24
Examination of witnesses
Tom Waters and Eduin Latimer.
Q1 The Chair: Good afternoon. Thank you for coming to give evidence to us today. Could you kindly introduce yourselves first and give us a little profile about you?
Tom Waters: I am an associate director at the Institute for Fiscal Studies, where I work on tax and benefit policy and labour market issues. I have recently done quite a bit of work thinking about incapacity and disability benefits.
Eduin Latimer: I am a research economist at the Institute for Fiscal Studies. I also work on benefits and labour market policy.
Q2 The Chair: Thank you. We are looking forward to your evidence. To give us context for this inquiry, can you give an overview of the overall impact that long-term sickness has on the economy? By that, I mean: what is the cost of inactivity, and how does it impact on both fiscal policy and monetary policy, not to mention growth?
Tom Waters: Inactivity covers a large range of things that people might be doing. Broadly, it is people who are not working nor looking for work, but that might be because they are unwell. It could also be because they are studying, they have taken early retirement, or they are looking after the home. Something like 22% of people are inactive at the moment.
Generally, we would expect moving people from inactivity into work to increase GDP—at least in the short run—because more people working means more stuff that can be produced. However, there are some cases where, in the long run, that might not be true. There may be some kinds of inactivity that are good for growth. People who are studying are a clear example of that. They have taken some time out of the labour force to study, which might make them more productive later on and so would be good for growth.
Inactivity due to ill health, which has been the focus over the last few years, naturally is bad for growth in the short run because it means that people are not working, but it is also likely to be bad for growth in the long run because it means that people are not developing the kinds of skills while working that can help them to be more productive or earn higher wages further down the line.
Broadly, that is how I think about the way in which inactivity affects the economy.
Thinking about how it affects the Government’s budget, not all benefit spending on health-related benefits goes to those who are inactive, but it predominantly does. That is about £48 billion today; it has increased significantly over the last few years. The OBR has estimated that increases in inactivity and reductions in working hours because of health over the last few years have reduced tax revenue by about £9 billion. These are reasonably significant numbers in fiscal terms.
The Chair: Do you want to make any points on monetary policy?
Tom Waters: Monetary policy is somewhat outside my area, but a simple way of thinking about it is that if more people are inactive, that creates a tighter labour market, as fewer people are out there looking for jobs. Generally, that means that you need higher interest rates in order to bring inflation back down to target.
Eduin Latimer: I think Tom hit most of the key points there.
Q3 The Chair: Would you like to comment on the phenomenon, the concept, of hysteresis? The point has been made that, if you have a period of very low growth with young people coming on to the market, what is a temporary problem might grow into something more permanent and more structural.
Eduin Latimer: We see in the data that the longer you remain out of work, the less likely you are to return to work. There is also evidence that, when there are recessions, the people who grow up in those recessions tend to see weaker wage growth, at least in the immediate years following those recessions. There is definitely evidence to suggest that the short-term damage of being out of the labour market can have longer-term costs for people and for the economy, as well as fiscally.
Q4 The Chair: The OBR in its upside scenario estimated that better health could lead to a debt level of 230% of GDP by 2073-74, whereas the worst health scenario results in an increase to 323% of GDP in the same year, compared to 270% of GDP in the baseline. How much weight can one really attach to figures of such precision?
Tom Waters: I think the OBR usually calls those sorts of exercises scenarios for a reason: they are an indicative estimate of how things might go if you have better or worse health. The general sense of scale is probably worth taking seriously, but I would not put too much store by the precise number, whether it is 330% or 331%. These things involve a large number of assumptions, but those sorts of exercises are useful to give a general sense of scale for the kinds of issue you might be thinking about.
Q5 Lord Burns: One of the problems we have with this—we have taken some evidence on it—is, of course, the great uncertainty about the figures for inactivity. First, we have the somewhat discredited Labour Force Survey figures, which show inactivity continuing to rise since the pandemic. On the other hand, we have the ONS experimentally adjusted figures based on HMRC PAYE, which show a quite different pattern, with inactivity now almost back to where it was before the pandemic.
Of course, in both cases, we are still looking at an increase in the proportion of inactive people who are registered as long-term sick, but it seems to me that the interpretation of what is going on here is quite different depending on which of these numbers one looks at. In one case, we are saying that we have the same level of inactivity but we have had a very sharp rise in the share of people who are long-term sick. In the other case, the discredited numbers say that both inactivity and long-term sickness have been rising.
