all of this was a rushed attempt to bridge the same budget gap that emerged in March.