What went wrong with the UK’s welfare system?

Sir Keir Starmer has vowed to slash spending on Britain’s “broken” and “indefensible” health-related welfare system, which is costing the government £65bn a year and is on track to hit £100bn by 2030.

The drivers behind the sharp rise in incapacity and disability benefits in recent years are complex and sometimes counterintuitive. Experts have urged the government to act with caution to avoid the unintended consequences that have beset previous attempts at reform.

“Rising disability benefit spending does not mean that welfare spending is out-of-control,” said Ben Geiger, a professor in social science and health at King’s College London. But, he added, “It’s staggering that despite all of the cuts of the past decade, welfare spending in 2024 is greater than in 2007”.

Most policy specialists agree that the rise in claims for incapacity and disability benefit can be attributed to three main causes: financial incentives pushing people to seek higher levels of benefits payments, a rise in the number of people with mental health conditions since the pandemic, and inadequate support and incentives to get people who are able to work into employment. 

Big cuts to welfare spending have become a central ambition for the Labour government because of the worsening fiscal outlook facing chancellor Rachel Reeves ahead of her Spring Statement on March 26. She is also under pressure to free up more cash for defence spending.

But backbench Labour MPs and cabinet ministers are threatening to rebel against some of the more drastic proposals to restrict disability benefits.

Data suggests that the UK is an outlier when it comes to the sharp rise in people claiming health-related benefits, with almost all comparable countries having recorded a fall since the pandemic.

About 4mn 16 to 64 year-olds — one in 10 — now claim either disability or incapacity benefits, up from 2.8mn in 2019, according to the Institute for Fiscal Studies.

More than half of that rise stems from an increase in claims relating to mental health or behavioural conditions; 44 per cent of all claimants cite mental health as their primary condition.

There is growing evidence that mental health conditions are on the rise. Data from NHS England shows the number of people in contact with mental health services increased by almost two-fifths in the five years to 2023-24.

Experts point out that claimants often have multiple conditions: four-fifths of people recorded as having a mental health issue in a Work Capability Assessment also reported a physical health issue, according to the Joseph Rowntree Foundation, a charity.

Another underlying change is demographic. About a fifth of the increase in recent years can be explained by the rising state pension age and an ageing population, increasing the number of sick and unwell people who fall into the “working age” category.

Still, experts agree that these factors alone do not account for the extent of the rise — there are also likely to be perverse incentives at play.

In 2023 the standard rate of unemployment benefits for a single adult reached a 40-year low in real terms, according to an official briefing.

According to the JRF, a single adult needs at least £120 per week to cover essentials such as food, utilities, vital household items and travel, excluding rent. But the basic rate of universal credit provides only £85 per week.

Most out-of-work benefits also require claimants to prove they are actively seeking work, with sanctions if they miss meetings or fail to prove they are job hunting.

Geiger from KCL notes that people are “often terrified of falling into destitution” and scared about the stress of regular official checks. This drives many to seek the higher rate of benefits which are paid without conditions.

There is little evidence that the process has become more lenient: the share of claimants being awarded Personal Independence Payments after initial assessment was 52 per cent in 2019-20 and 54 per cent in 2023-24. 

But experts say the system disincentivises people from finding work. “If you take steps towards work, that will be held against you,” said Ayla Ozmen, director of policy and campaigns at welfare charity Z2K.

“While in principle people shouldn’t be penalised, in practice they are,” she said, noting that roughly 90 per cent of claimants Z2K dealt with said they were afraid of looking for work because of the risk of losing their health-related benefits.

There has also been a sharp drop-off in the number of case reassessments since the pandemic, reducing the government’s ability to identify people whose condition has improved.

Reassessments are the biggest driver of people coming off benefits. Louise Murphy, a senior economist at the Resolution Foundation, said there had been a lack of concerted thinking about how to help claimants of the most generous benefits into work.

The Learning and Work Foundation, a research group, has suggested introducing a “benefit passport” that would allow claimants to automatically return to their previous benefit status if they left work within six months.

It also called for an increase in the current work allowance — which permits incapacity benefit claimants to do some work without having their benefits withdrawn — from eight hours to 16 hours per week.

Starmer has made clear that he intends to significantly reduce spending on health-related benefits, aiming to save some £5bn a year by the end of the parliament, with measures expected to focus principally on PIP.

Several policy specialists have warned against drastic changes to eligibility, noting that they can create distorted incentives in other areas of the system and often result in fewer savings than originally expected.

When the Tory-Liberal Democrat coalition government announced the move from the Disability Living Allowance to PIP in 2012, it claimed it would generate about £1.4bn in savings by the end of the parliament. In fact the move only saved £100mn according to calculations by the Office for Budget Responsibility.

Many argue that one way to improve the current system would be to rebalance the difference between the basic rate of universal credit and the higher levels of incapacity benefits — but this would not generate big savings.

One cost-saving option would be to freeze PIP so it does not rise in line with inflation, a move that former Conservative chancellor George Osborne believed was a step too far. Another would be to impose tougher eligibility criteria, to exclude some of the cases deemed to be less severe, including some mental health conditions. If the caseload were cut by 12 per cent, or 620,000 claimants, it would generate £5bn in savings by 2030.

“Saving as much as this government wants to from the benefit system will be really difficult,” said Murphy. “Limiting eligibility means you concentrate large losses among a fixed group of people. That’s a high risk thing to do.”