Britain is confronting an economic crisis hiding in plain sight, a slack economy weighed down by unprecedented levels of long-term sickness, soaring welfare dependency, and a shrinking labour force that threatens the country’s future prosperity.
While political debates rage over tax, immigration and public spending, a fault line also runs through a population increasingly unable, or in some cases financially disincentivised, to work.
The numbers are stark. Today, 2.8 million working-age Britons are economically inactive because of long-term illness, the highest on record. What began as a post-pandemic blip has hardened into a structural rupture. Chronic health conditions, mental illness, long COVID, and an overstretched NHS have combined to create a workforce hollowed from within.
The financial drain on the state
The costs are exploding. Spending on working-age sickness and disability benefits has risen by £20 billion in just four years, and is forecast to climb toward £70 billion a year by the end of this Parliament. The Office for Budget Responsibility warns that disability benefit spending alone will jump from £39 billion to £58 billion by 2028–29. Some parliamentary forecasts place total incapacity and disability spending at £100 billion by 2030 — around 3% of GDP. This is the quiet crisis draining Britain’s public finances.
According to National Institute of Economic and Social Research’s (NIESR) judgement, higher inactivity would have a constricting effect on labour supply, thereby reducing slack. “The data suggests that higher inactivity reflects net outflows from the labour market rather than an uptick in those who stay inactivity. So, broadly, one can say that the rate at which people are entering the labour market is not a concern, it is rather than rate at which people are leaving the labour market,” said Fergus Jimenez, Associate Economist at NIESR.
“As for the broader picture of labour market slack, the last few years have seen a reduction in inactivity paired with healthy job-finding rates among the unemployed. This has meant that the unemployment rate has only steadily ticked upwards. However, if the demand-side of the labour market (i.e., job-finding rates) cool further, as we saw in the data releases for Q3, then we could see a greater margin of slack open up,” he further added.
The deeper story is more unsettling. Nearly one in four working-age adults is now classed as disabled. The number of people with a work-limiting health condition has surged from 6 million a decade ago to 8.4 million today. Meanwhile, one in ten working-age people receives a sickness or disability benefit, and more than a quarter have remained on such benefits for over ten years.
For millions, illness is real, debilitating and economically devastating. But the system around them is collapsing under its own weight.
When work pays less than welfare
Research from the Centre for Social Justice shows that, in some cases, households on Universal Credit combined with Personal Independence Payment can receive £2,500 more per year than a full-time worker on the National Living Wage after tax. At the same time, organisations like Scope warn that disabled adults face £1,095 a month in unavoidable extra costs, from higher energy bills to specialist equipment, far beyond what benefits currently cover.
The welfare state is being stretched from both ends: too expensive to sustain, yet too inadequate to live on and now Rachel Reeves is set to rely on a stealth tax in her upcoming budget, extending the freeze on income tax thresholds until 2030. Although she has dropped her earlier plan to raise the basic rate of income tax, the freeze will still pull millions more people into higher tax bands as their wages rise.
This approach has sparked criticism and market alarm, but it also raises a simple truth: whenever any tax is imposed or increased, the cost ultimately falls on the consumer. Workers and pensioners end up with less take-home pay, which creates two major problems. First, their spending power drops, making everyday life more expensive. Second, many begin cutting back on essentials including healthcare.
In the long run, this leads to poorer health outcomes, higher medical costs for the government, more pressure on NHS and a combustible mix of public resentment, political fear, and genuine human hardship. Successive governments have tiptoed around reform, wary of the backlash that comes with tightening disability rules or reassessing claimants. But without bold intervention, in healthcare, job support, skills training and benefit design, Britain risks locking millions into a permanent state of economic detachment.
Fergus, however, thinks that the government deserves some credit for restoring investment spending relative to the previous government's plans. “This will help productivity and growth in the long-term, although much of the investment allocations in the medium term have gone to defence, which may be less effective for productivity returns.
“That being said, the government needs to establish a larger fiscal buffer (at least £30billion) against its fiscal rules to ensure that uncertainty over tax and spend policy does not become a chronic feature of this government's tenure. By providing fiscal certainty, the private sector will be more likely to commit to investment decisions while households will be more likely to spend rather than save. This will help growth in the coming years.”
The real question now is not whether Labour can afford to fix this crisis. It is whether Britain can afford not to.
