The major question thrown up by Labour's benefits plans

In the next 24 hours, and in the two weeks leading up to the spring budget, the government will focus on the shortcomings of the welfare system, pointing out that it has failed to effectively serve the public, the economy, and taxpayers. The government is attempting to address this issue, but this move, which clashes with much of Labour's ideology, has already triggered internal backlash, potentially escalating to the ministerial level, and will also spark protests.

The government is making two key judgments, which are closely related. First, the nation cannot afford the surge in health-related welfare spending and claims in recent years, particularly those related to mental illness. Simultaneously, the government will emphasize that employment is the best medicine, using this as the basis for reform.

The government believes that the health welfare system, initially established to address work-related injuries, is no longer suitable for the post-pandemic service economy labor market. Consequently, significant changes to Personal Independence Payment (PIP) are likely, aimed at reducing eligibility for the highest level of allowance, especially for working-age individuals with mental illnesses. Furthermore, the government will standardize the generosity of health subsidies within Universal Credit. These measures are projected to save billions of pounds, with approximately one billion pounds being reinvested in helping those capable of part-time work return to the workforce.

The UK's Department for Work and Pensions (DWP) is collecting data in real-time. "Cluster analysis maps" show ministers who are claiming unemployment benefits and where they are located. As the number of claimants continues to increase, the data is being segmented by industry, postcode, age, and type of illness. Every pattern is being analyzed in depth. Initially, the government hoped to use this data to understand how to cut billions of pounds in welfare spending to help the Chancellor achieve his government borrowing targets. Secondly, the government hopes to use the data to identify more fundamental welfare reforms aimed at controlling the rising costs of treating illnesses among the working population.

Data analysis reveals that poor mental health is a major driver of increased claims. To a lesser extent, raising the statutory retirement age has also contributed, leading thousands who would otherwise have retired to now claim health-related benefits. However, the data also raises an important question: Could cutting benefits to incentivize people to increase their working hours backfire, pushing them out of the labor market and ultimately increasing welfare spending? If this is indeed the case, would further benefit cuts lead to even more people claiming benefits? Should Labour increase investment in helping people return to work?

When I visited a job center in Birmingham with the Secretary of State for Work and Pensions, Liz Kendall, in the autumn, I was struck by how often employment advisors talked about health issues. "There are a lot of mental health issues here, depression and anxiety," one advisor named Cam told me. General practitioners report that a large proportion of their consultation time is spent assessing whether patients are "fit for work". In England alone, approximately 11 million sick notes are issued each year, with 93% assessing patients as "unfit for work." This figure has doubled in a decade. In the most recent quarter, 44% of sick notes lasted for 5 weeks or longer.

A significant proportion of the growing number of people on sick leave while employed eventually claim some form of incapacity benefit. The Treasury's spending on health and disability benefits, which was £28 billion in the year before the pandemic, has now reached £52 billion per year. The UK's Office for Budget Responsibility (OBR) forecasts that this figure will reach £70 billion by the end of this decade. The government's purely financial goal is to "bend" this curve to a level closer to £60 billion. This means limiting the generosity and eligibility for some or all of these payments. For example, a blanket cash freeze may be required, preventing benefits from rising with inflation, or entire categories of recipients may be removed.

A report released last week by the Institute for Fiscal Studies (IFS) showed a sharp increase in broader mental health problems since the pandemic. Between 2002 and 2024, the number of people aged 16-64 claiming disability benefits due to mental or behavioral health conditions increased from 360,000 to 1.28 million. In 2023, the number of "deaths of despair" due to alcohol, drugs, or suicide in England and Wales was 10 higher per day than the average between 2015 and 2019. The average sick leave rate across the economy remains higher than pre-pandemic levels.

Of particular concern is the impact on young people. Professor Paul Gregg, an advisor to the UK's Department for Work and Pensions, noted in a recent report that once a person claims incapacity benefit for more than two years, the chances of sustained return to work are "very low." Approximately two-fifths of new incapacity benefit claimants under the age of 25 come directly from the education system. The UK Department for Work and Pensions' latest analysis shows that these trends are now closely linked to broader socio-economic vulnerabilities, such as limited education and unstable industries like retail and hospitality.

The question remains, are so many people really becoming less healthy? What role, if any, does the reduction in mental health stigma play? But then how to solve this problem? Another major factor is the increase in the statutory retirement age, which the UK Department for Work and Pensions calculates has led 89,000 older workers to instead claim health-related benefits. However, the sharp increase in claims for such benefits since the pandemic is not solely attributable to an aging population or an increase in mental health diagnoses.

