Have people stopped working because benefits are too generous?
How tough is Britain’s benefits regime? Not tough enough, according to the British public, by a growing majority — or so we have told YouGov. Soaring economic inactivity plus attempts by successive governments to trim the welfare bill have hardened attitudes.
An extra 671,000 people have become “economically inactive” since the pandemic, costing the taxpayer an extra £12 billion in health-related working-age benefits. The bill could reach £63 billion by 2029, according to the IFS.
Labour, as well as clamping down on benefit fraud, made tackling worklessness a key manifesto pledge. But how well does it actually pay to be out of work in Britain?
In a word: poorly. Let’s start with unemployment benefits. If you’re a single person on an average wage and you lose your job, in most rich countries the state will help you keep most of your salary while you get back on your feet.
In Luxembourg this “replacement ratio” is a miraculous 86 per cent of the average salary. Portuguese workers keep 75 per cent of their pay, the French keep 68 per cent and the Germans keep 59 per cent.
Things are less rosy in the US, where median-wage workers keep 35 per cent of their working salary. But in Britain? A measly 12 per cent — the lowest in the developed world. Even if we include housing benefit, the UK still ranks 39th out of 42 rich countries, according to the OECD — ahead of only Australia, Romania and Russia.
Apart from being low, there are two main ways Britain’s unemployment pay differs from that of comparable nations.
First, our system offers universal welfare, with more assistance given to the neediest, funded through general taxes. Many European nations, by contrast, use social insurance models, in which workers pay into schemes while employed, and are given unemployment pay based on the salary they were on. High-earners get more benefits.
Second, generous though many of those European benefits systems appear, they are time-limited. Unemployed Italians enjoy 62 per cent of their wages immediately, but that falls to nothing after two years. In Britain, assuming none of your economic circumstances change, your (modest) universal credit allowance stays the same for ever.
So Britain’s unemployment pay lags behind most of the world. What about sick and disability benefits? In the UK health-related benefits fall into two categories: means-tested incapacity benefits — mostly via the health part of universal credit, which is designed to compensate for the fact that earning is harder when you have health problems — and disability benefits, given to disabled people regardless of income.
Recent international comparisons are hard to come by. But a 2020 paper by the OECD suggested that British claimants with the lowest level of incapacity get the equivalent of just over half the average wage — placing us roughly in the middle of the pack.
By international standards, then, Britain treats those on sickness benefits much better than the unemployed. This is the reverse of public opinion: people are more likely to think those with disabilities have too little support (48 per cent agree with that statement) than those who are out of work (26 per cent).
For the past three years the government has been trying to work out why so many more people are claiming disability benefits. It cannot all be down to the pandemic. Virtually every country in the rich world has seen a rise in sickness since 2019, yet Britain is, with Denmark, one of the only rich countries to see a rise in health-related benefits.
A recent report by three Institute for Fiscal Studies economists ends with this compelling suggestion. Because the level of basic unemployment support is so low, they say, it’s possible that “following a shock to real incomes, more people with health conditions in the UK apply for health-related benefits than in other countries”. In other words, as inflation starts to bite and budgets are stretched, some people with conditions who did not claim health benefits previously are now choosing to do so.
Since the pandemic, the number of people claiming incapacity or disability benefit has jumped from 2.8 million to 3.9 million. But it is not true that many of those extra 1.1 million claimants came from the workforce; in fact, nearly two thirds left their last job more than two years ago or had never had one.
Furthermore, the option to fill out health-related claims forms online has made it easier for those who start an assessment form to finish it — completion rates have gone from 72 per cent to 86 per cent.
Rising ill health did not begin with the pandemic: Britain was getting sicker throughout the 2010s. But to understand why so many more people are claiming sickness benefits now, we must look at the wider welfare safety net — which, if you fall on hard economic times, can be surprisingly porous.
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