Shrinking workforce costing taxpayers £16bn a year

Lost tax revenue from worklessness compounding impact of inflated benefits bill, warn economists

Britain’s worklessness crisis is costing taxpayers £16bn a year through lost tax revenue and an inflated benefits bill, top economists have warned.
The Institute for Employment Studies (IES) and the Commission on the Future of Employment Support warned that the country’s workforce was shrinking at the fastest rate since the 1980s, leading to a shortfall in employment-related taxes.
At the same time, the number of people claiming benefits because of ill-health has also spiked, leading to a rapid rise in the cost of benefits, while a growing number has never worked.
The trends are unique to Britain, as most other major economies are experiencing a strong bounce-back in employment post-pandemic.
“The UK is almost unique in the developed world in having seen employment fall over the last four years,” the report found.
“This in turn has seen the UK slip from having the eighth-highest employment rate in the developed world (placing it among the top fifth of countries overall) to 15th.”
If the UK had matched other countries’ performance, the economy would be £25bn larger and the Government would be £16bn per year better off.
More than £9bn of that would come in the form of lower benefits payments, while almost £7bn would come from higher tax receipts from workers.
That is before accounting for other savings to the Government such as lower healthcare costs, said Tony Wilson, director of the IES.
The worklessness crisis is of such a scale that solving it would eliminate much of the £22bn black hole Chancellor Rachel Reeves has identified in the public finances.
Employment and job seeking has plunged since the pandemic, the IES found. People either in a job or looking for one now account for just 62.6pc of the adult population – the lowest proportion since 1998.
The size of the workforce has shrunk by 800,000 since the start of the pandemic, the biggest fall since the “Lawson boom and bust” of the late 1980s and early 1990s.
By contrast, the share of people working in the rest of Europe has risen rapidly since 2019.
A major contributor to Britain’s problems is a rise in the number of young adults who have never had a job. A total of 680,000 people have never worked because of poor health, 230,000 more than before the pandemic. Most of these are under-30s, said Mr Wilson, indicating that they had left school or university but never joined the jobs market.
He said: “The figures are clear: we have got an increase in the number of people, particularly young people, who have never worked, and who say that the main reason they are not working is because of poor health. There are particular challenges around mental health.”
The length of time that people are out of the workforce because of ill health is also getting longer.
Mr Wilson said: “There are more people who have been out of work for a long time, and in part that is also one of the reasons why inactivity due to ill health is going up.
“If you have an underlying health condition, that will get worse the longer you are out of work. Being out of work is fundamentally bad for your health.”
Tough conditions imposed on jobseekers may have pushed people onto sickness benefits instead of encouraging them into work, Mr Wilson suggested.
He added: “Some would argue we just need a stricter approach to the benefits system, but I would argue that has been one of the things that has been driving higher worklessness, because it has pushed people away from employment support.
“It has pushed people towards claiming other benefits, it has pushed people to try to prove how sick they are, it has meant people who have got health conditions do not feel able to engage with Jobcentre Plus because the levels of requirements are so significant.”
The report calls for the Government to overhaul the jobs and benefits system to encourage more people back to work, reduce conditions imposed on benefit-claiming jobseekers and do more to help over-50s back into work, not just younger people.
Last night, a Government spokesman said: “Spiralling inactivity and millions of people being denied the support and opportunities they need is holding the country back and stifling the economy.
“Growth is our number mission, and we’re going to deliver the change the country is crying out for by overhauling jobcentres and giving power to local areas to tackle inactivity, so more people can find full and fulfilling work.”
Mubin Haq, chief executive of the abrdn Financial Fairness Trust and a commissioner behind the report, said spending more money on getting people into jobs would ultimately end up being beneficial for the public purse.
He said: “The UK desperately needs economic growth and one of the critical ways to deliver that is increasing the number of people in work. Our approach to supporting people into jobs is too short-term and draconian, failing too many employers and those locked out of the labour market.
“That’s a huge loss to our economy, to our public finances and a missed opportunity to raise living standards.”