How to stop the fruitless search for welfare savings

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If you are a new government desperately searching for money, then there can be few more inviting targets than the British welfare system. The only points in the UK’s history that welfare spending has been higher than in recent years have been times of severe economic hardship — the recessions of the early 1980s and 1990s, the immediate aftermath of the financial crisis and the lockdown-induced recession of 2020. Nor does anyone who has seen the system up close think that they are looking at something that could be called “generous”, or even, to be blunt, adequate.

Ripe for reform then? It might not prove quite so simple to cut back — nor to find sustainable savings.

The purpose of a good welfare system is to protect people from destitution and help them into some form of employment, education or training. But a decade and a half of attempts at reform have managed to deliver something that largely underperforms compared to 2007 in terms of meeting these goals — while costing more as a proportion of GDP. 

Even before the UK’s economic circumstances worsened or Donald Trump’s second-term pivot away from Nato necessitated a spending increase on defence, Liz Kendall, the UK’s welfare secretary, had a warning for Keir Starmer’s cabinet. Without major changes, her department’s spending would “eat up” the budgets of her colleagues. There are real opportunities to spend less money and get better results but only if she avoids the mistakes of her predecessors in the role.  

Part of the story of how and why the UK’s welfare system has become an expensive failure is that successive governments prioritised securing headline cuts in expenditure over changing the way it works. One aspect of that continuing failure is the least discussed and single biggest line item in the welfare system — the state pension.

The triple lock, which protects pension increases against inflation and rises in average earnings (with a floor of 2.5 per cent a year) is the cheapest solution to a two-fold problem: the UK state pension is lower than those of comparable countries and the demise of defined benefit pension schemes means the state taking on a heavier share of keeping pensioners out of poverty.

Through using this mechanism to gradually increase the value of the pension over time, ministers in the last government avoided any single, forced, significant increase. But now the mechanism risks becoming an ever-growing liability, while becoming politically harder and harder to exit from. 

The amount someone receives if they lose their job in the UK is incredibly low — the most that someone claiming Jobseeker’s Allowance can claim is £4,700 a year. Compared to 2010 or 2015, the number of people claiming has not risen significantly. The “claimant count” is higher because universal credit counts individuals, rather than households as under the old system.

The increase in the benefits bill is driven instead by rising numbers of people claiming health-related benefits, many of them young. And that is the product in part of a simple fact: that the upper limit that someone receives on health-related benefits may be still far from generous but it is much more than the unemployment benefit.

The incentives, and the consequences, are obvious. As Kendall herself has noted, the obsession with using the stick (tighter eligibility and better checks) as the only way to deter overclaiming has succeeded. But the behaviour change has shunted people on to a claimant list that they are much more likely never to leave. 

It’s true that some of the increase in people claiming health-related benefits is a result of genuine need. And raising the state pension age (which makes sense given most of us are living and working longer) has created a new demand: those two or three years below the new state pension age claiming due to physical ailments.

But there is little reason to believe that the increase in working age people now classed as long-term sick is the product of a health problem uniquely afflicting the UK (in other developed economies, health-related benefit levels have fallen or remained flat) rather than the product of a poorly designed system. 

There is an obvious and sustainable future saving here: moving people to a benefit that allows them to seek — or even to be in — part-time work without losing out, plus finding courses for young people rather than overseeing a growing number of “Neet” under-25s (those not in education, employment or training). In the long run, this can reduce the UK’s rising out-of-work benefits bill.

An additional problem is that the fiscal watchdog, the Office for Budget Responsibility, tends to believe only in savings secured by cutting entitlements — even though in practice that approach has been tested to destruction.

The current mess is itself the product of a desire to prioritise headline savings over designing a well-thought-through benefit system. This has delivered neither result.

Labour has a real opportunity to build a cheaper and better benefits system by the end of this decade. It is unlikely to reach that point if it ends up being boxed into the same hunt for illusory savings that has characterised the recent past. But a better outcome requires both Kendall’s department and the Treasury to come to terms with an awkward fact: this approach to one of the UK’s most intractable problems has not worked. Let’s not demand more of the same.

stephen.bush@ft.com