The purpose of the Workplace for Price Range Duty (OBR), which was founded in 2010, is to examine and document the sustainability of public finances. Our attempts to carry out that mandate have focused heavily on developing more effective ways to identify and communicate financial and monetary risks. We have used probabilistic ranges (often known as “fan charts”), various scenarios, and sensitivity analysis to highlight the degree of uncertainty around our key projections ever since we released our inaugural Financial and Monetary Outlook (EFO) in 2010. Our Fiscal Sustainability Reviews (FSRs), which included long-term public funding predictions, also featured sensitivity analyses to changes in important macroeconomic, demographic, and other assumptions. We created a biannual Fiscal Dangers Report (FRR) between 2017 and 2021 that outlined the main risks to public money together with specific fiscal and macroeconomic risks.

The OBR’s mandate was modified by Parliament in the January 2022 amendment to the Price Range Duty Constitution, giving us more freedom to choose the topics for our annual sustainability report. Previously, the FSR’s long-term projections and the FRR’s discussion of risks alternated annually. Last year, we published our first combined fiscal risk and sustainability report.

report (FRS), which combined our biannual long-term estimates with a current assessment of the main financial risks. The Treasury replied to this report and provided the March 2023 price range, as mandated by the Constitution.

In this second FRS, we address three specific risks: the increase in health-related joblessness; the effect of increased fuel prices on the supply and demand for energy; and the effects of growing interest rates and high inflation on the public debt of the United Kingdom. We’ve also updated our register of financial risks, which we updated to reflect current risks under three broad themes: long-term trends, coverage risks, and shocks.

The assessment and forecasts included in this report represent the opinions of the impartial members of the OBR Price Range Duty Committee as a whole. We fully accept responsibility for the decisions that guided our assessment, our forecasts, and the conclusions we came to. The OBR’s full-time staff has helped us with this, and for that, we are all very thankful.

Aside from HM Treasury, the Financial Institution of England, the Chief Medical Officer, the Local Weather Change Committee, the Debt Administration Workplace, the Division for Power Safety and Web Zero, the Division of Health and Social Care, HM Income and Customs, the Division for Work and Pensions, the Nationwide Infrastructure Fee, NHS England, and the Workplace for Nationwide Statistics, we have also benefited from the support and expertise of officers from numerous government departments and businesses. We really appreciate their insight.

We’ve also profited from conversations with experts from outside authorities. To be more precise, we would like to express our gratitude to the following organisations: the Decision Basis; Professor Ben Baumberg Geiger at King’s Faculty London; Professor Clare Bambra at Newcastle College; Spencer Dale at BP; Jacob Nell from EDF Buying and Selling; Selma Mahfouz on the French Normal Inspectorate of Finance; Gene Frieda and colleagues at PIMCO; and college students from U3A. We would also like to underline that, despite the valuable assistance received, all decisions and interpretations that form the basis of the FRS’s assessment and conclusions are our own.

On June 23 and July 3, respectively, we provided the Treasury with an updated model of our basic findings and an abstract of them. We have worked closely with Treasury officials throughout the process because of the importance of the report back to the Treasury in managing budgetary sustainability and risks. As soon as it filled up, we sent a copy of the whole document. We were never under any pressure to alter our assessment or findings from ministers, specific advisors, or officials throughout the process. We would be pleased to hear feedback on any aspect of the report’s presentation or substance. Please send this to [email protected].

  • The Committee on Price Range Duty
  • Andy King, Richard Hughes, and Professor David Miles, CBE

Government Synopsis

1.1 It seems that the 2020s will be very risky for state finances. They have experienced three major events in as many years: the COVID epidemic in early 2020, the catastrophe to vitality and the expense of living in mid-2021, and the abrupt increase in interest rates in 2022, the consequences of which are still being felt today. The rapid series of shocks that followed brought the worst recession in three centuries, the highest increase in health care expenses since the 1970s, and the steepest long-term increase in borrowing rates since the 1990s. They have typically driven government borrowing to its highest point since the mid-1940s, the debt inventory of the president to its highest point since the early 1960s, and the cost of debt payment to its highest point since the late 1980s.

1.2 From this more vulnerable position, governments confront growing costs due to an ageing population, global warming, and escalating geopolitical onflicts—issues  that do not seem far off in our 50-year forecasts but present serious financial risks this decade: As the ‘child increase’ generations retire and the cost of the triple lock rises due to high inflation, state pension expenditure is expected to increase to £23 billion (0.8 percent of GDP) in 2027–2028 compared to the beginning of the previous decade.

The increasing use of electrical vehicles is expected to cost £13 billion in avoided gasoline costs by 2030 as global temperatures rise and the 2050 deadline for achieving web zero draws closer, while public investments intended to support the decarbonisation of energy, buildings, and business may reach £17 billion annually by that time. The government has said that it hopes to increase defence expenditure from 2.5% to 2.5 percent of GDP, or around £13 billion annually, for the first time in seven years in response to growing security challenges in Europe and Asia.

1.3 In this second built-in Fiscal Dangers and Sustainability Report, we examine the fiscal fallout from three major risks that have become apparent since 2020 and consider their potential future effects. The causes of the growth in health-related inactivity among working-age adults—possibly the most concerning post-pandemic trend—and its prospects are examined in Chapter 2; examines the causes and potential consequences of what is likely to be the most concerning post-pandemic trend: the increase in working-age individuals; The impact of rising fuel prices on energy supply and demand, as well as the financial consequences of assembling or failing to meet the net zero emissions target by 2050, are examined in Chapter 3.

takes into account how rising fuel prices will impact supply and demand as well as the cost of assembling or not meeting the 2050 net zero emissions target; The fragility of current government debt ranges, the impact of recent interest rate increases, and prospects for debt reduction over the medium term are all examined in Chapter 4, and investigates the impact of recent interest rate increases, the vulnerability of current authority ranges, and prospects for debt reduction over the medium term; Chapter 5 discusses various risks in our fiscal dangers register, their evolution since our last update in July 2021, and any mitigating measures the authorities have implemented.

Well-being and inactivity

1.4 In the wake of the pandemic, working-age labour market participation has decreased after reaching an all-time high in early 2020. Growing labour force participation in the ten years that followed the financial crisis was a bright light amid otherwise poor financial improvement. The working-age employment rate increased from 70 to 77 percent in the 2010s, offsetting the relatively small increase in productivity during this time. A fast and abrupt reverse of this trend was seen during the pandemic, with the number of people classified as inactive climbing by approximately 650,000 and the working-age inactivity rate increasing by 1.5 share factors to 21.7% at its peak in mid-2022. Working-age inactivity remains 350,000 above pre-pandemic levels at this point. The post-pandemic spike in inactivity observed in the UK was unusual when compared to other advanced economies, where working-age inactivity rates decreased by an average of 0.4 share factors between late 2019 and late 2022.

1.5 The most significant and reliable source of this increase in inactivity has come from those who report being unwell as their primary reason for not being employed. At their height in 2021, the numbers of newly inactive were 390,000 and 80,000, respectively, due to an influx of scholars into greater training and a wave of early retirements. But by early 2023, these transitory booms had peaked, and in recent months, the number of early retirees has declined below pre-pandemic levels. In contrast, the number of people who are not in the labour force due to health-related reasons has been increasing. In the three months leading up to April 2023, it hit 440,000, surpassing the 350,000 web inactivity surge that followed the epidemic. 2.6 million working-age people (6.1 percent of the working-age population) were absent from the labour force as of early 2023 due to health reasons; this makes them the biggest group of people who are not in the workforce for the first time.

Table 1.1: The increase in working-age inactivity from the beginning of 2020

1.6 Three basic causative factors, some of which predate the pandemic, seem to be interacting to drive this increase in health-related inactivity: a slowdown and partial reversal in the rate of improvement in working-age people’s health over the previous ten years, which reflects both a rise in the average age of working-age people and worsening trends in some specific health circumstances, most notably psychological health circumstances;

over the previous ten years, reflecting both a rise in the average age of working-age populations and deteriorating tendencies in specific health circumstances, particularly psychological health circumstances; the impact of the pandemic on working-age populations as a direct result of COVID on individuals’ physical health as well as the disruptive effects of the pandemic on individuals’ psychological health and the treatment of non-Covid health circumstances; and

Both as a direct result of COVID-19 on people’s physical health and as a result of the pandemic’s disruptive effects on people’s mental health and the treatment of non-COVID-19 health circumstances; and increasing inflows to health-related benefits, which can partially replicate the level of ongoing assessment, conditionality, and return-to-work support for these on health-related benefits versus other out-of-work benefits, along with the role of a prolonged period of weak family income growth and rising cost-of-living pressures, increasing the incentives to claim the previous, more generous benefits.

1.7 The increase in health-related inactivity has been focused on certain age groups, those with certain health conditions, those from lower socioeconomic groups, and those with certain types of previous work. For instance, there has been a noticeable increase in health-related inactivity after the epidemic among those who:

are older, with those between the ages of 50 and 64 making up around half of the post-pandemic increase in health-related inactivity, although they make up less than one-third of the population of working age. Despite making up less than a third of the working-age population, those between the ages of 50 and 64 account for around half of the post-pandemic increase in health-related inactivity; are impacted by mental health problems or other unidentified circumstances, which together account for roughly half of the total increase in health-related inactivity since the pandemic;

which combined account for approximately half of the total increase in health-related inactivity since the pandemic; are relatively low experts, with those having neither {qualifications} at A-level nor below accounting for three-quarters of all long-term sick inactive residents and nearly three-fifths of the increase in that population since the start of 2020, despite constituting only half of the working-age population; and

Even though they only make up half of the working-age population, these individuals with either no {qualifications} or {qualifications} at A-level and below account for three-quarters of all long-term sick inactive population and nearly three-fifths of the increase in that population since the beginning of 2020; and have previously worked in lower-paid, customer-facing service industries and occupations. The largest increase in health-related inactivity will be among those who had previously worked in care, leisure, and other providers; gross sales and buyer providers; and elementary occupations (like cleaners and hospital porters).