Which of these interpretations do you find favour with? We still do not really know to any level of accuracy what the population figures are either, do we? Those could produce a third version of these numbers. Do you agree that the interpretation of the role of long-term sickness differs according to the interpretation of what has been happening to the total level of inactivity?
Eduin Latimer: Yes. There is some difference in how you would interpret it. I sympathise with your frustrations about trying to get to grips with the different data sources saying different things.
One data source that we have been putting quite a lot of weight on is the administrative data around health-related benefit claims, which is where we have seen very strong growth. The percentage of the working-age population receiving a health-related benefit has gone up from 7.5% pre pandemic to 10% now. That is stronger growth than we have seen in the reported long-term sick numbers. So we can pretty certain that there has been an increase in the number of people reporting health problems and claiming benefits for those health problems.
Even when we look at the Labour Force Survey figures, that is the stronger dynamic. There has been a small increase in overall inactivity in those figures, but among the inactive the clearer signal is this shift towards being long-term sick. That is the clearer signal that we are putting more emphasis on. Some of our colleagues also did some work showing that lots of the group who are reporting long-term sick were already out of work for some time before moving into reporting as long-term sick. Again, this points to quite a lot of the dynamic being about people who are already out of the labour market not coming back in and starting to claim health-related benefits.
Lord Burns: If we have broadly the same level of inactivity but a rising share of those who are inactive declaring themselves as having long-term sickness problems, which categories of inactivity are coming down?
Eduin Latimer: We have seen the share of people who say that they are inactive due to looking after the family and the home come down. That is continuing a trend, which was already happening pre pandemic. Let me give some figures. Pre pandemic, about 5% of the working-age population said that they were inactive due to looking after the family and the home. That is down to about 4% now, so it is partly offsetting the increase in long-term sick.
One thing to note about the figures is that people can report being inactive for a range of reasons. They get classified based on their main reason. Some of that might be people who look after the family and the home and have a health-related problem but who, because their health has got worse, have started to say that that is the main issue.
Lord Burns: The impression I got from a quick look earlier today at the inactivity figures in different parts of the country was that they are lower in the south-east, the south-west and the east of England and higher in Wales, Northern Ireland and Scotland. Are there any other messages that come out of the regional figures for inactivity?
Eduin Latimer: I broadly agree with that interpretation. The biggest increase in inactivity rates is in Wales, where it has increased from about 23% of the population pre pandemic to around 27% of the population. That is bigger. In London, according to the Labour Force Survey, there has been a decrease in inactivity rates.
Similarly, we found that health-related benefit claims as a percentage of the population increased most in the areas with the highest rate of claiming pre pandemic. The example areas we looked at were Merthyr Tydfil, Port Talbot, and some of the areas with weaker employment prospects and weaker wages in Wales. Those are showing broadly similar patterns.
Q6 Lord Layard: I just want to understand quite how it works when we are told that the new people claiming to be long-term sick were already out of work for some time. What reasons were they giving before they gave that reason?
Eduin Latimer: I do not have those figures off the top of my head. Some of them were definitely moving from, say, looking after family and home to being long-term sick. Some of them were unemployed and then moved into inactivity, and then said that the reason was long-term sickness.
Tom Waters: I think some moved from retirement. They reported they were retired and now they say they are long-term sick, but they were not working in either case.
Lord Layard: But these are people of working age.
Tom Waters: Yes, but they had taken early retirement for whatever reason.
Lord Layard: So they took early retirement, but then they became sick. Did they then go on to sickness benefit, or are we talking about a different set of figures for long-term sickness in the Labour Force Survey? Are there people who retire and then claim long-term sickness benefit?
Eduin Latimer: There are slightly different figures and different sources for them. We have administrative data for the health-related benefit claims. What you see in the Labour Force Survey is that most people who say they are inactive due to long-term sickness also report that they are claiming a health-related benefit. It is not all of this group, but these groups strongly overlap.
The Chair: Does the raising of the retirement age have an effect?
Tom Waters: Yes. That would be likely to push up the number of people on these benefits, partly because you cannot get incapacity benefits once you are past the state pension age anyway. That somewhat mechanically increases the number of people on these benefits.
Eduin Latimer: The OBR looked at that for incapacity benefits. In the pre-pandemic period—the 2010s—incapacity benefit would have fallen more if it was not for this dynamic of more people moving into working age as the pension age goes up. That was quite a big dynamic driving trends then. What it cannot explain is the big jump we have seen in claims for both disability benefits and incapacity benefits since 2020.
Q7 Lord Davies of Brixton: Have you had a chance to see how this fits with the report in today’s Times about the Centre for Social Justice saying that the figures for long-term sick have been underestimated? Is that the same story, or is it coming up with something new?
