Despite the political pain, Labour’s announcements on welfare come nowhere near close enough to solving the crisis of rising health-related benefits. Even after planned reforms, health-related benefits will still rise 5.3% per year throughout the 2020s, compared to the economy’s growth rate of 1.6%.
Labour can be commended for correctly identifying the problem, which is the structure and incentives of the benefits system. Liz Kendall noted that ‘the increase in disability benefits is double the rate of increasing prevalence of working age disability in the country’. That’s because of the ‘perverse financial incentives… which actively encourage people into welfare dependency’.
There were some promising changes, such as reducing the difference between what someone can get on standard Universal Credit (UC) and UC with the health element, and making personal independence payment (PIP) assessments more stringent. But overall, the plans are forecast to cut health-related welfare spending by just £4.1 billion by 2029/30. That means spending is still set to reach £97.7bn in 2029/30, up from £66.3bn in 2023/24.
The Government’s plans are subject to significant uncertainty: we don’t know the impacts of removing the Work Capability Assessment or the impact of its £1bn employment programme. Perhaps most importantly, we don’t know how the Government’s employment rights package will reduce the incentive to take on new workers, but it will probably work against trying to get people into work.
Despite this uncertainty, even in the best-case scenario, Labour’s reforms are not going to change much. In a briefing published for the Centre for Policy Studies today, I argue there are four big areas being neglected by the Government in their welfare plans.
First, the number of people receiving PIP will continue to rise, even with reforms making it tougher to get the payment. Labour’s reforms will cut the number claiming PIP by 400,000 as of 2029/30. However, the OBR still estimates there will be 4.65 million people claiming some form of PIP by that point, up from 3.7 million in January 2025. We don’t know the impact of the Government’s review of the PIP assessment, which has also been announced. This review needs to deal with the highly subjective nature of the assessment, which relies heavily on an assessor’s judgement and claimant’s personal experience.
One area which needs to be looked at is rising mental health claims. There are 1.4m getting PIP for psychiatric disorders and 400,000 of these for mixed anxiety and depressive disorders. While many of these cases will be genuine, its unlikely that the actual prevalence of these conditions has increased so rapidly.
Second, too many young people are left out of the Government’s plans. Labour have announced that they are restricting access to the health element of UC for those aged 18-21, while offering the Youth Guarantee to ensure they can find support and employment. We think this can go further, as the number of people under the age of 30 on UC health has been rising rapidly – there are now over 350,000 under 30’s on long term incapacity benefits, up from around 210,000 in 2019.
Third, the number of children getting the Disability Living Allowance has grown enormously, with the increase driven entirely by learning difficulties, behavioural disorders and hyperkinetic syndrome. The OBR expects the cost of these benefits to rise from £3.7bn to £7bn, which is a faster rate of growth than any other type of benefit.
Finally, Labour have cancelled the previous government’s reforms to the Work Capability Assessment. These reforms were expected to save around £1.6bn per year by the end of the Parliament. These reforms meant that, instead of signing people off as long-term sick, they were placed on a pathway where they were expected to find work. While not transformative, they would have at least made some impact, and there is no good reason why these should not have been continued.
Labour deserve credit for realising our welfare problem is driven by our welfare system itself, and the perverse incentives it creates. But the solutions are too small and barely save any money. We need bigger, bolder solutions that rethink the fundamentals of the welfare state. The rising bill represents a major opportunity cost – an extra £30bn in five years’ time that could cut taxes, pay off debt and boost defence spending. But the cost also represents lost lives. The welfare reforms should focus on unleashing the energy and dynamism of those who are trapped by the current system. More money for the Government and more people in work – that sounds like a win-win.
Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.
CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.