Characteristics of the working-age, chronically ill, inactive population (Chart 1.2)

1.8 Still, the vast majority of persons now unemployed due to health reasons have been unemployed since before the outbreak. Of the working-age inactive population, 1.5 million people (62%) have not worked for more than three years, and 560,000 people (23%) have never worked. Just 100,000 people (4%) have not had a job for more than a year. Given that the likelihood of an individual returning to work decreases with the length of time they are out of work (among those with health problems, a mean of one in six return to work every quarter within the first year after leaving, whereas only one in twenty do after they have been out of work for a year or longer), efforts to reverse this most recent development are clearly faced with challenges.

1.9 Only a very small percentage of these reasons for inactivity are included on the NHS readiness checklist. The number of people waiting for NHS treatments increased sharply from 4.6 million in January 2020 to 7.4 million in May 2023, with many people prepared for numerous treatments. This increase coincided with the post-pandemic spike in health-related inactivity. The simultaneous increase in these indicators raises the possibility of a causal relationship, but our estimation is that only 2.9 million people of working age were on the ready list in 2022, and only about 650,000 of them were inactive due to chronic illness (or one-fourth of the long-term sick inactive population).

While the disruption and challenges associated with accessing NHS services may have contributed to the decline in the physical and mental health of working-age individuals during this period, addressing the NHS ready checklist on its own is likely to have only a minimal impact on the number of unemployed people. We project that reducing the NHS readiness checklist by half over a five-year period, bringing it back to its mid-2015 level of about 3.5 million, would be sufficient to reduce working-age inactivity by about 25,000. 1.10 There are three possible ways in which the large and growing number of people leaving the labour force due to health issues or dealing with a health condition puts pressure on public finances:

higher welfare expenditures for those seeking benefits connected to their health. More than four-fifths of those who have been inactive due to health-related reasons, as well as all changes made to this group during the preceding three years, are receiving benefits related to incapacity. Given that this group receives an average annual increase in common credit score awards of about £10,000, combined with rising disability profit claims among those who are both in and out of the workforce, the total increase in welfare spending associated with the 440,000 increase in health-related inactivity and the 490,000 increase in ill-health among those who are employed is projected to be approximately £6.8 billion in 2023–2024.

More than four-fifths of those who have been inactive due to health-related reasons, as well as all changes made to this group during the preceding three years, are receiving benefits related to incapacity. Given that this group receives an average annual increase in common credit score awards of about £10,000, combined with rising disability profit claims among those who are both in and out of the workforce, the total increase in welfare spending associated with the 440,000 increase in health-related inactivity and the 490,000 increase in ill-health among those who are employed is projected to be approximately £6.8 billion in 2023–2024. lost tax revenue from those who either don’t work at all or who work fewer hours and make much less money.

Due to the fact that the vast majority of people inactive for health reasons would have been more likely to work in relatively low-paying professions due to their decreased {qualifications}, these fiscal costs are far lower than is probably expected. Accordingly, the loss of common earnings tax and NICs when work declines and health-related inactivity increases is projected to be around £5,000 per year for each individual, or £2.2 billion overall, based mostly on evidence from the preceding three years. The total annual tax loss due to rising health-related inactivity and in-work ill-health over the previous three years is likely to have increased to approximately £8.9 billion a year in 2023–2024 when combined with lost earnings tax and NICs revenues (£3.0 billion) and indirect effects on other taxes (£3.7 billion).

Due to the fact that the vast majority of people inactive for health reasons would have been more likely to work in relatively low-paying professions due to their decreased {qualifications}, these fiscal costs are far lower than is probably expected. Accordingly, the loss of common earnings tax and NICs when work declines and health-related inactivity increases is projected to be around £5,000 per year for each individual, or £2.2 billion overall, based mostly on evidence from the preceding three years. The total annual tax loss due to rising health-related inactivity and in-work ill-health over the previous three years is likely to have increased to approximately £8.9 billion a year in 2023–2024 when combined with lost earnings tax and NICs revenues (£3.0 billion) and indirect effects on other taxes (£3.7 billion). Spending on health care has increased, indicating the reciprocal association between a time of financial inactivity and a decline in health. Given the well-established detrimental effects of unemployment on people’s health, we calculate that each individual moving into health-related inactivity costs the NHS between £900 and £1,800 annually. In addition, it may lead to more costs down the road.

1.11 Stopping and even partly reversing the recent surge in health-related inactivity and in-work illness might significantly reduce a significant and growing burden on public coffers. We examine three scenarios for the longer-term development of health-related inactivity, mostly based on these estimates: The primary prediction from our Financial and Monetary Outlook (EFO) published in March 2023 is that working-age participation will increase from 78.6% in 2022–2023 to 79.3% in 2027–2028. According to this projection, borrowing starts to decline in 2023–24 and reaches £49.3 billion (1.7 percent of GDP) by 2027–28. Debt, excluding the Financial Institution of England, starts to grow in 2026–27 and then gradually declines to 94.6 percent of GDP in 2027–28.

According to our Financial and Monetary Outlook (EFO) for March 2023, working-age participation will increase from 78.6% in 2022–2023 to 79.3% in 2027–2028. According to this projection, borrowing starts to decline in 2023–24 and reaches £49.3 billion (1.7 percent of GDP) by 2027–28. Debt, excluding the Financial Institution of England, starts to grow in 2026–27 and then gradually declines to 94.6 percent of GDP in 2027–28. An optimistic scenario in which the rate of change in working-age participation resumes its pre-pandemic trend throughout the 2010s and increases to 80.5% by 2027–2028.

This is driven by a 500,000 (20%) reduction in health-related inactivity (as well as a corresponding decrease in in-work illness) in comparison to our core projection. By 2027–2028, this scenario decreases borrowing by £18.7 billion (0.6 percent of GDP) compared to our core prediction. Of that amount, £6.5 billion comes from lower welfare expenditure, £10.9 billion from higher tax receipts, and £1.3 billion from lower debt curiosity spending. Beginning in 2025–2026, debt decreases, reaching 91.6% of GDP in 2027–2028.

Consequently, throughout the 2010s, the rate of change in working-age participation recovered to its pre-pandemic trajectory, increasing to 80.5% by 2027–2028. This is driven by a 500,000 (20%) reduction in health-related inactivity (as well as a corresponding decrease in in-work illness) in comparison to our core projection. By 2027–2028, this scenario decreases borrowing by £18.7 billion (0.6 percent of GDP) compared to our core prediction. Of that amount, £6.5 billion comes from lower welfare expenditure, £10.9 billion from higher tax receipts, and £1.3 billion from lower debt curiosity spending. Beginning in 2025–2026, debt decreases, reaching 91.6% of GDP in 2027–2028. a regression scenario in which the percentage of working-age people participating drops for one further year to 78.2 percent, then hovers around that level until 2027–2028.

By 2027–2028, this scenario symmetrically predicts 500,000 more people to be unemployed due to health-related reasons than our core projection. By 2027–2028, borrowing will increase by £21.3 billion (0.8 percent of GDP) compared to our central forecast. Of this amount, £7.6 billion will come from higher welfare spending, £10.9 billion from lower tax revenues, £1.3 billion from increased pressure on the NHS, and £1.5 billion from higher debt curiosity spending. Due to the inclusion of higher NHS expenditure and some persistence in incapacity benefits spending as people go into the workforce, the borrowing shift is not much greater than in our upside scenario. Debt is still increasing, with a projected total of 98.0% of GDP in 2027–2028.

Chart 1.3: Variations in debt and participation across the scenarios

Power

1.12 Despite our rather quick decarbonisation over the last 30 years, the UK economy is still perhaps the most reliant on petrol in Europe. The UK has achieved the largest reduction in CO2 emissions.

emissions of any G7 country since 1990, mostly as a result of our primary energy source being converted from coal to fuel. Because of this, gasoline’s share of total inland vitality consumption increased from 24% in 1990 to 40% in 2022 (see the left panel of Chart 1.4). As a result, before Russia invaded Ukraine, the UK had the fourth-most gas-intensive banking system out of 40 European countries. Additionally, since 2000, online imports have increased to account for around half of the gasoline being used in the UK (see the right panel of Chart 1.4). Therefore, changes in the price of petrol internationally represent more of a “words of commerce” shock for the UK than for many other advanced nations.

Chart 1.4: Energy use and trade in the United Kingdom

1.13 Fuel prices have decreased recently after rising thirteen times in the aftermath of Russia’s invasion of Ukraine in 2022, but they are still expected to remain above their historical average until the mid-2020s. In the ten years before the pandemic, European wholesale fuel prices were relatively stable at around 50 pesos per therm. This was due to a continually increasing supply of pipeline fuel from Russia and Norway to meet the gradually increasing demand from European businesses and families. The disruption of daily deliveries of Russian pipeline gasoline resulted in spot prices stabilising at £6.40 per therm in late August before plummeting to £1.10 at the time of our most recent projection in March 2023. Markets anticipate that prices will stabilise at around £1 per therm in the second quarter of 2025 as more capacity to import LNG from Qatar and America becomes available.

1.14 For the first time, gasoline has become more expensive globally due to the increase in the price of renewable energy sources. Gas-fired energy remained competitively priced with various forms of electrical energy, even in the face of significant declines in the cost of renewable energy sources over the preceding ten years. In 2020, the mean lifecycle or “levelized” price of vitality was 58% lower than offshore wind, 8% lower than onshore wind, and 35% lower than photovoltaic energy. [1] However, projections for the lifetime cost of using fuel to produce electricity in 2022 exceeded the value of renewable energy by a factor of three to eight, depending on the expert’s choice. However, gasoline is likely to revert to being aggressive with low-carbon expertise in lifetime unit price terms, at least temporarily, when international fuel prices follow market predictions.

