Why old, sick and workless Britain is getting closer to breaking point

Rising economic inactivity is hollowing out the tax base and ballooning the benefits bill

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Rachel Reeves and Sir Keir Starmer have made “fixing the foundations” the centrepiece of their economic manifesto. The problem is that the ground is shifting beneath their feet.
More than 9m working-age adults are now economically inactive – meaning they are neither in work nor looking for it – and long-term sickness is to blame.
In the past year, the number of long-term sick has risen to account for more than 30pc of the inactive population for the first time, making it comfortably the leading cause of the problem.
Economists warn this growing trend knocks away an important driver of Britain’s economic growth.
“In the 2010s there were lots of things we worried about in the economy, but one thing we did rely on in that decade was rising labour supply,” Louise Murphy, an economist at the Resolution Foundation told the House of Lords Economic Affairs Committee on Tuesday.
“So it is particularly troubling that we are now seeing this inactivity. The positive thing that we were relying on, we can no longer use to prop up our economy.”
Edward Davies at the Centre for Social Justice told peers that the degree of Britain’s ill-health crisis is a particularly dire threat to the public purse.
“At a very fundamental level, the financial cost to the Exchequer of the benefits bill now is getting very very serious,” he said.
“From the beginning to the end of the decade, you are seeing a doubling towards £76bn for incapacity [and] health benefits. How do we afford to keep going on with the status quo?
“You have so many people who are now falling out of work through ill health – they are not contributors, they are net detractors from the economy. They are not paying taxes, they are not earning an income, so that is a major problem.”
Particularly worrying is the rise in sickness among under-25s.
While musculoskeletal problems are pushing older Britons out of work, for the younger generation it is mental health that is posing a particular scourge.
According to the Resolution Foundation’s Murphy, real-terms spending on children’s disability benefits has more than doubled in the past decade.
“Some of the increases among young adults, and in fact, among children are really striking,” she told the Lords’ committee.
“The strange phenomenon going on at the minute is the number of younger people dropping out of work,” Davies added. “That has a very long-term scarring impact, both on them and the economy.
“Seeing young people coming straight out of university and jumping onto benefits means they are not just costing something now – if they are out for six, 12 months, they might be costing [the economy] for the rest of their lives.
“There is a financial cost for the Exchequer, and a huge scarring effect on that individual, a loss of potential for the country.”
It comes amid an ageing of the population too, which will increase pressure on already strained public health services.
Currently, 65pc of the population is aged between 15 and 64, according to the Office for Budget Responsibility (OBR), while an additional 19pc are aged over 65.
By 2040, these figures are expected to be skewed further, as 62pc will be of working age while those aged over 65 will account for 23pc of the population – almost a quarter.
The impact of an ageing population is evident when assessing Britain’s workforce.
There are currently three working-age adults for every person aged above 65; by 2070 that figure is forecast to fall to almost two.
Given there are already existing labour shortages across a range of sectors, this forecast will fuel concerns for businesses up and down the country.
This cocktail of problems is already inflating costs for the Government, whether it be a higher benefits bill or increased spending on healthcare or pensions.
That is without taking into account the impact on tax receipts of 9.25m adults being economically inactive.
While a typical person aged 45 costs the NHS £2,000 per year, an average 80-year-old lands the Government with a healthcare bill of more than £10,000 annually. This means a shift in the country’s age demographics will send costs spiralling.
Healthcare spending has already risen from 5pc of GDP at the start of the century to 8pc today. According to OBR forecasts, this will rise to 10pc in the 2040s and 14pc in the 2070s.
Once pensions, social care and other benefits are accounted for, alongside so-called age-related spending, this bill will rise from just over a quarter of GDP to 36pc in 50 years.
Policies such as raising the state pension age can help to keep a lid on these costs. But there is only so far that such policies can realistically go if the aim is to keep more people in work.
For example, if future governments tried to push the pension age up to 75, the OBR estimates that up to a third of people in that age bracket will be unable to work, undermining the policy’s effectiveness.
This might be bearable if the Government’s finances were in a stronger position but the public purse is already buckling under pressure.
Britain’s national debt is currently more than £2.7 trillion – almost 100pc of GDP – and is set to smash through the £3 trillion mark by 2026-27.
Servicing this debt has become cripplingly expensive, with the Government’s annual interest bill having already hit £100bn. By contrast, next year’s defence budget is a mere £83bn. The UK is at the mercy of global financial markets as a result.
Britain is a well-respected borrower but surprise shifts in market sentiment can be costly, as Liz Truss discovered following her mini-Budget two years ago.
Donald Trump is also now expected to ramp up already-high US borrowing, which threatens a spike in interest rates through higher inflation.
Given Britain’s financial markets often track those in the US, the ripple effects of such a shift will inevitably be felt by the Treasury.
Whether it be historic debts, a long-standing failure to control borrowing or growing worklessness, this potent combination of factors poses an extraordinary challenge to the country’s finances.
That remains the case despite Britain’s tendency to find cash when problems arise, as occurred during the pandemic when the Bank of England stepped in with quantitative easing to prevent an all-out market disaster.
However, in a world of mounting geopolitical uncertainty and economic turbulence, more crises are certainly possible.
As such, the memory of heading cap in hand to the International Monetary Fund in 1976 will loom large for many in Whitehall, who hope never again will Britain have to seek emergency funding to stave off the worst.
Such fears make fixing the economy’s foundations more important than ever before.
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