Is this the least bad way to cut health benefits?

Creating a two-year time-limit for our National Insurance sickness benefit might be the best choice out of a list of miserable options

Rachel Reeves is said to be on the verge of cutting billions of pounds from health-related social security. But she has few good options for saving lots of money fast.

The government spends billions of pounds each year on working-age sickness and disability payments for the simple reason that so many people are sick or disabled. That position will not improve fast – in fact it will grow worse in the next few years. We have a mental health crisis that is hitting the young hardest while the incidence of most other illnesses rises with age - and people will soon be expected to work to 67. The OBR expects the price tag for working-age health-related benefits to increase from £52bn this year to £63bn by 2029/30.¹

With the right policy reforms more people who are sick or disabled could be working. The UK needs to create the support and incentives to help them stay in work and get back to work. The government should transform occupational health and sick pay, expand the employment support available to those with health conditions, guarantee they will not be worse off if they try a job and it doesn’t work out, and scale-back harsh obligations and sanctions facing jobseekers that push them towards sickness benefits. Such measures will reduce the benefit roll, increase employment and raise tax revenues over time. But it won’t be quick or easy. Right now only one per cent of the most disabled UC recipients move into work each month.² The OBR will not allow Rachel Reeves to ‘score’ big short-term savings by going down this path.

Cut payments?

Nor is finding money by reducing payment levels straightforward. Disabled people without earnings or other income for a prolonged period need enough money to live with decency. That is why universal credit pays a lot more to people with significant disabilities than to jobseekers without health problems who will mostly work again soon. But this gulf in payments is a ‘pull’ factor that encourages people to demonstrate their incapacity for work (although the ‘push’ of the harsh jobseeker regime is probably just as big a deal).

Last week the Resolution Foundation floated the idea of narrowing the gap between these two benefit rates by freezing the health-related component of UC, a move that could save ministers £1 billion by 2029/30. The last government took the same approach with non-sickness benefits. The rationale is that such real-terms cuts spread pain thinly across many millions of benefit recipients. But over time as prices rise this proposal would bring hardship to lots of disabled people with low incomes and little immediate prospect of work. It is understandable that ministers want to reduce the financial ‘pull’ of higher sickness payments. But the only fair way to close the gap is to raise the basic rate of UC – something that is long overdue but would mean more spending not less.

Since the early 1970s the government has also provided help with the extra costs of disability irrespective of a person’s income or employment status. These days this comes in the shape of Personal Independence Payment which helps towards disability-related costs that average over £1000 per month, according to research by Scope. There is speculation that the government is considering means-testing PIP, perhaps by incorporating it into universal credit as an additional element for disabled people. The argument in favour is that universal credit now offers a seamless benefit for both working and non-working households if they have low incomes or high costs. A disability costs element could be incorporated into UC alongside existing allowances for the costs of housing, children and childcare - and then gradually withdrawn as people’s incomes rise.

But means-testing PIP would be an incredibly controversial move among working disabled people, who are far less likely to be in full-time or well-paid jobs. Any transition would cause huge anxiety, including for those who would actually end up no worse off; and a mishandled migration might leave vulnerable people without the help they need. It is also unclear how much the means-testing of PIP would actually save as only 18 per cent of households where someone receives the benefit are in the top two-fifths of the income distribution.³ The more inclusive the future means-test, the fewer people would lose entitlement and the less the government would save. To take one example, ministers would gain peanuts if they replicated the means-test for child benefit, which starts to be withdrawn at £60,000 of net personal income.

Means-testing PIP would also worsen work incentives for disabled people just when the government is trying to improve them. And there is another complexity: PIP is replicated by similar benefits for children and pensioners – disability living allowance and attendance allowance. Would they be means-tested as well? All of this requires a great deal of thought, analysis and consultation. If there is to be change to the benefits intended to support the costs of disability, it should not be done in haste.

Tougher health assessments?

The other route being considered is to make health-related assessments harder to pass. But the system for proving entitlement is already pretty robust. People have to see a DWP-appointed clinician unless their eligibility is beyond doubt at the initial application. The rate of fraud and error for sickness and disability benefits is very low. In fact, it wasn’t so long ago that the DWP was being castigated for turning down large numbers who were subsequently found to be eligible. One reason spending has been rising in recent years is because ministers have deliberately sought to make the system more accurate and easier to use. The introduction of Universal Credit has enabled greater numbers to access health-related payments and customer service improvements are helping more people to complete the application and assessment process.⁴ We should not seek to save money by making social security more off-putting.

The only obvious avenue for tightening up the system as it stands is to reassess existing claimants more frequently. Since the pandemic the DWP has almost stopped repeat assessments. By comparison, in the late-2010s at least 50,000 people each year were transferred off sickness benefits following a WCA reassessment. The government is said to be planning to restore reassessments and this is an areas where the OBR has promised to scrutinise DWP performance.

