In the past 12 years, UK welfare spending has increased by £100 billion, yet, it is forecast to grow even more. We are seeing record levels of health related benefits, by the end of the decade we could see other £100bn benefit spending related to sickness. The British press are up in arms claiming 6.5 million are on out of work benefits. And the decision to scrap the two-child limit on benefits led Kemi Bedenoch to claim it was a budget for benefit street. However, is the UK welfare budget really out of control? and where does the £313 billion actually go?
Firstly, to get a sense of perspective, welfare spending as a share of GDP is actually lower than in 2010. You can see there was a big rise in the size of welfare spending from 1955 to 1985.
But, since a 2012 peak of 12%, it has actually come down. Now, firstly, this graph needs some context. Welfare spending is cyclical, in a recession with falling GDP and unemployment rises, benefit spending will go up.
If the UK were to enter a deep recession in 2026, you would see another big rise in welfare as a share of GDP.
Where does welfare budget go?
But, when we think of welfare spending, where does it actually go? By far the biggest component is the state pension, with pension credit another £6bn. The next biggest is universal credit. This itself has many components. Low income, unemployment, housing and number of children. For example, a single unemployed person in Oxford, might get basic allowance of £400 a month, plus up to £900 a month housing support, total £1,300. Same person in Blackpool maybe £770 a month because housing is cheaper. A big area of growth in recent years is health related benefits. It is possible that if you were out of work, but also eligible for limited capacity for work, and PIP payments, you could get up to £497 a week. £25,887 a year.
A lower level of disability could bring in say £262 a week. There are so many benefits permeatations, it is difficult to say exactly what the benefit will be.
The Centre for Social Justice shows more possible combinations from £12,000 for an unemployed adult to £27,354 for incapacity and a child. But, can the UK afford that kind of benefit for a growing section of the workforce.
Squeeze in Working Age Benefits
One important issue is that since 2010, the government deliberately sought to squeeze working-age benefits. Whilst pensions had the triple lock, working age benefits increased only with inflation. The result was that the real value of the unemployment benefit fell behind. Also, the housing component of benefits were squeezed, even as rents rose significantly. In fact, you could make a strong case, that a substantial pressure for welfare spending in the UK is related to the cost of housing. Not just working age, but also pensioners who increasingly will retire into the expensive private rented sector. The lid on working age benefits has been achieved partly by miserly increases in benefit levels.
Decline in Low Pay
Another fact that has helped limit the rise in universal credit has been the decline of low pay. Average wages may have stagnated but the national minimum wage has led to significant increases for the lowest paid. Improved pay for low earners helps reduce the component of universal credit for toping up low pay. Yet, whilst the national minimum wage has been a success, I would add one note of caution, there has been a rise in under-employment, people getting fewer hours than they would like. This is partly a response to the cost of labour going up so much.
Sickness
Anyway, as working age benefits were squeezed, it created a growing gap between the income you could get if you were classified as incapable of work, and serious health condition. And since 2020, there has been a really worrying rise in the level of long-term sickness and health related inactivity; it has increased from just over 100,000 to over 600,000 at the start of the year. A big driver of this has been an increased rate of mental health issues amongst the young. This shows the surge in reates of depression since 2012 by the way, which year did social media take off. Mental health issues are clearly a big factor in the rise in sickness benefit payments. However, the rise in incapacity is more than just the effects of covid and young people pretending to be sick. Firstly, the rise in the retirement age, means you can expect more people to struggle to work when they are old. Secondly, in the past, there were more jobs for life, and big firms were more willing to give workers light duties to avoid letting them go. These days, employment is more cut throat, there is less room for a worker who needs to be carried.
Now, the media have been full of stories about 6.5 million people out of work, Yet, how is it possible that there has been such a big surge, when as a share of GDP, welfare spending is going down? Well a big factor is that there have been huge changes in the way benefits are counted and so DWP statistics are flawed. If we count in a consistent way, the trends in out of work benefit claims are not as dramatic as it first appears.
Source: Ben Geiger
Nevertheless, the cost of health related benefits is definitely rising and it is a significant cost looking forward. Yet, although, it is a big rise, it is still dwarfed by the potential rise by the biggest component of welfare spending – pensions and pension benefits.
The pension triple lock means pension spending will take a bigger share of GDP. If pensions had been linked to inflation like other benefits, it would have risen 56% since 2011. But, the triple lock means it rises faster 87%, that’s a bigger rise than earnings. But, it’s not just that pensions are going up faster than national income, there will be more pensioners than ever. In 2022, 26% of the population were over 65. By 2050, that will be 43%. It will actually be more dramatic as fertility rates have been falling than the ONS predict. Pension spending is set to rise as a share of GDP from 4.2% towards 8%, which means in theory around 20% of all government spending will be on pensions.
Now to go back to the issue of welfare spending as a share of GDP. If that has been constant as a share of income, what explains the growing size of government spending? Because as you probably know, taxes and government spending have both increased. Well the big rise in government spending has been health care and debt interest payments. By the way some would like to see defense spending rise as a share of GDP too.
So after that wealth of statistics and forecasts, what is actually going on? Welfare spending is increasing, especially with regard to the health related benefits and pension spending. Yet, as a share of GDP, it hasn’t increased as much as some might expect, in fact, it has actually gone down in recent year The bigger push to government spending has come from healthcare and debt interest. Yet, for the future, welfare spending is set to rise as a share of GDP, partly from a projected rise in incapacity, but primarily because of the rise in pension spending. This is really the big dilemma with the UK economy, who is going to pay for these future pension commitments? And also there is another problem, a recession, would cause a big rise in pension spending and as housing costs continue to rise, many working age benefits are still insufficient to meet housing costs. Welfare reform is definitely needed, but it’s not always in the way you think.
Related
Sources
- https://www.datawrapper.de/_/mXV2w/
- https://www.benefitstrap.com/datalibrary
- https://substack.com/home/post/p-173768755
- https://inequalities.substack.com/p/the-real-trend-in-out-of-work-benefit
- https://www.thetimes.com/comment/columnists/article/why-do-some-benefits-pay-more-than-the-minimum-wage-zmzvjzf9r
- https://www.resolutionfoundation.org/
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