Good afternoon. I’m Delphine Strauss, the FT’s economics correspondent, and while Peter is away I’m going to look at one of the hardest puzzles the government must solve if it wants to avoid raising taxes again — how to cut the UK’s £65bn bill for health-related benefits.
The rising cost of support for people with long-term health conditions — set to rise to a staggering £100bn by 2029-30 in cash terms on current projections — has become a huge source of pressure on the public finances for a government fighting to meet its fiscal rules.
But charities and welfare experts are increasingly worried that a drive to cut costs quickly will hit vulnerable people and destroy trust in the system — without ultimately achieving any more than previous failed reforms, which ended up costing far more than anticipated.
There are lots of competing explanations for the sharp increase in the number of working-age people receiving incapacity or disability benefits: NHS waiting lists, an ageing population, a crisis in mental health among young people.
But there is broad consensus that the design of the welfare system is part of the problem — in particular, the huge contrast between the tough benefits regime for the unemployed, and the greater support on offer to those assessed as unable to work or job-hunt on health grounds.
“The current system does not work. It does not work for anybody,” Alison McGovern, the employment minister, told a House of Lords committee in December — referring to both the way claims were assessed and the financial incentives built into the system.
Incapacity benefits in focus
There are two main health-related benefits available in the UK. Personal independence payments, generally known as disability benefits, are meant to help people who struggle with daily activities to cover the additional costs of living with their condition.
Ministers’ current focus, however, is on incapacity benefits — the additional means-tested support available to people whose health prevents them working. People who qualify for the highest level of support through a “work capability assessment” receive an additional £416.19 a month, roughly double the basic rate of universal credit, with no work search requirements.
It is not clear what the extra money is for, but it is often seen as tacit acknowledgment of how difficult it is to live for any length of time on the basic rate of universal credit — or to meet stringent requirements to spend 35 hours a week job hunting, and prove it to a “work coach”.
As Tom Pollard, head of social policy at the New Economics Foundation, points out, this binary system “really raises the stakes” for people on incapacity benefit who might feel ready to go back to work — but risk losing much of their income if they fail to hold the job down.
“It’s a massive gulf — if you would like to work, it puts your whole situation at risk,” agrees Henry Parkes, principal economist at the think-tank IPPR.
But consensus on the nature of the problem doesn’t make it easy to fix.
Ministers claim some 200,000 people with mental health conditions would be ready to work now if the right job or support was available, and if the fear of losing benefits was removed — based on survey data published by the Department of Work and Pensions this week.
Liz Kendall, the work and pensions secretary, has already launched a set of reforms aimed at improving the support on offer. Set out in a white paper entitled “Get Britain Working”, they include an overhaul of the UK’s network of Jobcentres, which are widely distrusted by jobseekers at present, and rarely used by employers. The idea is for work coaches to spend less time policing benefits claims and more time helping people find the right job.
But as Parkes notes, cultural transformation of this kind “rarely happens overnight” and ministers are under pressure to make swifter cost savings.
This is because cutbacks proposed by the previous Conservative government are still pencilled into the Office for Budget Responsibility’s fiscal forecasts.
Those changes would have made it much harder for people with mobility or mental health problems to qualify for incapacity benefits — saving the exchequer £1bn a year between 2026-27 and 2028-29, on the OBR’s forecasts, but bringing very few people into work.
Ministers could not press on with these changes yet even if they wanted to. A court ruling earlier this year found the consultation on the proposals was “misleading” and illegal, because it failed to make it clear that the main aim of the policy was to cut costs.
But chancellor Rachel Reeves needs the OBR to find savings on at least the same scale, as the worsening economic outlook erodes her margin of error against her fiscal rules.
She made it clear last week that “fundamental reform” of the welfare system was on the government’s agenda, saying, “that includes looking at areas that have been ducked for too long, like the rising cost of health and disability benefits”.
Green paper
Against that backdrop, Kendall is finalising a green paper to be published in the run-up to next month’s Spring Statement, setting out options for a fundamental reform of the system.
Campaigners think the right approach would be to “de-risk” the system, stepping up support to help people back to work and allowing them a trial period before tapering their benefits.
They argue that bigger reforms — such as a move to a single assessment process, scrapping the distinction between disability and incapacity benefits — could have “drastic consequences if mishandled” and would need lengthy consultation.
“Saving money in the short term is quite difficult,” says Louise Murphy, senior economist at the Resolution Foundation think-tank.
She and others warn that attempts to make quick savings — by narrowing eligibility for benefits, cutting their rate or introducing a duty for recipients to prepare for work — could backfire if they further undermined people’s trust in the system.
“The fundamental barrier to getting more of this group back into work is overcoming the distrust and fear people experience,” Pollard says. “There’s lots more you could do to foster voluntary engagement.”
“We get that we need to improve the public finances,” says Dan Weir, at the Money and Mental Health Policy Institute. “We don’t think this should be at the expense of . . . vulnerable people who are already struggling.”
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Britain in numbers
When Rachel Reeves threw her support behind Heathrow’s third runway, the Oxford Cambridge Arc, and a host of other big infrastructure projects last week, the reaction from a lot of observers was a baffled question: who is going to build them?
Mark Farmer, an influential voice in the construction sector, set out to answer this in a review of the industry’s training system published last week by the Department for Education.
The report charts the nature of the problem in familiar detail. The sector’s workforce is shrinking as it ages. It has become more reliant on overseas recruitment that will face tighter restrictions. And while the industry has become better at attracting new entrants, far too many of them drop out.
Farmer’s proposals to address all this include a striking recommendation — when it comes to training, he thinks the industry needs more regulation, not less, to improve poor productivity.
“We cannot just assume we are going to recruit our way out of this crisis by setting ever more unattainable new entrant targets . . . we need to be able to do more with the resources we already have,” he says.
Setting a higher bar for the skills workers need to have accredited simply to be allowed on site would drive up quality and productivity, he adds, arguing for a system of digital skills “passports” workers could take with them from one job to the next.
The requirements could not be foisted on industry overnight, but the aim would still be to create a clear barrier to entry, he says. “It needs to be across the board, not just about safety . . . you don’t get on to the site without the competence to do the job.”
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