Tom Waters: The centre looked at the official forecast for the number of people getting incapacity benefits going back to the 2010s, I think, when it starts the clock. It says that the forecasts have been consistently too optimistic: it always thinks that the numbers are going to be lower than they are in almost all cases. I think the centre is saying that if that pattern were to repeat then the number of people on these benefits by the end of the decade would be even higher than current forecasts suggest.
Lord Davies of Brixton: That is the point for the OBR.
Tom Waters: To be fair, it is very difficult to predict what will happen to these sorts of things and, over the last 18 months or two years, the OBR has very significantly adjusted its forecasts in the light of the fact that we have seen lots of people flowing on to these benefits—a lot more than pre pandemic. I would certainly say that those sorts of forecasts are pretty uncertain. They could definitely be higher, but equally they could be lower. In that sense, it is worth keeping in mind that they are just forecasts.
Q8 Lord Davies of Brixton: What are the major benefits that people who are long-term sick receive? Following on from that, how do those compare with benefits that you receive if you are unemployed but well? What has been the trend in that difference?
Eduin Latimer: Broadly, health-related benefits can be classed into two groups of benefits: incapacity benefits, which provide additional income to people who are judged to have limited capability to work; and disability benefits, which provide additional income to people because their disability is judged to increase their living costs.
Those are the two groups of health-related benefits in the UK. The main disability benefit at working age is the personal independence payment. That is not means-tested and does not depend on your employment status or any previous contributions. It is a slightly more fragmented picture on the incapacity benefit side, because we are still partly through the rollout of universal credit, but in most cases the benefit new claimants will be on will be the health element of universal credit.
On their value relative to basic unemployment support, it is fair to say that they are large relative to basic unemployment support. Especially if you do not have children, the level of basic unemployment support is fairly low relative to earnings in the UK compared to internationally.
Just financially, if you move out of work, getting on to these benefits will give you a significant financial advantage. For context, the standard allowance for universal credit if you are single and without children is about £5,000 a year. If you were then to get incapacity benefits—the health element of universal credit—that would be another £5,000 a year. That would almost double your income. You would also have some of your housing costs covered, so this is not accounting for housing costs. On top of that, how much you get in personal independence payments can be quite varied, but it can be up to an additional £9,000 a year—so between £1,000 and £9,000 a year. Getting on to these benefits could have very significant financial effects.
Lord Davies of Brixton: Has there been a trend in that difference over the years?
Tom Waters: For the basic kind of support you can get from being out of work, over the 2010s there were a number of freezes in cash terms, or when it went up by 1% in cash terms. So in real terms those have fallen, but the health elements have always been uprated with inflation, so they have got larger.
Lord Davies of Brixton: So the difference has grown, but that is because, in very broad terms, unemployment benefit has been held down below inflation.
Tom Waters: That is right.
Lord Davies of Brixton: So people on sickness benefit are not getting anything that is better in real terms than they were in the past. There is just the arbitrage.
Tom Waters: Exactly. The gap is widening between the two in real terms.
Q9 Lord Layard: Could you explain a little more about PIP? I can easily see how the cost of living is different if you have a physical disability and you have a wheelchair, et cetera, but I think there are a lot of people with mental health problems who also get PIP. How is that assessed? What is the basic idea there about a change in their cost of living?
Tom Waters: That is a fair question. The share of people on PIP whose main problem is mental health is about 40%.
Eduin Latimer: That is for new claims. For people newly getting on to PIP, about 37% say the main reason is due to mental health.
Tom Waters: The PIP assessment is supposed to be a functional assessment: what are you able to do or not do without help? Some of it is related to mobility, for example, but there will be other things related to things like planning, budgeting and social interactions. Those sorts of things that you can score points for and potentially get on to PIP as a result. There is no direct connection to the costs you incur in the sense that you are assessed. Are you unable to do this set of things? If so, and if you get enough points from that, you get PIP. But there is no kind of measurement of how your costs personally might go up as a result of your disability.
Lord Davies of Brixton: There must be a working schedule, presumably carried out by local officers in some form. They must have a book or computer programme that tells them that, given these facts, this is what people will receive. It would be interesting to see that.
Tom Waters: It is run centrally.
Eduin Latimer: Yes. DWP set up a set of activities and some descriptors around those activities as to how challenging you find it to do them. Those are split between your daily living activities—things that you do can do day to day—and mobility. You can get separate awards based on those two. For example, the first one I see is preparing food. If you evidence that you can prepare and cook a simple meal unaided, you would be scored as zero points, so that would not count towards you getting on to the benefit. Then there is a range of categories going up in severity, with the strongest category being unable to prepare and cook food at all. There are categories like that which you are assessed on, based on a face-to-face or phone assessment and supporting evidence.
