Welfare benefit cuts: ‘What’s the least bad way to find savings?’

Rachel Reeves is said to be on the verge of cutting billions of pounds from health-related benefits. But she has few good options for saving lots of money fast.

The UK is spending so much on sickness and disability payments because so many people are sick and disabled. We have a mental health crisis that is hitting the young hardest while the incidence of most other illnesses rises with age – and people will soon be expected to work to 67. 

With the right reforms more people who are sick or disabled could be working. The government should transform occupational health and sick pay, expand the employment support available to those with health conditions, guarantee they will not be worse off if they try a job, and scale-back harsh conditions on jobseekers that push them towards sickness benefits.

Such measures will increase employment and save money over time. But it won’t be quick or easy. The OBR will not allow Rachel Reeves to ‘score’ big short-term savings by going down this path. 

‘Freezing the health-related component of Universal Credit would bring hardship as costs rise’

Nor is finding money by reducing payment levels straightforward. Disabled people without earnings for a prolonged period need enough money to live with decency. That is why Universal Credit pays a lot more to people with significant disabilities than to jobseekers without health problems.

Last week, the Resolution Foundation floated the idea of narrowing the gap between these two benefit rates by freezing the health-related component of Universal Credit, a move that could save ministers £1bn by 2029. The rationale is that such real-terms cuts spread pain thinly across many millions of benefit recipients.

But as prices rise this proposal would bring hardship to a lot of disabled people with little immediate prospect of work. To close the gap, Labour should be raising the basic rate of UC – but that would mean more spending not less.

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‘Means-testing PIP would harm employment incentives and cause huge anxiety’

Personal Independence Payment provides help with the extra costs of disability irrespective of a person’s income or employment status. There is speculation that the government is considering means-testing PIP, perhaps by incorporating it into universal credit as an additional element for disabled people. This would be an incredibly controversial move among working disabled people that would harm employment incentives and cause huge anxiety.

It is also unclear how much the means-testing of PIP would actually save as only 18% of households with it are in the top two-fifths of the income distribution. Replicating the child benefit means-test on high earners would save peanuts. If there is to be change to benefits that support the costs of disability, it should not be done in haste.

‘Tightening eligibility did not deliver anything like the expected savings for Conservatives’

The other route being considered is to make health-related assessments harder to pass. But the system for proving entitlement is already pretty robust. People have to see a DWP-appointed clinician unless their eligibility is beyond doubt. The rate of fraud and error for sickness and disability benefits is very low.

The only obvious avenue for tightening up the system as it stands is to reassess existing claimants more frequently. Since the pandemic the DWP has almost stopped repeat assessments. By comparison, in the late-2010s at least 50,000 people each year were transferred off sickness benefits following reassessment. 

To go further ministers would need to tighten underlying rules on eligibility. The Conservatives proposed to do this by first restricting the work capability assessment and then scrapping it altogether and using the PIP assessment for all health-related benefits. Labour ministers are still committed to WCA reform although they have rejected the previous Tory plans.

Media stories indicate that a toughening of the requirements for both the WCA and PIP assessments are being considered. But Liz Kendall and her team will be aware of the impact this could have on many with significant ongoing health problems. They will also be mindful that past Conservative reforms aimed at reducing claimant numbers did not deliver anything like the expected savings. Some change to assessments is almost certain but the OBR will again be sceptical about scoring a big saving.

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‘Limiting ESA would save the government over £2bn’

With this tough backdrop perhaps the least bad option for saving money is to time-limit Employment and Support Allowance. ESA used to be a two-pronged entitlement with eligibility based either on National Insurance contributions or on means-testing. But the creation of UC means it will soon be only a National Insurance benefit. Back in 2010, the coalition introduced a one-year time limit to this part of ESA for those with moderate disability. Now that UC exists it is time to debate ending long-term ESA claims altogether. 

The question to answer is when and whether claimants should receive out-of-work benefits even if they have sufficient income or assets to exclude them from UC. This usually happens when people have a working partner, savings or a private pension. There is a strong case for non-means-tested benefits when people first leave a job. I argued before the election that people should receive a lot more than they do now when they first stop working. But for how long should someone’s past employment earn them payments in addition to those on offer in the rest of the benefit system? We provide National Insurance benefits to the unemployed for six months and to people with less severe health problems for 12 months. Would 24 months be enough before expecting people with serious disabilities to receive just UC and PIP? 

Limiting ESA to two years would save the government over £2 billion in 2029/30 if it was applied to all existing recipients. Even if current long-term claimants were protected the measure would still yield significant savings, with two-fifths of the historic caseload likely to leave the benefit before the end of the decade. 

As an option for benefit reform a time-limit on ESA is far from ideal. It will have real-world consequences for people who, while not on the breadline, are still sick and out of work. Still, it is a better way of saving money than most of the alternatives.

A longer version of this article is published on his substack Cradle to Grave.

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