Chart 1.5: Price of petrol

1.15 Not only has the demand for energy declined recently due to rising fuel prices, but household earnings have too. The overall decline in the UK financial system’s energy depth since the energy crisis of the 1970s indicates that the increase in average energy prices over the preceding two years has had a very little impact on production and consumption. Even though the government’s energy value guarantee and the Ofgem value cap mitigated the impact of higher wholesale fuel prices on consumers, the cost of fuel for families increased by 150% between the first quarter of 2019 and the last quarter of 2022. Even after accounting for the warmer-than-average temperatures of the previous winter, this led to a 15% reduction in the family’s need for energy over the earlier winter. However, the lack of alternatives has limited the potential for a further shift away from electrical energy and heat. While there have been similar declines in energy consumption across businesses, some of the most energy-intensive sectors have seen reductions of more than 50% in energy usage.

1.16 Gas-exporting countries outside of Russia have also responded strongly to rising gasoline prices. After the invasion, Russian imports into the UK decreased to zero; however, in 2022, LNG imports from Qatar and the US increased by 40 and 230%, respectively, more than offsetting the Russian deficit. Up until now, a large portion of the LNG imported into the UK has been shipped back to Europe, where a lack of infrastructure has made it more difficult for other countries to import LNG. Nonetheless, global funding for pure fuel supply increased by almost $30 billion (12%) in 2022 and is expected to increase by an additional $15 billion in 2023. This funding is crucial for boosting LNG imports into Europe, which is followed by the anticipated development of global export capability over the remaining ten years.

1.17 In opposition to this, there is currently no evidence of a strong enough reaction to the decline in the relative cost of renewable energy in the UK. Between 2000 and 2021, the percentage of electrical energy-generating capacity derived from renewable sources increased from less than 5% to more than 45%. Additionally, the UK saw a gain in its wind era capacity of 11% and its solar era capability of 4% in 2022 (compared with increases of 8% and 22%, respectively, in European countries). Despite the fact that the lifetime cost of renewable vitality has decreased, there isn’t any evidence of a significant shift in financing for renewable vitality in the UK in response to the most recent fuel price surge. In 2022, complete-economy support for low-carbon applied sciences increased by 0.1% of GDP in France, 0.2% of GDP in Germany, and 0.2% of GDP in Italy; but, in the UK, it actually decreased by 0.2% of GDP.

1.18 Launched The UK government’s investments in cutting-edge applied sciences are also the driving force behind our pivotal position for the possible transition to net zero carbon emissions by 2050. According to our 2021 Fiscal Dangers Report (FRR), public financing overall is expected to be over £327 billion over the next 30 years as we move towards being carbon neutral by 2050 (based on 2019 prices). In our core scenario, this amounts to £25.4 billion during the four years to 2024–2025. To date, the authorities have committed the equivalent of £22.5 billion. In the energy industry, its purposeful funding of £3.8 billion is more than the £2.4 billion predicted in our core scenario. Additionally, the authorities have ambitions to create up to eight more nuclear reactors as part of their vitality safety approach. In contrast, the purposeful financing provided by the authorities for decarbonising buildings, at £8.6 billion, is less than the £10.9 billion that is envisaged in our case. Furthermore, not much has been done to replace the more than 20 million household fuel boilers with carbon-neutral alternatives, even though doing so is essential to reducing our dependency on fuel for home heating.

Desk 1.1: Our 2021 scenarios and web-zero public funding projections until 2024–25

Presented Authorities Financing Fiscal Dangers Report for 2021 Public Funding Possibilities Total Distinction Low central excess Low central excess Whole of which: 22.5 16.5 25.4 33.7 6.0 -2.9 -11.3 Floor movement 5.9 6.4 6.2 0.5 0.2 0.0 6.4 Structures 17.2 4.5 -2.2 -8.6 8.6 4.1 10.9 Vitality 1.9 2.4 2.9 1.9 1.4 0.9 3.8 1.9 Exchange Dissimilarities: 1.2 0.4 1.0 1.7 0.8 0.2-0.5-1.7-2.4-3.2 2.5 4.2 4.9 5.6

Notification: Further details on this comparison are provided in the wording for Desk 3.1.

1.19 There is a chance that the UK financial system will continue to rely heavily on imported fuel rather than fully transitioning to renewable energy sources as more foreign LNG supply comes online. By the second part of this decade, it is expected that investments in LNG processing and transportation capabilities will significantly increase fuel imports into Europe and reduce wholesale gasoline prices back to levels seen before the financial crisis. This might further reduce the incentive for manufacturers to invest in and for consumers to switch to renewable energy sources. This would result in fuel being removed from the UK’s dominant—and crucially for retail costs—marginal petrol supply for a longer period of time than predicted under the Government’s Web Zero Technique. In the event of adverse demand- or supply-driven price fluctuations in the expanded global LNG market, the UK financial system would experience more trade shocks similar to the ones described above.

1.20 In dire circumstances, continuing with our current fuel-dependent lifestyle might prove to be just as expensive financially as completing the shift to Web Zero. We consider a stylized scenario in which the UK continues to rely heavily on gasoline and unfavourable shocks to global petroleum prices, similar in size to the shocks last year, occur every ten years. Should fiscal policy react similarly to protect individuals and businesses against comparable increases in retail expenses, these shocks might cost the government between two and three percent of GDP annually. Considering rising debt interest rates and their impact on financial activity, such periodic increases in gasoline costs would increase the nation’s debt by almost 13% of GDP by 2050–2051. This is about twice as much as the mainstream estimate of 6% of GDP for the total cost of public support needed to complete the shift to web zero by the turn of the century.

Chart 1.6: Possible future gasoline value shocks and their financial effects

Sustainability of Debt

1.21 After peaking at just over 250 percent of GDP in 1946, public debt dropped to a low of 28 percent of GDP at the turn of the century. Public sector debt fell by over 200 percent of GDP in the years after World War II, falling by an average of four percentage points annually between 1945 and 2000. This consistent reduction in state debt after World War II was made possible by the relatively advantageous:

trends in demographics brought on by the “child booms,” growing rates of female employment, and the regular lengthening of working life; due to “child booms,” growing costs associated with employment for women, and the customary extension of working lives; financial tendencies, where, for much of this era, the rate of financial progress exceeded the rate of interest on government debt, typically as a result of insurance policies of “monetary repression”; and

, with the speed of financial development often surpassing the interest rate on government debt during this period, owing to insurance policies of “monetary repression”; and geopolitical tendencies, where decreasing defence spending creates space for the welfare state to grow without burdening borrowing and debt.

1.22 Government debt levels have tripled since the year 2000 and are now at their highest point in more than 60 years, accounting for around 100% of GDP. The UK and other great countries have faced an incredible array of crises this century, which has contributed to the tremendous improvement in public debt. Three-quarters of the 72 percent GDP increase in public debt since the start of this century happened during the six years that were most severely affected by the financial, pandemic, and energy crises. But it has also proven to be more difficult to reduce public debt in between crises than it was in the previous century. Even though all UK chancellors have been committed since 2010 to reducing public sector debt as a percentage of GDP, this objective was only met in three of the last twelve years and by a meagre 3.4 share factors overall.

Chart 1.7: Since 1900, the debt-to-GDP ratio

1.23 While other governments also have to contend with growing interest rates on debts that are close to or more than 100% of GDP, the UK’s public debt position is more vulnerable to certain shocks than it was before or in other developed countries. In particular, the UK government has

The public liabilities’ shortest common maturity is on file. Combined with central authority obligations, the UK’s inventory of gilts and other Treasury liabilities reached an excessive median duration of 8 and a half years in 2022. But as part of its quantitative easing (QE) programmes, the Financial Institution of England has purchased one-third of the liabilities since 2008 in exchange for central bank reserves. These reserves have a variable rate of interest, which means that they have a one-day maturity. The median term of the consolidated liabilities of the UK public sector as a whole has decreased from seven years in 2008 to two years at this time due to the cumulative impact of those QE activities. This makes the public finances in the UK far more vulnerable to the sharp increase in interest rates that we have seen over the last year.

Combined with central authority obligations, the UK’s inventory of gilts and other Treasury liabilities reached an excessive median duration of 8 and a half years in 2022. But as part of its quantitative easing (QE) programmes, the Financial Institution of England has purchased one-third of the liabilities since 2008 in exchange for central bank reserves. These reserves have a variable rate of interest, which means that they have a one-day maturity. The median term of the consolidated liabilities of the UK public sector as a whole has decreased from seven years in 2008 to two years at this time due to the cumulative impact of those QE activities.

This makes the public finances in the UK far more vulnerable to the sharp increase in interest rates that we have seen over the last year. the highest percentage of debt connected to inflation of any major, superior financial system. The percentage of UK gilts (also known as “index-linked gilts”) whose value is directly tied to RPI inflation increased from around 10% in the late 1980s to approximately 25% last year, more than twice as much as the second-largest advanced-economy issuer, Italy, at 12%. This, together with the reduction in typical maturities, has meant that rising inflation will boost nominal debt levels and debt service costs more quickly than it has in the past or has in the past in other countries.

The percentage of UK gilts (also known as “index-linked gilts”) whose value is directly tied to RPI inflation increased from around 10% in the late 1980s to approximately 25% last year, more than twice as much as the second-largest advanced-economy issuer, Italy, at 12%. This, together with the reduction in typical maturities, has meant that rising inflation will boost nominal debt levels and debt service costs more quickly than it has in the past or has in the past in other countries. More of its debt is held by individual foreign purchasers than in the majority of other G7 countries.

The UK government has historically depended on a sizable group of long-term savers, particularly pension and insurance funds, to pay down its debt. However, throughout the course of this century, the UK government’s debt in foreign (non-official) hands has almost quadrupled from 13 to 25 percent, making it the second biggest share factor among the G7 and two share factors behind France. This undoubtedly makes the UK public finances more vulnerable to unforeseen shifts in the perception of foreign investors about the relative value of UK sovereign assets. This risk stems, in part, from the demand for sterling debt from pension funds with sterling commitments, which has created a rather inelastic demand for gilts and is undoubtedly discounted over time.

Chart 1.8: Share of inflation-linked issuance and median maturity of UK public debt

1.24 The events of the preceding year have shown the greater fragility of the UK authorities’ debt position. Specifically, within the preceding 12 months:

The cost of borrowing for the UK government has increased more than in any other G7 financial system and has been more volatile than it has ever been in the previous 40 years. As of the end of June this year, the yield on UK 10-year government bonds increased by 2.0 share factors, compared to a G7 average of 0.5 share factors throughout the course of the year. By the end of September and the beginning of October of the previous year, the volatility of 10-year gilts peaked. Over a month-to-month period, yields increased by 190 foundation factors, marking the largest increase since 1986.