Lord Davies of Brixton: None of that is medical. The medical entry thereafter is just a question of looking it up on the schedule.
Eduin Latimer: Yes. Some of the supporting evidence that you can be asked for can be from a doctor. Medical evidence is definitely taken into account. But, looking internationally, the UK is one of the countries where assessment is predominantly functional. It is about what you are judged to be able to do or not do. Countries are broadly split between having these kinds of functional assessments and having medical assessments.
Q10 Baroness Liddell of Coatdyke: Is any assessment done if someone’s health has improved—say, somebody with bad back problems or something like that, or something to do with hospital waiting times? I can only speak about Scotland, but lots of people are waiting 18 months to two years for treatment. Is there any means of assessing that there has been an improvement in an individual?
Tom Waters: Yes. For PIP, for example, when you get awarded the benefit, a review period will be set. That is how long you are going to get the benefit for before you have to be reassessed. The substantial majority of reviews are set at about two years. Then you will have to come back in after two years, they go through the same exercise again, and you could be kicked off it or you could see your amount go up or stay the same.
If your condition improves within that period, the claimant is supposed to report that to DWP. I do not know how well that is enforced, but that is what is supposed to happen. It is more complicated for incapacity benefits. There is not the same set time you are supposed to be reviewed in, and people can stay on it for relatively long periods without being reassessed.
Eduin Latimer: Looking specifically at disability benefits, it is worth saying that the main reason why we have seen the case load go up so much is because there has been an increase in onflows on to it, but part of the reason for the increase is because the off-flows have gone down. That is partly because, since Covid, when people come to these reassessments, more people are assessed as still needing support. That may well be because broader health changes have meant that that person’s health has not improved as it might have done otherwise.
Lord Griffiths of Fforestfach: Can you just clarify one thing from your answer to my colleague’s previous question to Mr Latimer? You went through the amount of money paid for various benefits. I understood that if you were on a maximum benefit, you could be on £19,000 a year. Was that correct, or was that an underestimate or overestimate?
Eduin Latimer: That is broadly right if you are without children and not including the housing element of universal credit. If you were renting, you would probably also get some housing support.
Lord Griffiths of Fforestfach: But that would be totally separate from the health assessment that we are discussing.
Eduin Latimer: Yes. That £19,000 also includes the kind of base element of universal credit that you would get if you were just unemployed, but that is much smaller; it is just £5,000. Also, the contrast between how much of the unemployment element of universal credit you would get relative to getting these health benefits is a bit smaller if you have children, because there is the additional benefits part. You get more from universal credit if you have children. The contrast is not quite as big, but you are still better off if you are on these benefits.
Q11 Lord Griffiths of Fforestfach: Let us assume that I am 50 years of age, I have a family and some children, and I have been lifting weights all my life. I develop some back pain and it is getting worse. In order to understand the assessment process, could you now take me step by step through what I would do to assess these various benefits?
Tom Waters: What you would do as a claimant.
Lord Griffiths of Fforestfach: Yes. Do I see the doctor first? Take me through it as if this were a video of my life.
Tom Waters: Okay. Let us start with PIP, the disability benefit. You would first phone up DWP, which would give you a form to fill in where you could provide any medical evidence that you have, which you could get from going to a GP. You would then be subject to an assessment, the vast majority of which are now on the phone. They used to be face to face, but post pandemic they have pretty much moved to phone.
In that assessment, you will be taken through the kinds of things that you are able to do and not do; Eduin gave the example earlier of being able to prepare food. At the end of that, the assessor makes an assessment of the number of points you get—a function of the number of things you are unable to do. That number of points specifies how much PIP you will be entitled to, including zero. Then you start getting that from DWP. That process takes, on average, about four months from start to finish. For incapacity benefit it is broadly the same.
Lord Griffiths of Fforestfach: On that, I would be seeing a single GP, or not even seeing but on the telephone.
Tom Waters: It would not be a GP.
Lord Griffiths of Fforestfach: A nurse, or—?
Tom Waters: It would a health professional who works for a contractor for DWP, like Capita or Atos. It is not Atos any more.
