Britain’s Crisis of Ill Health Costs Treasury £15 Billion

Deteriorating health in Britain is costing the state more than £15 billion ($19.6 billion) a year in higher benefits and lost taxes, the Office for Budget Responsibility found in a report that adds urgency for sweeping government action.

(Bloomberg) — Deteriorating health in Britain is costing the state more than £15 billion ($19.6 billion) a year in higher benefits and lost taxes, the Office for Budget Responsibility found in a report that adds urgency for sweeping government action.

The Treasury’s budget watchdog found that part of the surge in costs over the past three years may have been due to the relative generosity and fewer checks for those on health-related benefits, which encourages working age people to claim more welfare.

Britain’s rising benefit bill is unusual because it comes at time of acute staff shortages that are driving up pay and inflation. Those shortages would normally be associated with falling working age benefit costs. 

Employment has only just recovered to pre-pandemic levels, a far slower rebound than all other major advanced economies that has been blamed for the UK’s persistent inflation problem.

“The health legacy of a health crisis in the midst of a cost of living crisis will is likely to make people look very carefully at what they may be eligible for within the welfare system,” Andy King, a senior official at the OBR, said at a briefing in London on Thursday. “It’s clearly a more generous benefit than unemployment-style benefits. It would be unlikely that has not been a factor in some people’s choice.”

The OBR’s conclusions add to the sense of crisis in the National Health Service, where junior doctors walked off the job this week demanding higher pay and waiting lists for patients to receive treatment hit another record. The OBR’s report set out a number of budget pressures from rising worklessness to the need for higher defense spending, which are constraints on Prime Minister Rishi Sunak’s government to shovel money at NHS problems.

The issue is putting huge strains on the public finances, which are already buckling under high interest rates and inflation. The £15.7 billion cost in lost taxes and higher welfare, that the OBR estimates for this year compared to 2020, is comparable to raising the basic rate of income tax from 20% to 23%.

While health benefits are more expensive than other support programs, they also come with fewer follow-up checks, the OBR found. Moreover, claimants are less likely to return to work once on them. That may partly explain the increase in working age inactivity for those reporting health issues. 

“Changes in conditionality and sanctioning could plausibly have played a role” in rising health-related benefit caseloads, the OBR said. Those factors may also “create barriers to work due to fear of losing benefits.” The watchdog added: “The implication is that rising health-related benefit onflows result in large and enduring changes in caseloads due to low off-flow rates.”

Since the pandemic, health related inactivity has risen by around 400,000 to 2.6 million — 6.1% of the working-age population “making this group, for the first time, the single-largest segment of the economically inactive population,” the OBR said.

Record National Health Service waiting lists are often cited as a cause but the OBR said they have had minimal impact. King said that although rising backlogs and inactivity appear to be related, his analysis of the data showed they were not linked.  

“Halving the NHS waiting list over five years would only reduce working-age inactivity by around 25,000,” the OBR said. However, King stressed that the increase in health-related inactivity was because “deep down the health of the population has deteriorated.” 

He said those who have dropped out tend to be the most vulnerable members of society, in low-paying jobs and rented accommodation. Of the roughly 400,000 post pandemic increase in health related inactivity,  the OBR said:

  • Half are aged 50 to 64
  • Half are suffering from mental health problems or other unspecified conditions
  • Three fifths are relatively low skilled
  • Many previously worked in lower-paid, customer-facing service industries

Sunak is addressing the issues of inactivity on a number of fronts. He has increased childcare support and given early retirees incentives to get back to work. Changes to the work capability assessments for those on benefits is under review. He has backed recommendations to boost pay across the public sector, hoping that will bring an end to strikes especially in the NHS. 

The fall in employment or working hours related to the rise in health-related problems since 2020 will cost £8.9 billion in foregone taxes this year, the OBR estimated. The increase in spending on health-related benefits is an further £6.8 billion cost on the state. 

Strains on the NHS also drive up costs. “We estimate that each individual moving into health-related inactivity costs the NHS between £900 and £1,800 a year, as well as precipitating further costs in future given the well-documented negative effect of worklessness on people’s health,” the OBR said.

Britain’s increase in economic inactivity — where people are out of work and not looking for a job — is unique among Group of Seven economies. Employment has only recently recovered to pre-pandemic levels, a far slower rebound than all other major advanced. 

The Institute for Fiscal Studies said in a separate analysis released Thursday that the £19 billion the Treasury is spending on one-off payments to help families cope with the cost-of-living squeeze isn’t well targeted. That may be distorting incentives for people to work, with a report by the Treasury select committee of MPs warning that benefit “cliff-edges” were deterring people from taking jobs. 

“Families that are on benefits are really in for a roller-coaster as their incomes are changing in quite arbitrary ways at the time because of the lag in the measure,” Xiaowei Xu, a senior economist at the IFS, said on Bloomberg Radio.

–With assistance from Tom Rees, Jill Namatsi, Ellen Milligan and Emily Ashton.

(Adds details on follow-ups on recipients of health benefits.)

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