As of the end of June this year, the yield on UK 10-year government bonds increased by 2.0 share factors, compared to a G7 average of 0.5 share factors throughout the course of the year. By the end of September and the beginning of October of the previous year, the volatility of 10-year gilts peaked. Over a month-to-month period, yields increased by 190 foundation factors, marking the largest increase since 1986. The increase in interest rates abroad has caused the cost of debt servicing in the UK to grow more than twice as quickly as it did before or in other countries.

Due to the UK’s debt maturities being shorter than those of other G7 countries, our debt payment costs were impacted by the interest rate increase six times faster than they were before. In contrast to France and Italy, where curiosity prices were 0.5 and 1.0 percent of GDP, respectively, and the United States, where they were down 0.2 percent of GDP, the online curiosity price set by the UK authorities increased by 2.6% of GDP between 2019 and 2022. That is, even though in 2022, all of those countries will have gross debt exceeding the GDP of the UK by between 10 and 40 percent.

Due to the UK’s debt maturities being shorter than those of other G7 countries, our debt payment costs were impacted by the interest rate increase six times faster than they were before. In contrast to France and Italy, where curiosity prices were 0.5 and 1.0 percent of GDP, respectively, and the United States, where they were down 0.2 percent of GDP, the online curiosity price set by the UK authorities increased by 2.6% of GDP between 2019 and 2022. That is, even though in 2022, all of those countries will have gross debt exceeding the GDP of the UK by between 10 and 40 percent. Compared to other countries, the UK public finances have not seen much of a gain from the increase in global inflation.

The UK’s normal government gross debt is expected to increase by 3.1% of GDP in 2023 due to monthly inflation rates that are expected to approach double digits throughout the continent, while common debt-to-GDP ratios are expected to decrease by 1.8 percentage points in other European countries. Fiscally speaking, the UK in particular experienced the “flawed kind of inflation” in 2022 as a result of rising excess earnings between each common wage, which is a major source of tax revenues, and the GDP deflator, which measures inflation and is used to calculate nominal GDP. Index-linked debt, pensions, and working-age welfare funds will all increase as a result of these factors. Without a doubt, the differences in 2022 between the GDP deflator (5.4%), the CPI (9.1%), and each RPI (11.6%) were the largest on record.

1.25 Looking ahead to the next five years, the UK authorities’ plans to stabilise and then reduce debt as a percentage of GDP are relatively modest by historical and global standards. According to our central forecast from March 2023, the UK authorities’ goal measure of underlying debt (excluding Financial Institution of England) as a percentage of GDP increased by more than five percent from 88.9 percent last year to 94.8 percent in 2026–2027, before barely falling to 94.6 percent in 2027–2028. The UK had many periods of increasing debt in the 1970s, the early 1980s, and the early 1990s, although these periods were often brief, sporadic, and ended within a few years. Hence, the second half of the last century was characterised by declining debt in general and most of the time. In other parts of Europe, 75 percent of governments, along with all major economies, are expected to begin reducing their gross debt by 2024 and by a total of 9.1% of GDP between 2020 and 2024.

1.26 Looking back over the next 50 years, a new set of long-term fiscal projections highlights the difficulties of trying to keep debt from growing uncontrollably. Our new baseline long-term fiscal projection, which is primarily based on an updated fiscal start line provided by our March 2023 EFO and takes into account the newest residents and rate of interest developments, shows:

Over the next 50 years, the population’s ageing is expected to reduce the ratio of working-age residents to retired residents from four to three to one, despite an increase in assumed web inward migration ranges from 129,000 to 245,000 per year in regular state (which increases the working-age population by more than the pensioner-age population, even when accounting for the ageing of migrants themselves).

is expected to reduce, over the next 50 years, the ratio of working-age to retired people from four to three to one, despite an increase in the assumed ranges of web inward migration from 129,000 to 245,000 per year in regular states (which increases the working-age population by more than the pensioner-age population, even when taking into account the ageing of migrants themselves). Tax collections are strained lower, primary (non-interest) expenditure is strained higher, and a widening hole is left between the two, causing the first stability to worsen from a 1.1 percent GDP surplus in 2027–2028 to a 10 percent GDP deficit by the mid-1970s.

declines, going from a 1.1% GDP surplus in 2027–2028 to a 10% GDP deficit by the middle of the 1970s. The swift increase in gilt yields indicates that the effective rate of interest on government debt (‘R’) is close to the financial system’s expansion price (‘G’), eliminating the positive influence that the recent unfavourable ‘R-G’ has had on debt dynamics. Rising interest rates and an increasing debt stock drive debt curiosity prices, which are now at 4% of GDP and might reach an all-time high of 12% of GDP by the middle of the 1970s.

, as well as an increasing debt stock, drive debt interest rates from 4% of GDP at present to what may reach an all-time high of 12% of GDP by the middle of the 1970s. Due to the first major surplus and declining numbers of students enrolled in training, the debt-to-GDP ratio drops to a low of 88% in the mid-2030s. But then, a growing primary deficit and skyrocketing commodity prices sent debt on a rapid track, reaching 31% of GDP by the middle of the 1970s—31 percentage points more than the prediction from the previous year.

1.27 Although concerning in and of itself, this baseline prediction probably underestimates the whole range of possible long-term strains on public budgets. in particular, the baseline estimate assumes there is no relationship between the amount of debt and the interest rate that the federal government pays on it. As governments get more indebted, the market becomes saturated, and purchasers charge more to offset the growing risk of default, interest rates often increase. The range of estimates for how sensitive sovereign borrowing prices are to debt increases is from 17 to 30 basis points for every 10 share levels that the debt-to-GDP ratio improves. By applying the reduction in those sensitivities to our forecasts, debt would increase by an additional 65% of GDP by the middle of the 1970s, reaching 376% of GDP by that time.

The federal government paid for it. As governments get more indebted, the market becomes saturated, and purchasers charge more to offset the growing risk of default, interest rates often increase. The range of estimates for how sensitive sovereign borrowing prices are to debt increases is from 17 to 30 basis points for every 10 share levels that the debt-to-GDP ratio improves. By applying the reduction in those sensitivities to our forecasts, debt would increase by an additional 65% of GDP by the middle of the 1970s, reaching 376% of GDP by that time.

excludes from consideration any underfunded coverage goals or other risks that have been discovered and are described elsewhere in this study, except for the impact of certain non-demographic and other demographic pressures on public expenditure. These include: (i) the possibility that public investments will move towards web zero, which could cost 0.4 percent of GDP annually between now and 2050; (ii) the government’s goal to increase defence spending to 2.5 percent of GDP, which could cost 0.5 percent of GDP annually; (iii) the government’s goal to make 100% capital allowances permanent and its repeated failure to index petrol duties, which could cost 0.4 percent of GDP annually overall; and (iv) the purposeful reduction in department If just the last of those risks materialises in the late 2020s, debt will not be decreasing through the 2030s and will instead reach 385 by the mid-2070s.

The demographic and a few non-demographic constraints on public expenditure are addressed elsewhere in this paper. These include: (i) the possibility that public investments will move towards web zero, which could cost 0.4 percent of GDP annually between now and 2050; (ii) the government’s goal to increase defence spending to 2.5 percent of GDP, which could cost 0.5 percent of GDP annually; (iii) the government’s goal to make 100% capital allowances permanent and its repeated failure to index petrol duties, which could cost 0.4 percent of GDP annually overall; and (iv) the purposeful reduction in department If just the last of those risks materialises in the late 2020s, debt will not be decreasing through the 2030s and will instead reach 385 by the mid-2070s.

disregards possible shocks to the public finances in the future, even when hostile events seem to have become more frequent, severe, and costly. We’ve seen three major shocks so far this century, with debt accounting for around 20% of GDP in each case. That is double the magnitude and twice the cost in terms of money of the shocks that the UK experienced in the latter part of the 20th century. The already unsustainable levels of debt predicted by the foregoing baseline dynamics may have increased by an additional 125 percent of GDP if similar shocks had been repeated over a longer period of time, bringing debt to 435 percent of GDP by the mid-2070s. [2]

Chart 1.9: Long-term debt forecasts under entirely distinct scenarios

1.28 The range of internal fiscal pressures and the regularity of external fiscal shocks suggest that governments should prepare for a significant ex ante decline in debt if they want it to remain constant as a percentage of GDP. This illustrates the reality that a risk-adjusted or implied path for public debt will likely be higher than a median path conditioned on current coverage (which is the concept of our estimates, as mandated by Parliament), because the impact of fiscal risks on debt is somewhat skewed upward rather than round zero. Providing for external fiscal shocks of the same magnitude as those we have seen this century would call for an ex ante fiscal attitude in which the debt-to-GDP ratio would decline by 12% of GDP over a specified five-year period, or 2.5% of GDP annually on average. To account for the mere possibility of DEL increases during future assessments of expenditure, debt reduction of a lesser but still significant 1.6% of GDP annually would need to be the goal in order to prevent debt from increasing. Making no ex ante provision for either is perhaps more important than preventing debt from continuing on its steadily increasing track, if the most recent history is any guide for the long run.

Register of fiscal peril

1.29 In addition to thoroughly examining the aforementioned risks, this paper lists the many other significant threats to public expenditures that are covered by our fiscal risk register. Following our last inventory in our 2021 FRR:

Public finance shocks that occurred in the early half of this century continue to be more frequent, severe, and costly than those that occurred in the second half of the previous century. In addition to the once-in-a-century financial and pandemic shocks, the UK and other European economies are also experiencing a once-in-a-generation energy crisis. These events are still being felt today. With each of those shocks came previously unheard-before multibillion-pound budgetary measures, such as financial institution bailouts, the furlough programme, and now the vitality value guarantee. The risks associated with cyberattacks, disruptions to the financial sector, increased tensions in international trade, and the declining quality of European safety are also higher than they were two years ago. Additionally, there are short-term risks that we will take into account in our next EFO prediction this fall due to the steep increase in mortgage interest rates that is flowing through the financial system when fixed-rate contracts are refinanced.

