The complaint that “Britain isn’t working” is a familiar one. It was heard during the 1930s and 1980s when unemployment exceeded three million people, and again during the austere early 2010s when it peaked at 2.7 million.
Today, the situation has superficially improved. Unemployment stands at just 4.4 per cent (1.56 million) – lower than it was throughout the four decades from 1975 to 2015. But as our business editor Will Dunn writes in this week’s cover story, a crisis of joblessness has been replaced by one of worklessness.
Over the past five years, the number of people out of work due to long-term sickness has increased by 714,000 to a record high of 2.8 million. Spending on health and disability benefits for working-age adults is projected to rise from £48.5bn in 2023-24 to £75.7bn in 2029-30 (£21.8bn more than the UK spent on defence last year).
The benefits system is “unsustainable, it’s indefensible and it is unfair – people feel that in their bones”, Keir Starmer declared when he addressed the Parliamentary Labour Party on 10 March, adding that “if you want to work, the government should support you, not stop you”. Mr Starmer is correct. But solving Britain’s worklessness crisis will first require truly understanding it.
The UK bears the unwanted distinction of being the only G7 country in which employment has not returned to its pre-pandemic level. Numerous explanations have been offered: the baleful legacy of Covid-19, the NHS backlog (the waiting list stands at 7.46 million) and long-term epidemics such as obesity.
But the issue is not simply that the UK is sicker than other countries. A recent report by the House of Lords Economic Affairs Committee stated it had “received no convincing evidence that the main driver of the rise in these [sickness and disability] benefits is deteriorating health or high NHS waiting lists”.
The problem is instead a system awash with perverse incentives. At present, a study by the Centre for Social Justice shows, a typical unemployed person will receive an annual income of around £12,005 (one of the least generous replacement rates in the OECD). By contrast, someone on incapacity benefits will receive £16,999, while someone also claiming the Personal Independence Payment will receive £23,899 – higher than the national minimum wage of £20,654. As a consequence, for some a life on benefits offers greater security than a life of work.
Reform is essential, but the government must not confuse this with crude austerity. An approach based purely on cutting as much as possible risks not only harming the vulnerable but costing more in the long run.
The previous Conservative government made precisely this mistake. In 2017, additional Universal Credit payments for those with a “limited capability for work” were abolished. The aim was to encourage full-time work, but the result was to incentivise longer-term sickness claims. Those who do enter employment, meanwhile, face an effective taper rate – a reduction in benefit payments as earnings increase – of 55 per cent (above the 45 per cent income tax rate paid by those earning £125,140 or more).
The answer, then, is not only making welfare less attractive, but making work more attractive. Policies announced by the government such as a higher minimum wage (the main rate will rise by 6.7 per cent next month) and stronger employment rights will help achieve this. But the risk remains that, faced with the need to increase defence spending, ministers will embrace deep welfare cuts as the most politically palatable option.
Rachel Reeves, the Chancellor, is right to seek to maintain fiscal discipline. Some Labour MPs urge her to emulate Germany’s “war Keynesianism”, but the UK’s national debt already stands at 95.3 per cent of GDP (compared to Germany’s 62.9 per cent). The markets have limited tolerance for more borrowing. Higher taxation – perhaps through a hypothecated “defence tax” – is a more plausible option.
What is certain is that welfare and public services alone cannot bear the cost of higher defence spending. The UK needs a social security system that supports those in need and makes work not merely tolerable but desirable. Rather than simply saving money, ministers must be guided by the imperative of saving lives.
[See also: Trump’s spell has been broken]
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This article appears in the 12 Mar 2025 issue of the New Statesman, Why Britain isn’t working