Research suggests that there are important systemic and policy drivers. At the heart of the problem is that the current welfare structure has become too binary, failing to accommodate the growing number of people who should be able to do at least some work. This rigidity – what ministers call "hard boundaries" – inadvertently encourages individuals to declare themselves completely unfit for work and may lead to complete reliance on benefits, especially Universal Credit Health (UC Health), rather than promoting a gradual return to employment.

This is detrimental to the economy, employers, public finances, and is of deep concern for individuals' career prospects. Historical experience can provide some assistance. Health-related benefits are often a disguised form of unemployment. Since the 1970s, the number of claims for incapacity benefits (including UC Health and its predecessors) shows that the UK is moving towards a situation where one in every 12 working-age adults receives this benefit.

But this is not the first time this has happened. It also occurred in the late 1980s under Margaret Thatcher's premiership and was reversed in the early 2000s under New Labour. The "Restart Programme" launched in 1986, a precursor to JobSeekers Allowance, which was modeled on Ronald Reagan's policies in the United States, helped many claimants return to work, but also prompted a large number of people to claim incapacity benefits.

Over the decade or so that the policy was in place, the number of people claiming this benefit increased by 1.6 million. But at the time, this shift from claiming unemployment benefits to claiming incapacity benefits was clearly a deliberate strategy, as it helped to counter headlines about "three million unemployed." The government has not yet published its analysis of the labor market, but Professor Gregg's early thinking is clearly stated in a report written for the Health Foundation. He argues that, historically, the welfare system has responded effectively through a middle ground, allowing individuals to combine part-time work with partial benefits. He attributes this to reforms introduced in the early 2000s, such as tax credits.

This is essentially a crystallization of Iain Duncan Smith's critique of then-Chancellor George Osborne's 2016 welfare cuts. He told me at the time that these cuts were "very unfair" to working people and that the vision of a proper welfare-to-work program "cannot be repeatedly nibbled away at." Some argue that these reforms created a situation where people unable to sustain full-time work would gravitate towards more generous health-based benefit schemes.

Crucially, claim numbers began to rise in 2018. At the UK Department for Work and Pensions, ministers tried to study the reasons behind the increase in claims and found that about a third of the growth could be explained as a predictable result of policy or demographics. With new claimants continuing to flood into the system (close to 500,000 in the last financial year), the focus now is on finding preventative measures rather than cures.

This is where the problem becomes tricky – one suggestion is to reintroduce intermediate support for part-time work, thereby eliminating the current welfare trap. However, this requires additional funding, as well as an approach that provides more personalized job search and better mental health support. Another option is to shift responsibility to employers. In the Netherlands, employers bear significant responsibility and financial costs if they fail to adequately support employees facing health challenges. In the early 2000s, the Netherlands also had high levels of incapacity, but now their employment rate has reached 83%.

The structure of the UK labor market makes this model difficult to replicate – for example, there are more precarious zero-hour contracts. Given the pressure on businesses from rising national insurance contributions and an economic slowdown, will they really be persuaded to help? The questions raised by the data will have significant implications for the economy, public finances, our health, and the careers and livelihoods of young people, and are currently in a period of dramatic change.

Fundamentally, this is a question about the purpose of the welfare system, in an era where illness is being redefined, and where these trends are frankly frightening. Furthermore, there is the question of whether the public is willing to pay higher taxes in the hope of long-term gains. Welfare-to-work programs can ultimately become self-sustaining, but the government believes it needs to cut spending faster.

This is because all of this is happening as the Chancellor's self-imposed borrowing targets, set to cope with Trump's shock to the world economy, the budget, and the announcement of increased European defense spending, are being wiped out. But government insiders vehemently argue that the primary motivation for any spending cuts is not to regain additional wiggle room. "We don't need the UK Office for Budget Responsibility to tell us that we need to fix the welfare system to get people back to work. We don't need the UK Office for Budget Responsibility to tell us that we need to improve the productivity of the National Health Service (NHS). Nor do we need the UK Office for Budget Responsibility to tell us that taxpayers should get better value for money," one source told me.

"Whether or not there is wiggle room, the Chancellor is determined to push forward with the changes we need to make Britain more secure and prosperous." Ultimately, the economic imperative is clear – to get a cohort of young people, hit by the double whammy of mental health problems and unemployment, back into work. The government believes that this cannot be done without first hurting the incomes of sick people. Disability charities, and in turn Labour backbenchers, will strongly oppose this.

Therefore, it is no exaggeration to say that this month's fierce debate about welfare will define this government.