Eduin Latimer: It is broadly similar for incapacity benefits. Assuming we are in the universal credit world, if you are starting a new claim, you could start a claim for universal credit just to get the unemployment element first. Then you would have to provide a fit note from your GP. Once you had done so, you would wait until you had an assessment. Similarly for PIP, you would do that assessment and be judged as to whether you get this health element or, if there is a slightly lower status, you do not get the health element but you get fewer job search requirements or you are judged fit to work.
Lord Griffiths of Fforestfach: To what extent is the evidence of somebody checked or judged in some way? If I can do everything so far through a telephone response, there is nobody actually overseeing the process and checking that what I am claiming is reasonable.
Tom Waters: I am not certain about the answer to that. It is worth noting that about half of the people who apply for PIP are rejected, so in that sense it is not as simple as phoning up and just saying the right words. I am not certain how much of it ultimately is checked. To a large degree, they will very much take into account what you say you are able to do and not do, but a lot of these things are pretty difficult to check; how are the Government supposed to check whether or not you can prepare food, for example?
Eduin Latimer: They also ask for supporting evidence. If you had a doctor justifying what you said, that might be taken into account in your claim.
Q12 Lord Burns: I want to look at the difference in rates between universal credit and some of the health-related benefits that you mentioned. You mentioned that one of the things that has been in decline is the proportion of people who declare themselves retired. Suppose you have retired early. You have some pension—not a great pension, but some—and you previously regarded yourself as retired. How far would that be taken into account if you wanted to go through this disability route? Would you not be able to do it, or is it open? Is the fact that people already have some pension taken into account?
Tom Waters: On the incapacity side, which is the side of the system that is about being unable to work, it is mostly through universal credit. That is means-tested, and they will take into account any other income you have. On the disability side, PIP is completely non means-tested. You could be a millionaire and get it. They would not take the pension you have into account.
Eduin Latimer: But you can only start your claim pre pension age. There is a different health-related benefit if you are past pensionable age.
Lord Burns: I was looking at the numbers of people in the age bracket of 50 to 64 who are affected by this.
Eduin Latimer: Exactly.
Q13 Lord Razzall: I am interested in your response to Lord Griffiths, because it did not seem to chime with where the Daily Mail gets its stories about people who have nothing wrong with them being signed off by GPs and then scoring three goals for the local football team. Where does that story fit in with your description of what people will do when Lord Griffiths is 50 next year and this applies?
Tom Waters: That refers to fit notes for people to get signed off work, which is the first step to getting incapacity benefits. But that is just the gateway; it is not really an assessment. They then do the assessment that we are talking about later on. The role of GPs in this process is to provide fit notes.
Lord Razzall: Or unfit notes. You say fit note, but you mean an unfit note.
Tom Waters: Yes. I do not know why they are called fit notes. They used to be called sick notes, which makes more sense.
Lord Razzall: So that is where the story comes from: GPs allegedly signing off as unfit people who are not. That is the allegation.
Tom Waters: That is the claim, yes.
Q14 Lord Turnbull: Is there a process of migration where people start with not being able to do things that are quite work-related—hips, backs, knees, strength and being unable to do manual work—and then, over time, more of their claims are based on mental health?
Once you get into mental health, if someone says, “I’m depressed” or, “I’ve got bad nerves”, how does anyone say, “No, you’re not”, or, “No, you don’t”? At that point, the whole thing becomes self-certifying and very difficult for the authorities to control. That is why I think we see a growth in the mental health proportion of this. If you go through a series of tests and someone asks, “Can you walk straight? Can you lift this?” and so on, that is certifiable. But if you just say, “I can’t get up in the morning, I’m so depressed”, there does not seem to be any check on it, nor anyone coming round to say, “I can give you therapies that would get you out of this condition”, so it goes on and on. Over time, more and more people will migrate into these low-certifiable kinds of claims.
Eduin Latimer: One thing to say is that if you are applying for PIP predominantly on mental health grounds, the acceptance rate is similar—or perhaps slightly lower; I am not completely sure—to if you are applying predominantly for a physical condition. There are still, as part of the assessment, significant numbers of people—roughly 50%—getting rejected. It is not as simple as your making a claim and definitely getting on it.
You are right that we are seeing a shift towards more mental health claims. For PIP, 28% of new claims pre pandemic were predominantly for mental health. Post pandemic, it is now 37%—a big increase—and we have seen that across the board. There is also evidence, if you look at reported disability rates across the whole population, that we have seen a shift towards more reporting mental health problems.
Lord Turnbull: Is there any sign that DWP is modifying its procedures in the light of this change in the basis of claim? Is it still using the same method of testing, when people are now referring to their mental health, as it did when people were saying, “I can’t do lifting any more”? Should DWP basically be altering its whole way of dealing with this if a claim is being made on a different basis?