In addition to the once-in-a-century financial and pandemic shocks, the UK and other European economies are also experiencing a once-in-a-generation energy crisis. These events are still being felt today. With each of those shocks came previously unheard-before multibillion-pound budgetary measures, such as financial institution bailouts, the furlough programme, and now the vitality value guarantee. The risks associated with cyberattacks, disruptions to the financial sector, increased tensions in international trade, and the declining quality of European safety are also higher than they were two years ago. Additionally, there are short-term risks that we will take into account in our next EFO prediction this fall due to the steep increase in mortgage interest rates that is flowing through the financial system when fixed-rate contracts are refinanced.

Because the authorities’

  • long-term goals have exceeded their current resources,
  • current insurance policies have proven challenging to execute, and
  • fiscal management frameworks have come under strain, coverage-related fiscal risks have increased.

The first category includes the government’s about £10 billion annual goal to extend temporarily generous capital allowances and its approximately £13 billion annual goal (in current currency) to raise defence expenditure to 2.5 percent of GDP. The second class has low revenue, which might reach £4 billion in 2027–2028 if the authorities keep the petrol speed limit in place as they have done every year since 2011. In the third class, major fiscal policy announcements have been made outside of fiscal occasions over the last two years, fiscal guidelines have been modified often, and the number of de facto insolvencies among local governments has increased.

.. The first category includes the government’s about £10 billion annual goal to extend temporarily generous capital allowances and its approximately £13 billion annual goal (in current currency) to raise defence expenditure to 2.5 percent of GDP. The second class has low revenue, which might reach £4 billion in 2027–2028 if the authorities keep the petrol speed limit in place as they have done every year since 2011. In the third class, major fiscal policy announcements have been made outside of fiscal occasions over the last two years, fiscal guidelines have been modified often, and the number of de facto insolvencies among local governments has increased.

Long-term trends have become an immediate reality due to population ageing, pandemic-related disruptions, and inflation spikes. These factors have significantly increased pressure on pensions, health benefits, and the National Health Service (NHS). Attempts to address local climate change by moving away from fossil fuels are rapidly depleting the £39 billion the authorities now get in tax money from cars that run on petrol and diesel. Furthermore, the rapid normalisation of interest rates over the last 18 months has increased the amount of £22 billion that the authorities may want to spend in 2022–2023 to service their growing debt inventory, using up fiscal headroom that may be available to respond to various risks and pressures.

1.30 The intensity of the financial risks has increased within the last two years for all of those reasons. Examining all 53 risks listed in our fiscal risks register for 2021 (after some technical risk consolidation), the changes in risks over the preceding two years are as follows: 13 have become apparent, along with the increased sensitivity of debt interest payments to inflation, the adjustment of fiscal guidelines in accordance with the projection, and the fact that the whole problem of productivity is weighing on potential production in the medium term. Each of the 13 remains an active threat.

Along with the increased susceptibility of debt interest expenditure to inflation, the adjustment of fiscal policies in accordance with the projection, and the overall problem of productivity impacting potential production in the medium term, Each of the 13 remains an active threat. 15 have grown, along with pricing and demand constraints on health and social care expenditure, long-term increases in state pension spending, and the possibility of a delayed shift to Web Zero, raising the associated budgetary cost.

combined with rising demand and pricing pressures on health and social care expenditure, long-term increases in state pension spending, and the possibility of a postponed shift to Web Zero, all of which would raise the associated budgetary cost. Together with the exorbitant cost of tax expenditures, four have declined, as has the possibility of advancement from a labour supply discount (partially as a result of measures made within the March 2023 price range) and the long-term pressure on excise taxes from changes in behaviour and technology.

Along with the exorbitant cost of tax expenditures, the possibility of advancement from a labour supply discount (partially because of measures made within the March 2023 price range) and the long-term pressure on excise charges from changes in behaviour and technology. 19 remain the same, including the risks of financial crises and recessions, these throughout the execution of planned welfare changes, and individuals about tax evasion.

together with the risks associated with financial crises and recessions, these throughout the execution of purposeful welfare changes, and individuals about tax evasion. The post-pandemic effect on receipts and public providers, as well as a structural change in receipts as a result of the pandemic, have both been rectified and removed from the register.

from the register: a structural change in receipts as a result of the pandemic, as well as the post-pandemic effect on receipts and public providers. This study now includes four more risks: cyberattacks, growing tensions in international trade, ongoing and high inflation, and international safety concerns. This brings the total number of threats listed in our record to 57.

Changes made to the OBR fiscal hazard registry since our 2021 fiscal dangers report are shown in Chart 1.10.

Sedentary behaviour and health

Overview

2.1 The pandemic has caused a substantial increase in labour market inactivity, which had been declining consistently over the preceding ten years. A large portion of this most recent improvement has been driven by an increase in those who report long-term illness as their primary reason for not being employed. If health-related inactivity continues to grow, it will reduce the UK’s medium-term financial advancement prospects and tax revenues while driving up health and welfare expenditure. This presents a serious threat to fiscal sustainability. Due to the pandemic-related increase in long-term illness among working-age individuals and the resulting rise in ill health among those in the workforce, there has been an increase in annual welfare costs of £6.8 billion, lost tax revenue of £8.9 billion, and borrowing of £15.7 billion (0.6 percent of GDP) as a result.

2.2 This chapter examines the financial risks brought about by the sharp decline in labour force participation and increase in inactivity among the large number of people of working age. [3]

In doing so, it takes into account:

longer-term trends in physical activity and inactivity before and after the pandemic, as well as the relative contributions of illness and other factors to these patterns; sources of the most recent increase in health-related inactivity, including the contributions of pre-pandemic well-being tendencies, the pandemic itself, and the welfare system; before and after the pandemic, and the corresponding contributions of illness and other factors to these tendencies;

together with the roles played by pre-pandemic health trends, the pandemic itself, and the welfare system; the characteristics of the chronically ill and sedentary residents, including their age, health status, previous job history, industry, and {qualifications}; together with their age, health status, previous employment history, industry, and {qualifications}; the financial effects of increased health-related inactivity and in-work illness on tax revenues, welfare payments, and health care expenditures; and the effects of in-work illness on tax revenues, welfare, and health care costs; as well as possible outcomes for the long-term development of health-related inactivity and their financial consequences for the general population.

Changes in the financial activities and exercise of working-age individuals

2.3 The percentage of working-age people participating in the labour force (either by working or looking for a job) decreased by 1.5 share factors as much as the middle of 2022 and remains 0.7 share factors below its pre-pandemic peak within the three months leading up to April 2023, after rising by 3.3 share factors to a file excess of 79.8% within the decade to early 2020. Labour participation was a major contributor to GDP growth prior to the pandemic, consistently exceeding our projections and partially offsetting drawback surprises on productivity growth.

[4] Over the last three years, falling working-age participation rates and rising inactivity rates have unwound around a fifth of this post-financial disaster improvement and are relatively unusual among superior economies whose participation rates have typically continued rising post-pandemic (see Field 2.1). causes of the decline in activity before the pandemic 2.4 The regular decline in working-age inactivity from 9.5 million to 8.4 million people in the ten years prior to the pandemic reflected a rise in the average retirement age and a decline in inactivity due to household or caring responsibilities, both of which were primarily driven by female participation.[5]

As self-reported in the Labour Power Survey (LFS), Chart 2.1 displays ranges of working-age inactivity throughout time, broken down by the primary reasons given by survey respondents for being economically inactive. It shows that of the 1.1 million working-age people classified as inactive between early 2010 and early 2020, the following fall within the whole range:

Those who were categorised as caring for their home or household decreased by 530,000, from 2.4 million to 1.8 million. decreased by 530,000, from 2.4 million to 1.8 million; the number of college students who were not enrolled during the pre-pandemic period was around 2.5 million. was relatively stable throughout the pre-pandemic period at around 2 million; the number of people who reported long-term sickness as their primary reason for inactivity remained stable at approximately 2 million.

given that the number of them remained largely inactive at about 2 million; the number of “early” retirees decreased from 1.5 to 1.1 million in the ten years prior to the pandemic, as the State Pension ages for men and women equalised at 65 by November 2018 and increased to 66 by October 2020; and decreased from 1.5 to 1.1 million in the ten years prior to the pandemic, indicating the equalisation of male and female State Pension ages at 65 by November 2018 and the increase to 66 by October 2020; additionally, the number of people who were inactive due to “different” causes increased slightly from 1.1 to 1.2 million in the final ten years prior to the pandemic. [6]

Chart 2.1: Financial inactivity among 16–64 year olds by underlying reason

Origins of the post-pandemic increase in idleness

2.5 After the pandemic, the number of working-age people classified as inactive increased by around 650,000 at its highest point and continues to rise by 350,000 above pre-pandemic levels. The makeup of this most recent wave of inactivity since the pandemic’s start is seen in Chart 2.2. [7]

It shows the 350,000 increase from the beginning of 2020:

The number of people who are not in the labour force because they are caring for their family or home has continued to decline by an additional 200,000, which is indicative of two pre-pandemic trends that persisted until early 2021: a declining start rate that reduced the number of mothers of younger children and increasing employment rates within this demographic. [8]

has persisted in shrinking by an additional 200,000, indicating the persistence of two pre-pandemic trends into early 2021: a decreasing start rate, reducing the number of mothers with younger children, and increasing employment rates among this demographic. By early 2021, the number of college students who were not enrolled had increased by 390,000, which might be attributed to the lack of viable job options in addition to the pandemic and the spike in A-level results after the cancellation of examinations. However, since the financial system has reopened, the number of dormant college students has now dropped to levels similar to those before the outbreak.

had increased by 390,000 by the beginning of 2021, a result of the pandemic’s aftermath, a lack of viable job options, and an increase in A-level results after the postponement of examinations. However, since the financial system has reopened, the number of dormant college students has now dropped to levels similar to those before the outbreak. The variety of early retirees saw a little and transient improvement, peaking at 80,000 in mid-2021, and there was a far greater increase in the flows from work to retirement (offset by growing flows from retirement to alternative basic grounds for inactivity). [9]

The most recent data, however, shows that trend has entirely reversed, with the number of working-age retirees currently falling by 50,000 below pre-pandemic levels.

which peaked in mid-2021 at 80,000, and a far larger increase in the flows from work to retirement (balanced by growing flows from retirement to other underlying reasons for inactivity). The most recent data, however, shows that trend has entirely reversed, with the number of working-age retirees currently falling by 50,000 below pre-pandemic levels. The number of people who attribute their lack of activity to long-term illness has been shown to be one of the pandemic’s most significant and lasting effects. It has increased gradually over the past three years, reaching 440,000 by early 2023, and now accounts for more than the overall improvement in inactivity when compared to pre-pandemic levels.

since their primary reason for inactivity has been shown to be likely the most significant and lasting effect of the pandemic, increasing gradually over the preceding three years and by 440,000 by early 2023, and so now more than accounts for the overall improvement in inactivity when compared to pre-pandemic ranges. This class of inactive people for “different” reasons increased in 2020, probably as a result of the initial pandemic disruption that led people to categorise themselves as inactive because they did not require employment but did not provide one of the common causes. However, by early 2023, this class was only 100,000 above pre-pandemic ranges.

