‘Welfare iceberg’ will wipe out entire tax take from NI raid, Reeves warned

Spending on health and disability welfare to rise by £19bn, official forecasts show

All of the money raised by Rachel Reeves’s tax raid on workers and businesses will be wiped out by the spiralling cost of working-age health benefits, official forecasts show.

Analysis by the Centre for Social Justice (CSJ) shows spending on health and disability welfare payments is set to increase by more than £19bn by the end of this parliament.

This far exceeds the £16.1bn the Chancellor hopes to raise from increasing employer National Insurance contributions (NICs), after taking into account a reduction in profits, wages and jobs that will come as a result of the higher levy.

The CSJ said Britain’s “welfare iceberg” was increasingly using up vital tax revenues that Ms Reeves hoped to spend on improving public services.

The Office for Budget Responsibility (OBR) has also warned that the NICs raid will result in £400m of extra spending on Universal Credit as lower wage growth forces more people to claim welfare to top up their incomes.

Britain’s tax watchdog warned this week that the post-lockdown surge in health-related benefit claims would become a permanent drag on the public finances.

The number of people neither in work nor looking for a job has surged by almost 700,000 since Covid to 2.75m. Many people claiming health benefits are not required to even look for work after being signed off for mental health conditions including anxiety and depression.

The independent tax and spending watchdog now believes annual spending on health and disability benefits will rise above £100bn for the first time by the end of the decade, including £75.7bn paid to people of working age.

This is up from an estimated bill of £56.4bn this financial year, with payments expected to continue to be “strongly-geared to health-related claims”.

The OBR expects an additional 420,000 households to be claiming health-related incapacity benefits by the end of the decade. The share of people claiming Universal Credit for health reasons is expected to account for half of all claims by the end of the decade, up from just under a third today.

It also warned of a surge in child disability benefit payments as more young people are diagnosed with autism, ADHD and learning difficulties. Payments are expected to rise from £4.4bn this year to £7.2bn in 2029.

Ms Reeves announced an extra £240m to fund more local schemes to fix Britain’s worklessness crisis in her maiden Budget. Labour has accepted Tory benefit reforms that will focus work incentives on what claimants can do, rather than what they can’t.

The Government will also publish a white paper by the end of the year to get people back to work. Liz Kendall, the Work and Pensions Secretary, has said proposals for disability benefit reforms will follow next year.

Andy Cook, the CSJ’s chief executive, said: “Liz Kendall is making the right noises on devolved employment support and an Into Work Guarantee, but these forecasts show the Government’s fiscal plans crashing directly into a welfare iceberg.

“Radical action is needed to address the epidemic of long-term sickness and economic inactivity, starting by following the successful example of the Dutch and handing responsibility back to local communities so we can finally get Britain working again.”

Ms Reeves announced a £25bn raid on employers through the National Insurance they pay, with the headline rate rising by 1.2 percentage points to 15 per cent from April.

The OBR said the actual amount of NICs raised was likely to be £16.1bn a year by 2029 because weaker wage growth as a result of the tax rise would ultimately hit Treasury revenues.