Tom Waters: It is the same assessment, regardless of the underlying condition.
Lord Turnbull: My contention is that that is a mistake. If the assessment is the same but the basis of the claim is different, the chances are that you are probably not assessing the new claim as well as you could.
Tom Waters: You might well criticise this, but the idea is: “We’re going to try to find out how much your day-to-day activities are affected by your condition. We don’t care what the condition is, per se. We just want to know whether you’re able to make budgeting decisions, dress and undress yourself, communicate verbally—things like that. We don’t mind about the underlying condition”.
You are right that these sorts of assessments were designed in a world where the substantial majority of claims were for physical conditions. There might well be a case for DWP looking again at it today.
Eduin Latimer: One challenge to that is that quite a lot of people in the survey data report having both mental health problems and physical health problems. Any assessment will have to deal with people having both types of problem.
Lord Turnbull: Is not what is happening with a lot of people who have not worked for some time is that they basically lose confidence about going to work or going to an interview, and they need someone to give them confidence rather than ask them the same questions they were asked when they could not work in a manual job any more.
Tom Waters: That might well be true. I suppose that, in principle, that is the kind of thing that a work coach—if they are meeting a work coach at a jobcentre—could deal with. I am not sure.
Q15 Lord Londesborough: Can you help us to understand the distinction—indeed, the relationship—between short-term sick and long-term sick? Long-term sick is what is getting into the national headlines—the 2.9 million. As I understand it, on a typical working day we have about 1.3 million people on short-term sick leave. Where is the differentiation? Is there any data showing how many people graduate, if you like—that is the wrong word—from short-term sick to long-term sick? How should we look at this?
Eduin Latimer: I am not sure whether we have done the specific analysis that you suggest. You are broadly right that there is likely to be a trajectory where people have short-term sickness problems first—either working or not working—and then move out of work. We see that typically two-thirds of people starting claims for these health-related benefits have already been out of work for two years or more. So this tends to be a fairly long way along your journey.
One thing I would say is that the number of people reporting disabilities is significantly greater than the number of people who are on these benefits. It is 23%, based on the latest Labour Force Survey figures. So, as much as we can trust them, that is the number, and only 10% of people claim these health-related benefits.
So if you are worried about this case load, we should be thinking about the people who might be on the trajectory towards claiming these benefits but are not there yet.
Q16 Lord Davies of Brixton: Just to be clear, following Lord Turnbull’s question, if you feel that you are ill and depressed, you get a sick note—call it what you will—from your doctor. The claim then goes to a claims assessor, who gives you the questions so that he or she can tick the boxes, and a number will come out. Do we have any information about the extent to which people who get to that stage because of depression are accepted or rejected? You quoted an overall figure.
Eduin Latimer: I cannot remember the exact figure for depression. I am more familiar with the figures for personal independence payments. I do not know the exact figure for that, but I do know that there are not huge differences in acceptance rates for the main conditions and that the broad acceptance rate is 50%. I would expect it to be around that.
Lord Davies of Brixton: So you do not get the claim accepted just by saying that you are depressed.
Eduin Latimer: No.
Q17 Lord Layard: I want to understand why you used the phrase “work coach” just now. There is a question in my mind, and I am sure that of other members of the committee. If someone is sick, what effort is being made to make them better? This applies particularly to mental health. Probably most of the physically ill people are in treatment, but the majority of the mentally ill people may not even be in treatment. Is there somebody they are interacting with who is discussing their problem with them, how it can be improved, the extent to which they might feel better if they went back and did a bit of work, et cetera? Do they have a work coach, or are they on their own once the assessment is over?
Tom Waters: I was not clear enough in what I said before. If you are getting incapacity benefits, are out of work and have a health condition that stops you working, you can be put into one of two categories. About 85% of people are put into one called limited capability for work-related activity. It is not the snappiest name, but it is the more severe group, where DWP has assessed that you are a long way from the labour market and cannot be asked even to do work preparation activities, like preparing a CV, going on a training course, or something like that.
The other 15% are in what is called limited capability for work. They are required to do things like preparing a CV and stuff like that—getting ready for work is the idea. People in that smaller, less severe group are meeting someone in the jobcentre with some frequency to do these sorts of activities. The more severe group, at least by default, do not have any interaction with anyone from the jobcentre.
Eduin Latimer: There has been a range of different voluntary schemes which they could sign up to to get support looking for work through the jobcentre. The latest is the work and health programme, which is also supposed to support them with their health. It gives them a key worker who they can ask for support from for these things. Separately from that, they could also be getting support through the NHS at the moment. I am not as well versed on that.
