How to cut Britain’s rising welfare bill

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Britain’s spending on welfare is growing inexorably. The Office for Budget Responsibility has estimated that the country’s total expenditure on benefits will increase by more than 25 per cent to £378bn by 2030. This is driven by rising pension payments and surging spending on working-age health-related benefits, which are set to rise from around 1.7 per cent of UK GDP to 2.2 per cent by the end of the decade. The expanding outlays are, in part, an inevitable consequence of an ageing population, as well as modern ailments linked to obesity and mental health. But the country’s flawed welfare system also adds unnecessarily to the tab.

Britain’s benefit payments have been fiddled with by consecutive governments. Past munificence has been hard to row back on without political damage, and attempts to make cuts have often ended up raising expenses and eroding the effectiveness of the system. What remains is an inefficient set-up that, rather than acting as a safety net, can become a trap. That makes it unsustainable. As it is, the government is already struggling to meet its fiscal rules and will face an even tougher task given Prime Minister Sir Keir Starmer’s commitment to raising defence spending.

The government is set to outline plans for an overhaul of the health and disability benefits system later this month. These include incapacity payments given to those unable to work and personal independence payments for those with health conditions or disabilities regardless of their working status.

What improvements can be made? First, the government needs to recalibrate the support on offer. For instance, an individual out of work due to severe ill health can receive twice as much as someone simply unemployed. This disparity creates a distorted incentive to be categorised as sick and unable to work, and needs fixing.

As for PIPs, hasty changes to make it harder to qualify, which the government is reportedly mulling, risks widespread pain. Better to ensure entitlements are graded according to the additional costs individuals actually face due to their illness. Payments are mostly scored on what people cannot do, rather than what they can, leaving them open to gaming the system. Addressing this also raises the possibility of streamlining, by merging incapacity benefits into PIPs.

Second, further effort must go into getting people back into work and off health benefits. Fewer than 1 per cent of those receiving the highest incapacity benefit move into work each month, according to the Resolution Foundation. The proportion of people staying on PIP payments for longer has also risen over time. Overall, reassessments need to be more frequent to capture changes in circumstance, with a greater emphasis on medical expertise and support for individuals to find employment opportunities. This would require putting some money back into the welfare system for staffing. Raising the number of people who leave the benefits system could, however, save billions in the long run.

Beyond health and disability benefits there are other avenues for savings. The government should reform the UK’s generous “triple lock” on state pensions, which guarantees payments rise annually by the higher of total pay growth, inflation, or 2.5 per cent. This is not sustainable or a fair deal for workers. The Institute for Fiscal Studies has estimated that up to £40bn could be saved up to 2050 if the mechanism was linked, more sensibly, only to earnings growth.

The government should also recognise that some solutions lie outside the welfare system. Demand for housing benefit is driven by the lack of affordable housing. Rising health-related payments emanate from growing cases of mental illness and chronic disease. That requires improvements to health and social care. Making savings from the welfare system is not easy. It requires political will, attention to detail and a holistic approach. But the temptation for quick cuts — by significantly slashing entitlements or raising eligibility criteria — will not make the long-term bill disappear.