Table 2.2: The increase in working-age inactivity from the beginning of 2020

2.6 Of the many factors contributing to the increase in inactivity after the pandemic, the 440,000 improvement in long-term disease is very concerning from a financial standpoint because of: It’s the cause of the biggest and most stable increase in inactivity during the preceding three years, and it now stands as the largest single category of people of working age outside of the labour force.

constitutes the most significant single group of working-age people outside the labour force during the previous three years; The numbers continue to climb, with early 2022 and early 2023 accounting for over half of the increase over the previous three years. Early 2022 and early 2023 will see over half of the growth in the preceding three years; earlier increases in health-related inactivity have been shown to be permanent. The percentage of people aged 16 to 64 who are unable to work due to chronic illness increased until the late 1990s. This was mainly due to older men of working age quitting the workforce during and after the early 1980s recession and frequently transferring to disability benefits. [10]

The percentage of people aged 16 to 64 who are unable to work due to chronic illness increased until the late 1990s. This was mainly due to older men of working age quitting the workforce during and after the early 1980s recession and frequently transferring to disability benefits. For health-related reasons, inactivity is more likely to result in financial costs in the form of increased welfare and health care expenditure as well as missed earnings tax and NICs income from work earnings (as addressed further on in this chapter).

How does the level of financial inactivity compare among advanced economies?

The UK consistently had one of the lowest rates of inactivity among G7 economies for those aged 15 to 64 between 2010 and the start of the pandemic in early 2020; only Japan had a decline in this rate in late 2019 (left panel of Chart A). In the early stages of the pandemic, inactivity increased everywhere except for Germany before declining everywhere, save for the UK in 2021 and 2022. This indicates that, as a result of the pandemic, the inactivity price for individuals aged 15 to 64 has increased in the US by 0.3 share factors and in the UK by 0.5 share factors (i.e., modest declines in inactivity in 2021 and 2022 haven’t offset the rise in 2020). However, it has decreased in the other five G7 economies (as shown in the best panel of Chart A). As a result, over this period, the UK’s inactivity price has risen beyond that of Canada and Germany but has remained below the OECD average.

Chart A: Inactivity costs for individuals aged 15-64 throughout the G7 economies

Comparable data on the causes of inactivity across advanced economies is much more limited; however, the majority of countries conduct similar labour force surveys that include a measure of illness or disability as the primary driver in addition to some self-reported data.

Pre-pandemic analysis revealed that, while not to the same extent as in the US, illness or infirmity continued to account for a larger share of inactivity in the UK economy compared to other European countries. In the mid-2010s, the percentage of working-age people who were inactive due to illness or incapacity was slightly less than 6% in the UK, compared to approximately 4% in the euro area and approximately 7% in the US. More recent data is available for European economies, but it only looks at the portion of economically inactive people who claim to require employment (roughly one-fifth of working-age inactive people in the UK). Moreover, data shows that during the course of the twenty-first century, the UK has consistently seen a higher percentage of both younger and older working-age populations who are inactive due to “personal sickness or incapacity” and the desire for employment than have Germany, France, and Italy. Additionally, between 2019 and 2021, these disparities grew as a result of UK levies being unchanged or increasing while declining in Germany and France.

In summary, the available global evidence indicates that although the UK has consistently shown strong performance on a global scale in terms of working-age participation, the post-pandemic increase in inactivity is noteworthy. Furthermore, the UK has consistently had higher rates of inactivity due to illness than the majority of other advanced countries, with post-pandemic trends likely to have exacerbated these differences.

  • “Working age” is defined here as those between the ages of 20 and 64, mostly based on data from the United States. Eurostat and the Census Bureau. Refer to Romei, V., “The excessive and rising US inactivity on account of household care and sickness,” Monetary Instances, November 6, 2015.
  • The working age of 15 to 24 is out of date; the working age of 50 to 64 is out of date. Refer to: IMF, The Latest Fall in Labour Force Participation in the United Kingdom: Reasons and Possible Solutions, July 2023.

Reasons behind the most recent increase in health-related inactivity 2.7 Three key factors, which are discussed in more detail below, seem to be driving the most recent increase in health-related inactivity in the UK: a halt and, in some cases, a partial reversal in the rate of change in several health conditions that existed before the epidemic. This shows a combination of an increase in the average age of people in working age and a deterioration in some specific health situations.

This shows a combination of declining trends in some specific health conditions and a rising average age of the working-age population; the impact of the pandemic on working-age population health due to the effects of COVID-19 on people’s physical health; the disruption of the pandemic’s effects on people’s mental health; and the treatment of non-Covid-related conditions.

due to the impact of the pandemic on people’s psychological health, the effects of COVID on people’s physical health, the treatment of non-COVID-related conditions, and the degree of continuous assessment, conditionality, and return-to-work support for these health-related benefits versus other out-of-work benefits, as well as the role of a prolonged period of weak family income growth and more recently intense cost-of-living pressures raising the incentives to assert the previous.

Pre-pandemic patterns of health

2.8 Longer-term, pre-pandemic well-being tendencies may be linked to a portion of the most recent improvement in health-related inactivity. For more than a century, advances in medical knowledge and the growing demands of living and working environments have gradually improved people’s quality of life across all age groups. These persisted throughout the early 21st century, as seen by the increases in healthy life expectancy and life expectancy as well as the decrease in premature mortality in Chart 2.3. Nonetheless, Chart 2.3 also shows a stagnation in these metrics over a large portion of the 2010s, with healthy life expectancy at the start (which is determined by fusing data from life expectancy surveys with self-reported survey information regarding the standard of people’s well-being) slightly declining in the two years prior to the pandemic, especially in more disadvantaged areas of the country. [11]

While improvements in healthy life expectancy and life expectancy have slowed down or stopped in most developed countries, the UK has seen a more severe stalling in healthy life expectancy in 2010 than any other country in Europe (see Field 2.2). [11]

Chart 2.3: Healthy life expectancy, premature death, and life expectancy

2.9 Only self-reported health data also indicate a growing trend in illness over the ten years before the pandemic. The reported prevalence of incapacity among the population increased gradually between the mid-1970s and mid-1990s, from about 15 to about 20 percent; it then levelled off in the 2000s and increased to 24 percent in 2022 (Chart 2.4). [12] Additionally, the self-reported prevalence of incapacity among working-age adults has recently increased noticeably, rising from 15 percent in 2010 to 23 percent in 2022. [13]

2.10 Compared to life expectancy and death data, self-reported data on illness and disability seem to point to an especially steep long-term rise. This is partially due to the fact that most medical advancements in the late 20th and early 21st centuries contributed to increased life expectancy and declining mortality. These advancements prevented deaths, but they also made people more likely to live with unfavourable health conditions that negatively impact daily life [14].

The fact that morbidity charges were essentially flat between 1990 and the mid-2010s [15] is indicative of this.

Additionally, throughout time, changes in society and public health are likely to have had an impact on self-reported health inclinations with regard to other medical or “goal” metrics. These include higher analysis costs resulting from better or more advanced medical testing and intervention; greater awareness of, and reduced stigma surrounding, physical and particularly psychological well-being circumstances; changes in how daily life demands and living standards interact with perceived well-being standing; and adjustments to social survey methodologies. [16] Although a growing body of research continues to suggest that self-reported well-being data is a strong predictor of future well-being and care needs, as well as mortality [17], these elements must be kept in mind throughout this chapter, which focuses primarily on self-reported data on the interactions between illness and labour market participation.

Chart 2.4: The incidence of self-reported disability among age groups

2.11 Setting aside these reporting obstacles, what factors, specifically for individuals under pension age, have contributed to the halt in long-term improvements in mortality and well-being during the decade before the pandemic? Three elements are particularly noteworthy:

First, there is a decline in each psychological well-being metric that is professionally tested and self-reported. Although it is particularly difficult to assess psychological well-being tendencies over time, self-reported psychological ill-health has been increasing among the long-term sick inactive population since the early 2010s (as detailed below), and this appears to be supported by different data. The Adult Psychiatric Morbidity Survey, which was created to be administered by psychiatrist-like clinically trained interviewers, verified an increase in indicators of generalised psychological issues among 16–64-year-olds in rounds 1 and 4 between 1993 and 2014 (from 14.1% to 17.5%).