Tom Waters: But there is nothing that they are required to do.
Eduin Latimer: No, there is nothing that they are required to do, and these are voluntary schemes. For context, the work and health programme is the largest recent voluntary scheme to support you to get back into work. Over the last five years, about 250,000 people have used it, which is less than 10% of the current case load for these benefits, so it will not have a huge impact on the number of people on these benefits.
Lord Layard: You are saying that that is voluntary.
Eduin Latimer: It is voluntary, yes.
Lord Layard: Has there been any trial of a more proactive form of interaction with this huge number of people to get them better and more active?
Eduin Latimer: There are some trials going on at the moment in hospitals on trying to support people specifically with mental ill-health into employment. I am not aware of the results of those trials yet. From my knowledge, there have been some trials but nothing on a very big scale.
Lord Davies of Brixton: There is some suggestion that we might hear more about this tomorrow—one of many leaks.
The Chair: Have we finished on changes to conditionality?
Q18 Lord Layard: Could I ask another incidental question before I ask my main question? What fraction of the total bill is for PIP, as compared with incapacity benefits? What is the argument for having it not means-tested?
Tom Waters: While Eduin finds the number, I will talk about the argument for making it not means-tested. I think the case would be that people have higher living costs by virtue of their condition and we want to compensate them for that, even if they are well off; if you have two equally well-off people, but one of them has health conditions and the other one does not, in real terms they are not equally well off, so you might want just to compensate the one who has the health condition. That would be the case for it, I think.
Eduin Latimer: We do not have the figure in billions here, but PIP, at the moment, is slightly smaller than incapacity benefits. I think it is slightly above £20 billion, and incapacity benefits are closer to £30 billion, but the forecast is for disability benefits to get bigger. By the end of the forecast period, according to the OBR forecast, we will be spending a similar amount on incapacity benefits and disability benefits.
Q19 Lord Layard: We have talked about the system of assessment and the system of benefits, but we have not talked much about changes to those and whether they could explain changes in activity. I think we have been told that the benefit differences have been fairly stable, but the conditionality differences have changed a lot, in the sense that the conditionality for unemployment benefit has become a lot tougher, if I am not wrong. What is your assessment of the changes and how they might have affected levels of inactivity?
Tom Waters: Job search conditionality has definitely increased over the past 15 years or so through a number of reforms. Lone parents used to be able to get out-of-work benefits until their youngest child turned 16, without doing job search. That was steadily reduced to age three. Universal credit also embodies extra conditionality requirements. For example, you used to be able to be out of work and get housing benefit and child tax credit, but as long as you did not claim jobseeker's allowance you would not be subject to conditionality.
UC bundles all these benefits together, so if you are out of work and claiming it, you are typically subject to conditionality. UC also has in-work conditionality, so if you are on a fairly low level of earnings but are working, you can still be required by the jobcentre to try to find more work or higher-paying work.
We have good evidence that conditionality can cause people to shift over to incapacity benefits. I mentioned the reform whereby lone parents used not to have to search for work until the youngest child turned 16. That was reduced to five. The effect of that policy over that period was to shift a fairly significant amount, about 3.5% of lone parents, on to incapacity benefits. That is quite a large share, almost as much as the number who got into work because of the policy. Once you get on to incapacity benefits, you do not have to do job search. So it certainly seems possible that some of the reason for the increase in the number of people on these benefits is due to expanded conditionality.
At the same time, the very sharp increases that we have seen recently are harder to square with it being a conditionality story, because there has been a very quick increase in a very short period of time when there has not been a very big change in conditionality.
Lord Turnbull: It seems to me that the mindset of DWP is that depression is an exogenous variable: people get afflicted by it and, when they are depressed, they cannot work. A more plausible sequence, in my view, is this: people get out of work, try to find a job after two years and get more and more depressed. In other words, depression is the result of worklessness, not the thing that causes worklessness. We then try to treat it as a medical condition. Eventually, you have to tackle the opportunities for work and build up people’s view that they can do it when they are completely discouraged, they have completely lost heart, so they stick on it. You get this history. We used to talk about learning by doing. This is atrophy of one’s skills by not doing. You have to try to break that cycle. Simply funding the consequences of disability is never going to work.
Tom Waters: You might well be right. I do not have enough expertise to venture an opinion. I am probably not the right person to answer that.
