Why the social pain of welfare reform overshadows any economic gain

The UK government is calling it^[1] the “biggest shakeup to the welfare system in a generation” – prompted by what the prime minister described as the “devastating” cost of sickness and disability benefits. Planned reforms^[2] to cut those costs are designed to save £5 billion a year by 2030, from a welfare budget that will reach £70 billion on current projections.

Similar warnings about unsustainable welfare payments can be heard in other countries struggling with the rising costs of social security, state pensions and subsidised healthcare.

Germany’s new chancellor thinks^[3] his country’s welfare system is wasteful and discourages full-time work. France, meanwhile, has been preparing for social security to absorb half the spending cuts it says it needs in 2025^[4].

All of these social security funds collect contributions from the people enrolled in them, and pay out to those who retire or cannot work. Technically, some of them can reach a point of bankruptcy, when payouts become unaffordable – unless governments reduce entitlements or raise taxes.

In some cases, their solvency can be calculated using projections of future claims, employment levels and demographic trends. On present predictions, for example, the US social security fund will “go broke” between 2033 and 2035^[5]. The Trump administration, while denying it will cut benefits, is promising to trim the bill with a clampdown^[6] on “fraud and waste”.

The UK is slightly different because it does not put social security into a separate fund – so its sustainability depends on the overall state of public finance. But the Office for Budget Responsibility (OBR) projects an unsustainable acceleration of public debt growth from the late 2030s^[7] as the costs of welfare, public services and debt interest lift public spending towards 60% of GDP.

As welfare accounts for almost a third of public spending^[8] in 2024-5, it is inevitably a target when savings are needed. Put simply, if more working-age people take jobs and stay in them for longer, there will be extra funds available for those who genuinely cannot work or need additional income.

So, underlying the government’s stated motive of providing opportunities for people with sickness or disabilities is the Treasury’s agenda – of boosting economic growth while borrowing and spending less.

After all, current fiscal rules and growth prospects left the government little room for additional spending^[9] after last autumn’s budget. And now it wants to raise defence spending^[10] to 2.6% of GDP by 2027, so that £5 billion saving would certainly be useful.

The projected savings come at a social cost, however. There is evidence, for example, of a genuine worsening of young people’s (especially mental) health^[11], which could be further damaged by a forced move into inappropriate employment^[12].

And personal independence payment (Pip) applications (which the government says have “skyrocketed” among the young) are already designed to help claimants find work. The proportion who do so has stayed steady at around one in six^[13].

A rapid rise in benefit claims from younger people is one motivation for the reform plans. But they are likely to boost Pip claims^[14] by making it the basis of universal credit eligibility.

And although ministers argue that an unusually high proportion of working-age people in Britain are not in employment, the participation rate of 16- to 64-year-olds (74.9%) is the same as it was in 2017^[16], and comparable to other industrial countries^[17].

Past efforts to move more people into work by restricting benefits have often hurt those^[18] who lose them, without expanding the available workforce in areas that employers most need.

It’s true that present arrangements leave some claimants in a “poverty trap”^[19], where they are effectively penalised for getting a job or promotion, because the loss of means-tested benefits exceeds any gain in income.

The Department for Work and Pensions proposes tackling this with the right to try a job before eligibility is re-assessed. But Pip, designed to cover the extra costs of disability or chronic ill-health, is one of the few non-means-tested benefits that helps avoid these traps.

The argument that working-age participation must rise to support the growing number of retired people reflects the long-running inability of UK governments to get UK labour productivity growing again. OBR projections assume that hourly productivity growth will average 1.1% from 2025 to 2029^[20], but it was zero in 2023-24. And there is no sign of any pick-up in the vital investment or innovation^[21] that might actually deliver this.

Output per UK worker has dropped since 2022^[22], falling back to 2019 levels. And UK productivity growth since 2010 has been significantly slower^[23] than in the US, Germany or France.

The UK government is looking keenly at new technology, especially AI, to streamline its own service delivery so as to reduce public sector costs. But current fiscal problems stem from the slow growth of private sector productivity. Compelling more people to work – especially when in fragile health – could erode this even further.

References

1. ^{^} calling it (www.gov.uk)
2. ^{^} Planned reforms (theconversation.com)
3. ^{^} thinks (www.dw.com)
4. ^{^} it needs in 2025 (www.lemonde.fr)
5. ^{^} between 2033 and 2035 (www.ssa.gov)
6. ^{^} a clampdown (apnews.com)
7. ^{^} from the late 2030s (obr.uk)
8. ^{^} of public spending (www.bbc.com)
9. ^{^} additional spending (ifs.org.uk)
10. ^{^} raise defence spending (www.gov.uk)
11. ^{^} health (www.health.org.uk)
12. ^{^} inappropriate employment (theconversation.com)
13. ^{^} one in six (obr.uk)
14. ^{^} boost Pip claims (ifs.org.uk)
15. ^{^} AmbrosiniV/Shutterstock (www.shutterstock.com)
16. ^{^} same as it was in 2017 (www.ons.gov.uk)
17. ^{^} other industrial countries (www.oecd.org)
18. ^{^} hurt those (theconversation.com)
19. ^{^} “poverty trap” (neweconomics.org)
20. ^{^} 2025 to 2029 (obr.uk)
21. ^{^} investment or innovation (theconversation.com)
22. ^{^} dropped since 2022 (www.ons.gov.uk)
23. ^{^} significantly slower (www.productivity.ac.uk)