Meanwhile, the similarly constructed Psychological Health of Children and Younger People Survey indicates that this trend persisted until 2020 for young working-age adults. Additionally, between 2012–13 and 2018–19, the percentage of patients with severe psychological problems on GP follow-up registers in England increased by just under 5%, from slightly over 0.8 percent to just under 1.0 percent (which may indicate increased analysis or therapy in addition to or instead of declining psychological health itself). [18]

Although it is particularly difficult to assess psychological well-being tendencies over time, self-reported psychological ill-health has been increasing among the long-term sick inactive population since the early 2010s (as detailed below), and this appears to be supported by different data. The Adult Psychiatric Morbidity Survey, which was created to be administered by psychiatrist-like clinically trained interviewers, verified an increase in indicators of generalised psychological issues among 16–64-year-olds in rounds 1 and 4 between 1993 and 2014 (from 14.1% to 17.5%). Meanwhile, the similarly constructed Psychological Health of Children and Younger People Survey indicates that this trend persisted until 2020 for young working-age adults.

Additionally, between 2012–13 and 2018–19, the percentage of patients with severe psychological problems on GP follow-up registers in England increased by just under 5%, from slightly over 0.8 percent to just under 1.0 percent (which may indicate increased analysis or therapy in addition to or instead of declining psychological health itself). Second, a composite perception of physical well-being that shows improvement in some areas while deteriorating in others. The Chief Medical Officer’s (CMO) 2020 annual report outlines a number of measures that show how health outcomes have improved even in the face of the pandemic, such as death from cancer and heart disease (seen in the upper part of Chart 2.5).

But it also identifies regions where health declined or where earlier gains had been largely undone, such as in the case of diabetes prevalence and respiratory disease mortality among those under 75 (seen in the lower half of Chart 2.5). Although most of the situations described below are more common among individuals of pension age, they also affect those of working age, who are generally older. Some of this seems to be linked to behavioural patterns or risk factors. While excessive alcohol use decreased among younger individuals throughout the 2010s and smoking remained taboo across age groups, the number of fatalities from drug abuse and STDs increased. Most importantly, however, weight issues—which are closely linked to diabetes, heart disease, some malignancies, and osteoarthritis—kept the trend of increasing over the long run in the [19] century (see Field 2.2).

The Chief Medical Officer’s (CMO) 2020 annual report outlines a number of measures that show how health outcomes have improved even in the face of the pandemic, such as death from cancer and heart disease (seen in the upper part of Chart 2.5). But it also identifies regions where health declined or where earlier gains had been largely undone, such as in the case of diabetes prevalence and respiratory disease mortality among those under 75 (seen in the lower half of Chart 2.5). Although most of the situations described below are more common among individuals of pension age, they also affect those of working age, who are generally older.

Some of this seems to be linked to behavioural patterns or risk factors. While excessive alcohol use decreased among younger individuals throughout the 2010s and smoking remained taboo across age groups, the number of fatalities from drug abuse and STDs increased. Most notably, however, weight issues—which are closely linked to diabetes, heart disease, some malignancies, and osteoarthritis—kept the trend of increasing during the course of the century (see Field 2.2). Third, the ageing of the working-age population indicates that, even if the average health status of UK adults at a particular age had stayed constant, the overall health status of the workforce would still have declined as the large “child increase” cohort of the 1960s makes its way towards retirement age. Employing a more rigorous self-reported definition than the standard assessment of incapacity—one for each instance of chronic, work-limiting illness [20] —

Chart 2.5: 21st-century trends in selected physical well-being metrics

Field 2.2: How do pre-pandemic health trends in the UK compare to other countries?

Comprehending patterns in health between countries and across time adds another level of complexity to the challenge of interpreting changes inside the UK alone. We don’t aim to provide a comprehensive assessment of this subject; instead, we provide selected global comparisons of the metrics discussed in this chapter and make some educated guesses.

Regarding life expectancy, Chart B’s left panel shows that the major industrialised countries also had a strong reversal in life expectancy during the pandemic, along with a stall in improvements throughout the 2010s. But over a long period of time, the UK’s relative position has decreased; over the past 50 years, it moved farther away from Japan, France, and Canada and under Italy. The exact panel of Chart B, which spans a more recent period, shows (using a metric that is nearly identical to that in Chart 2.3 above) that the UK has the lowest healthy life expectancy at the beginning of any major developed financial system, with the exception of the US, and that it has experienced a slower rate of advancement during the 2010s than all other countries combined, with the exception of the US and Canada. According to the IPPR’s most recent assessment, these trends have coincided with consistently higher curable mortality than that of all other G7 countries save the US.

Chart B shows the starting life expectancy and healthy life expectancy for each of the G7 economies.

Similar to the figure on healthy life expectancy, Chart C shows the burden of sickness, a metric that shows the years of life lost due to a particular health condition as well as the years of life lived with that condition across G7 countries. It shows that since 1990, the UK has had the second-highest burden of sickness among the G7 countries behind the US, with improvements stagnating in the majority of countries after 2010, and the burden of illness scarcely increasing in the US, Canada, and the UK in the years immediately before the pandemic.

Chart C: The cost of disease across the G7 economies

Since the turn of the century, Chart D shows trends in a number of mortality charges and weight issues (which are linked to a number of ongoing conditions, as detailed elsewhere in this chapter). It demonstrates that:

Cardiovascular death has been declining in many countries, but in the UK, particularly when compared to the US, there has been a noticeable improvement over the 2010s.

Over the last 20 years, the UK has consistently had higher death rates from cancer and respiratory illnesses than other developed countries with similar trends (although there has been a particularly notable drop in respiratory mortality within the UK over the prior few years). Age-specific data indicates that throughout the 2010s, improvements in the death rate from most malignancies for persons under 50 stagnated when compared to other developed nations. c

reflecting similar trends throughout the preceding 20 years (although respiratory mortality in the UK has decreased significantly during the previous several years). Age-specific data indicates that throughout the 2010s, improvements in the death rate from most malignancies for persons under 50 stagnated when compared to other developed nations. Compared to Germany, France, Italy, and Japan, the UK has higher rates of adult obesity, and it has had a faster rise in the prevalence of obesity since the turn of the century than any other developed country, with the exception of Japan, which had a very low baseline.

Chart D: Proportion of selected well-being outcomes among G7 economies

While some data present the UK in a more positive light—noting faster progress towards quitting smoking than other advanced economies and lower than average suicide rates, for example—the preliminary conclusion drawn from these global comparisons is that the UK has experienced worse health outcomes than all other G7 countries except the US on a number of metrics throughout the twenty-first century, with some signs of a more marked slowdown in improvements in health during the years prior to the pandemic. The King’s Fund conducted a recent cross-country comparison of health methods and outcomes and found that, on many measures of health standing and health care outcomes, “the UK performs considerably less properly than its friends and is more of a laggard than a pacesetter.”

  • Thomas, C., and colleagues, Healthy people, prosperous lives: The IPPR fee on prosperity and well-being’s first intermediate report, April 2023.
  • The respiratory mortality metric used here is different from those used elsewhere in the chapter since it includes people of all ages rather than only those under 75.
  • Supply: World Burden of Illness, 2019, Institute for Health Metrics and Analysis.
  • Supply: Information About Our World.
  • Anandaciva, S., How does the NHS compare to other countries’ health care systems? June 2023.

2.12 Given that a number of indicators point to a deceleration in improvements in well-being and a decline in working-age individuals’ self-reported illness prior to the pandemic, one could wonder why health-related financial inactivity has only increased over the last three years. As demonstrated in Chart 2.6, this illustrates the reality that in the years preceding the pandemic, rising rates of self-reported, work-limiting illness among people of working age (up 7% between 2014 and 2019, from 14.0 to 15.1%) had been largely offset by rising rates of exercise among those who reported having work-limiting health issues (up 9%, from 45.8 to 50.0 percent). Later in this chapter, we will examine the economic and monetary ramifications of this concurrent growth in self-reported ill-health among the numerous working people.

Chart 2.6: Financial exercise costs and long-term, work-limiting health situations

Health consequences of the pandemic 2.13 The pandemic has also had significant negative effects on the health of those of working age, making it perhaps the worst public health emergency the UK has faced in recent memory. There are three main ways that this got here:

long-term COVID, defined by the ONS as COVID symptoms occurring more than four weeks following a confirmed infection, and the wider risk of acquiring COVID; defined by the ONS as having COVID symptoms more than four weeks after a real infection, as well as the increased risk of getting the disease; declines in people’s mental health both during and after the epidemic; and interruption to the availability of more comprehensive health providers to individuals in varying conditions both during and after the epidemic.

Covid and protracted Covid

2.14 The number of working-age people reporting persistent COVID symptoms, such as exhaustion, aching muscles, and dyspnea, increased gradually from 0.7 million in July 2021 to a peak of 1.7 million in September 2022 before declining once more to 1.4 million (3.4 percent of working-age people in the UK) in March 2023 (Chart 2.7). The likelihood of having long-term COVID-19 symptoms was more than twice as high for the non-student, non-retired economically inactive population as it was for those in employment (at 7.4% and 3.5% of those teams, respectively).

The ONS estimates that the inactivity rates among working-age individuals who self-reported having long-term COVID-19 symptoms increased by 3.8 share factors between mid-2021 and mid-2022, compared to 0.4 share factors among those without [21]. In addition, of the 1.9 million people (of all ages) who reported having long-term COVID-19 symptoms in March, 1.3 million (69%) reported having had COVID signs for at least a year. If this were repeated among working-age individuals, it would imply that approximately 1 million 16- to 64-year-olds have had long-term COVID-19 symptoms. These very long durations suggest that it may have played a role in the recent surge in health-related inactivity, as does the higher incidence of long COVID among the many economically inactive.

Chart 2.7: Long-term COVID-19 prevalence among working-age people in the United Kingdom

2.15 In addition to the long-term effects of COVID, people’s willingness to work and engage in frequent social interactions may have been hampered by the ongoing danger of an airborne respiratory disease, particularly for those with pre-existing respiratory conditions. According to ONS data on sick leave, for example, the percentage of cases of sick leave due to respiratory conditions more than doubled, rising from 3.6% in 2019 to 8.3% in 2022 (likely a combination of both short-term and long-term COVID, as well as other respiratory conditions). Furthermore, among those formerly engaged in high-human-contact industries, where the likelihood of catching the virus is highest, the growth in inactivity due to long-term sickness has been greatest (as seen in Chart 2.15, below).