To go any further ministers would need to change the law and tighten underlying rules on eligibility. The last government proposed to do this by first restricting the work capability assessment and then scrapping it altogether and using the PIP assessment for all health-related benefits. Labour ministers are still committed to WCA reform although they have rejected the previous Conservative plans. Media stories indicate that a toughening of the requirements for both the WCA and PIP assessment are being considered. Options include making it harder for people with mobility-related or intermittent conditions to meet eligibility requirements.

Liz Kendall and her team will be aware of the impact this could have on many with significant ongoing health problems. They will also be mindful that Conservative reforms designed to reduce the numbers receiving health-related payments did not deliver anything like the decline in recipients or expenditure originally expected.⁵ Some change to assessments is almost certain but the OBR will again be sceptical about ‘scoring’ a big saving - before a consultation on new rules has even started.

The least bad option?

With this tough backdrop, perhaps the least bad option for making savings is to time-limit the National Insurance benefit Employment and Support Allowance. ESA used to be a two-pronged entitlement with eligibility based either on National Insurance contributions or on means-testing. But the creation of UC to replace the means-tested version means ESA will soon be a National Insurance benefit only. This new ESA has been ignored as a quiet backwater of social security policy and is rarely mentioned in the debate on health-related benefits. But it is still a big deal. Only in social security could an entitlement that costs almost £5bn per year and serves 700,000 people be considered a backwater.

Back in 2010 the coalition introduced a one-year time limit to non-means-tested ESA for those with moderate disability. The policy was a failure because most people were able to satisfy assessors that they had significant disabilities. But now that UC is in place it is time to debate ending long-term ESA claims altogether.

We need to ask when or whether claimants should receive out-of-work benefits even if they have sufficient income or assets to be excluded from UC. This usually happens when people have a working partner, savings or a private pension. There is a strong case for having these non-means-tested benefits when people first leave a job. In the 2023 Fabian Society report In Time of Need I argued that people should receive a lot more than they do now when they first stop working.

But for how long should someone’s past employment earn them payments in addition to those on offer through the rest of the benefit system? We provide National Insurance benefits to the unemployed for 6 months and to people with less severe health problems for 12 months. Would 24 months be enough before expecting people with serious disabilities to receive just UC and PIP?

This would mean stopping payments of £138 per week after two years. However a lot of recipients would see no change as they would already be claiming universal credit, which would automatically rise to offset the loss of ESA. Others would be likely to make a new claim for PIP or UC. The main ‘losers’ would be those in households with income or assets that made them ineligible for UC (although we could protect some of them by relaxing the harsh asset rules in universal credit).

In an ideal world we should continue to support a group of people who are unlikely to return to work. But policy on health benefits is far from ideal and time-limiting an entitlement that is not linked to people’s means feels like a ‘least bad’ choice. The people who would be affected face much the same risk of poverty as all working-age adults.⁶ And the chart shows that long-term claims for non-means-tested ESA operate in part as an early-retirement benefit: 37% of people in receipt for more than two years are over 60. If we are going to use money to help sick people retire early we should spend first on those who have low living standards close to the pension age, as recently proposed by the Fabian Society and IFS.

Four times as many long-term ESA recipients are aged 65 as 45 and over a third of people in this group are over 60

Limiting ESA to two years would save the government £2.3 billion in 2029/30 if it was applied to new and existing recipients (though some of that money would be offset by successful new applications for UC or PIP in response).⁷ 430,000 people who were not also claiming UC would be affected.

Usually when reforms like this are introduced existing recipients are protected. Doing so would still yield significant savings by 2029/30. Each year around 40,000 recipients would see their claims terminated at the two-year cut-off and a similar number of long-term recipients would flow off the benefit (the chart shows how 20,000 recipients leave the benefit annually just by reaching pension age). If the time limit was introduced next year the number of long-term recipients would fall by around two-fifths by the end of the decade. This would represent an £800 million saving by 2029/30 - and more could be freed up by freezing payments in cash terms or including legacy recipients in any wider plans for assessment reform.

As an option for benefit reform a time-limit on ESA is far from ideal. It will have real-world consequences for people who, while not on the breadline, are still sick and out of work. But it is a better way of saving money from health benefits than most of the alternatives.

1. Benefit expenditure and caseload tables, Autumn 2024

2. Welfare trends report, OBR 2024

3. Households below average incomes, 2022/23. Deciles of net household income after housing costs, adjusted for household composition

4. Welfare trends report, OBR 2024

5. The replacement of DLA by PIP did not lead to the expected decline in cases. Changes to entitlements linked to ESA’s lower level of disability led to more people ending up in the higher category. The last time a reform significantly reduced access was the introduction of the work capability assessment by the 1997-2010 Labour government.

6. Households below average incomes, 2022/23. The rate of poverty for households receiving ESA who do not receive UC or equivalent is 22 per cent, compared to 21 per cent for all working-age adults.

7. Author’s calculations. Projected ESA expenditure for 2029/30 is £4.66bn. 66% of recipients are not projected to be on UC in 2029/30. In 2024 73% of recipients of ESA without a means-tested elements were in receipt for over 2 years. A one-year-time-limit would save an additional £300m. Sources: Benefit expenditure and caseload tables, Autumn 2024 and ESA statistics, stat-xplore, DWP 2025.