Psychological health and the global health crisis

2.16 The pandemic also saw a sharp and persistent increase in the number of working-age people reporting mental health problems, which hastened the previously mentioned pre-pandemic increases. The most compelling evidence primarily stems from ONS surveys showing that the proportion of 16- to 64-year-olds in Great Britain reporting moderate-to-severe depressive symptoms increased from 10% in early 2020 to a peak of 23% (9.9 million) in early 2021, before declining once more to 19% in late 2022, or 3.6 million more working-age adults experiencing these symptoms than prior to the pandemic. [22] Other data show less striking results, but nonetheless, materials will rise. the

Since the start of the pandemic, the number of working-age people reporting a psychological well-being situation has increased by a mere 530,000 (from 6.2 to 7.5 percent of the working-age population); in contrast, the growth among long-term ill-inactive persons is 70,000. Clinically measured psychological well-being information for younger adults presents comparable tendencies. [23] And referrals for speaking therapies for anxiety and melancholy, which measure demand for (and provision of) NHS therapies for a wide range of psychological well-being circumstances, have additionally risen, from 1.7 million to 1.8 million between 2019–20 and 2021–22. [24] A spread of pandemic-related components is likely to have contributed to those increases, together with social isolation, concern about job loss, and decreased entry to psychological well-being providers. [25]

Disruption to the well-being service

2.17 The number of patients needing hospital care due to contracting COVID-19 and the measures needed to stop infections from spreading within healthcare settings put significant strain on the National Health Service (NHS), causing many of its regular operations and coverage to be stopped or postponed by 2020 and into 2021. The NHS referral-to-elective-treatment-ready checklist in England, which tracks the range of non-mental-health-related remedies being waited for as soon as a referral has been obtained, reflects the ongoing effects of those disruptions. As of May 2023, there were 7.4 million entries, up from 4.6 million in January 2020 (Chart 2.8). Wales and Scotland both have growing readiness lists. [26]

NHS England’s referral-to-elective-treatment-ready checklist is shown in Chart 2.8.

2.18 Although it is challenging to draw agency conclusions due to a lack of information relating the actions on the ready checklist to individuals in the labour market, it doesn’t seem likely that the growing NHS ready checklist was a major contributing factor to the recent rise in long-term sick leave inactivity. By combining data from many sources [27], we calculate that:

2.9 million working-age individuals on the NHS ready checklist in 2022, taking into consideration the fact that more than half of the ready checklist was made up of both children and adults of pension age, and that the same persons may be on the ready checklist for many cures;

Around 1 million working-age persons were economically inactive, of whom approximately 650,000 were unable to work due to chronic sickness (i.e., approximately 1/4 of the long-term sick inactive population); [29]

(or one-fourth of the long-term sick inactive population); the ready checklist’s median duration is 15 weeks, a figure that is consistent across age groups and has remained relatively stable since mid-2021. This indicates that, in contrast to health-related inactivity, the ready checklist has a relatively high turnover rate.

a figure that is similar across age groups and has remained relatively stable since mid-2021, indicating that the ready checklist has a relatively high turnover rate (as opposed to health-related inactivity); Additionally, there appears to be a limited correlation between ready checklist tendencies by age and “therapy operation” between mid-2021 and the end of 2022 and concurrent changes in inactivity due to long-term illness. For example, only 16 percent of the increase in health-related inactivity over this period was attributed to those aged 55–64, although 32 percent of the increase in working-age people on the readiness checklist came from the same age group. Furthermore, the primary factors influencing the improvement of the working-age readiness checklist—musculoskeletal treatments and individuals with progressing illnesses—do not align with the primary factors influencing changes in the health-related inactivity data throughout this period (shown in Chart 2.13, below). [30]

2.19 Although it doesn’t seem that the NHS readiness checklist was a major factor in the most recent increase in inactivity due to chronic disease, it’s possible that the interruption to NHS providers and services during the pandemic period remains a critical concern. For example, these disturbances could have caused people to put off seeking advice or treatment related to their health or to find themselves unwilling to act (without joining a prepared checklist). Additionally, the customary use of “match notes” by health professionals—which provide advice to employees and employers on their suitability for employment and assist in a return to work—was put on hold (for example, with a much longer period of time before employees must self-certify for statutory sick pay). These results could have increased the intensity of health problems and disengagement from the workforce.

The welfare system relates to health.

2.20 Working-age welfare caseloads linked to well-being have increased significantly during the last ten years (left panel of Chart 2.9). Our analysis divides the health-related welfare system into two components: ‘incapacity’ benefits, such as employment and assistance allowance (ESA) and health-related common credit score (UC), which are means- and needs-tested for these unemployed; and ‘incapacity’ benefits, such as private independence fee (PIP) and its predecessor, incapacity residing allowance (DLA), which are needs- but not means-tested and intended to cover the additional costs faced by disabled people, both in and out of The fact that month-to-month onflows for incapacity advantages had almost doubled (up 97%) and nearly tripled (up 180%) in 2022–2023 compared to 2016–17 is shown by the increase in caseloads for both incapacity and incapacity benefits.[31]

2.21 The left panel of Chart 2.9 shows that the increase in health-related profit caseloads corresponds with the increase in the number of people who are no longer economically engaged due to chronic disease. Additionally, the most recent developments in the PIP caseload—where a significant portion of the increase has been among 16–44-year-olds with psychological health circumstances [32]—are in line with changes in health-related inactivity, with similar age-group trends observed in the advancement of incapacity advantages. [33] Furthermore, as the appropriate panel of Chart 2.9 demonstrates, the estimated percentage of long-term sick inactive residents claiming these benefits has been rising, particularly Thus, more than 100% of the group’s change over the previous three years has received incapacity benefits (presumably representing almost all of the inflows into the long-term sick inactive group that have claimed benefits, along with some current long-term sick inactive individuals who have just recently claimed benefits and possibly some non-claimants who have left the long-term sick inactive group).

Chart 2.9: Profit caseloads linked to health and idleness due to chronic disease

2.22 Based on this premise, it is worthwhile to consider whether the welfare system itself may have played a role in the increase in indicators of financial inactivity connected to health. One reason for a linkage is that people’s answers to LFS questions on inactivity tend to be heavily impacted by how the welfare system categorises and interacts with them. Welfare and inactivity may be causally linked due to changes in some combination of assistance generosity (with regard to unemployment benefits), conditionality levels, the operation of the evaluation regimes, and the amount of back-to-work assistance provided to recipients of health benefits. Field 2.3 provides a brief overview of the UK’s health-related benefits system’s development and the evolution of caseloads in various components of the means-tested system, providing background for answering these questions.

Field 2.3: The UK’s working-age welfare system with a focus on health

Understanding the welfare system’s design is necessary to understand the feasible role it may have played in the growth in health-related inactivity. The majority of the £100.6 billion that the Division for Work and Pensions is expected to spend on working-age claimants in 2023–2024 (£73.7 billion and £18.9 billion) goes towards common credit score (UC) and its legacy counterparts. These days, the latter is mostly in the form of private independence fees (PIP), which have significantly altered the disability living allowance (DLA) for those who are of working age.

After a ten-year strategy of being implemented to exchange numerous benefits and tax credits, universal credit (UC) is currently the primary means-tested working-age benefit for people in a variety of situations, such as those who are in and out of the workforce and those with varying income needs and work capacities with regard to housing, childcare responsibilities, and well-being. We don’t attempt to cover every angle of this intricate and extensive business here; instead, we focus on the experiences of claimants who are unemployed and have health problems as opposed to those who do not.

After applying for UC, claimants may disclose a health condition or an impairment that affects their ability to work. They provide a variety of medical certifications from healthcare providers (along with a “match word”) in addition to filling out a health-related questionnaire. This evidence is subsequently sent to medical specialists hired by the Department of Work and Pensions (DWP) to do a Work Functionality Assessment (WCA), usually in conjunction with a phone consultation, via video conference, or in person. These evaluations assign claimants who are unemployed to one of three teams:

“Match for work” (which we term “unemployment”) implies that it is expected of claimants to make plans, look for, and accept employment. They receive the standard UC allowance, which is approximately £4,400 per year for single adults 25 years of age and older, plus additional amounts for {couples}, children, and housing costs. They are also placed in the ‘intensive work search’ conditionality group, meaning they frequently have to work up to 35 hours per week in addition to attending weekly conferences with a piece coach. In 2022–2023, there were 1.3 million claimants who were unemployed or had very low incomes in this conditionality category.

(which we call period””), implying that it is expected of claimants to make plans, look for, and accept employment. They receive the standard UC allowance, which is approximately £4,400 per year for single adults 25 years of age and older, plus additional amounts for {couples}, children, and housing costs. They are also placed in the ‘intensive work search’ conditionality group, meaning they frequently have to work up to 35 hours per week in addition to attending weekly conferences with a piece coach. In 2022–2023, there were 1.3 million claimants who were unemployed or had very low incomes in this conditionality category.

“Restricted functionality for work” (LCW), which we define as “much less extreme incapacity,” denotes a claimant’s inability to work at this moment but their expectation that they would make arrangements to work in the future. Their UC award while they are unemployed is the same as that of those who are found to be compatible for employment (although they keep more of their earnings if they go into employment using the subsequent “work allowance”). As members of the “work preparation” conditionality group, they often meet with a piece coach and may also be expected to participate in coaching or other preparatory activities. There were 425,000 claimants on this group in 2022–2023 in addition to those on the equal portion of the legacy system (mostly income-based employment and assistance allowance (ESA)) and the contributory system (as seen in Chart 2.9, above).

According to ‘(LCW, which we time period’),’ claimants are expected to make arrangements for working in the future even when they are now unable to do so. Their UC award while they are unemployed is the same as that of those who are found to be compatible for employment (although they keep more of their earnings if they go into employment using the subsequent “work allowance”). As members of the “work preparation” conditionality group, they often meet with a piece coach and may also be expected to participate in coaching or other preparatory activities. There were 425,000 claimants on this group in 2022–2023 in addition to those on the equal portion of the legacy system (mostly income-based employment and assistance allowance (ESA)) and the contributory system (as seen in Chart 2.9, above). “Limited functionality for work and exercise related to work” (LCWR)

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