Q20 Lord Londesborough: Can we come back to the issue of regional differences in the number those on long-term sickness benefits? The ONS data suggests that, across the UK, the proportion of people on long-term sickness benefits has gone from 5.1% to 5.8% of the overall working population. Rather more disturbingly, the areas with high levels of long-term sickness seem to be getting sicker—that is, the sickness gap is widening, in contrast to the employment gap. Regions mentioned in the labour market outlook include Merseyside, Tees Valley and west Wales. They have all, at an already high level, experienced more than twice the national average increase in the past year. Is there any explanation for this disparity?
Eduin Latimer: When we looked at some slightly different statistics, the administrative data on how many people claim health-related benefits, we saw that the numbers increased roughly proportionally across local areas. However, the case load was already much higher in some of these areas, which tended to have weaker economies and poorer health, meaning that the absolute change was larger in those areas. In some of those areas, the proportion of working-age people claiming these health-related benefits is close to one in five.
There are theories as to why there are these differences. The evidence from previous studies is that, in areas that have weaker local labour market conditions, shocks to the local labour market conditions can mean that people moving on to these benefits. Similarly, on broader health indicators, these areas tend to be worse as well. Health and the local economy are likely to be a factor here. Exactly what role they are playing I do not think we know yet.
Lord Londesborough: In terms of demographic factors that may have an impact on the regions, one very notable trend is in the 16-to-24 age group. I think I read that the number of new claims has gone up from 250,000 per year to 500,000 per year. Is that playing out across the regions, or is it manifesting itself more in some regions than in others? When I say regions, I am of course talking about Scotland, Northern Ireland and Wales as well as England. Are there any interesting regional insights into that?
Tom Waters: We looked at the combination between region and age. You are absolutely right that, in proportional terms, the fastest growth is among young people. You can start getting these benefits from the age of 16. If you look at the growth among those aged between 16 and 24, you will see that the number of people flowing on each month pre pandemic versus today has gone up by something in the order of 100%, 200% or 300%, depending on exactly which age group you look at. These are very big increases. If you look at the group of people around the age of 50, the increase is only 70% or something like that. So these are very big increases, but the increase is sharper among young people.
Q21 Lord Londesborough: We had a Question in the Chamber on NEETs. I remind ourselves that that means people not in education, employment or training. The number of NEETs has gone up to 900,000 in the UK. We have a much higher NEET rate than the majority of OECD countries. That seems to relate to Lord Layard’s earlier question about what people were doing before they became economically inactive. It is quite a large cohort. The answer to that, I think, is that they were in education. Once they leave education, they are signed off as economically inactive. Is that right?
Tom Waters: I think that is right. One important fact about the NEET rate is that almost all of the increase has been driven by young men. The NEET rate is now higher for men than it is for women. It always used to be the other way round. When I last looked at the data, which was fairly recently, the NEET rate for young men now was about as high as it was in 2010, when the labour market was in a really bad state and unemployment was high. Now, unemployment is quite low and the labour market is fairly buoyant, but young men have this very high NEET rate, and, as you say, they are largely going to be coming directly from education.
Q22 Lord Razzall: I want to move on from regional differences to international comparisons. It is a given that our major European competitors have a lower amount of people signed off in the way we are talking about. I have read your papers as to why you think this might be. Would you like to expand a bit on that?
Eduin Latimer: I would challenge that a bit. It is hard to get comparable figures, but if you look just at spending on these health-related benefits as a percentage of GDP—we do have comparable figures there—at least pre pandemic it looked like we were broadly average compared to a set of other rich countries. So in terms of the actual level of spending it does not look like we are completely extraordinary. Even if we look at the post-pandemic figures there, we move up the league table a bit, but we are still broadly towards the middle.
What is exceptional in the UK, and we did not see it anywhere else, is the big rise in claims post pandemic. That is the real thing which lots of work needs to be done on to try to understand it.
Lord Razzall: I read your paper. Do you have a theory about why this might be?
Tom Waters: I suppose it is fair to say that we have some theories on why it might not be. Given that it is seen only in the UK and we do not see it across other countries, it cannot be as simple as saying, “It’s just Covid”, or, “It’s just the cost of living crisis”. Obviously, Covid and the cost of living crisis affected countries differently, but they were big shocks to every country, and we see this increase only in the UK and a little bit in Denmark. So it is a bit of a puzzle.
It could be that there is some way in which, say, the cost of living crisis or Covid is interacting with our existing welfare system or our economy to drive this increase. But there are other possible hypotheses. NHS wait times are a possible hypothesis. It could somehow be to do with tightening conditionality, although, as I said earlier, it is hard to believe that that is the whole story.
Lord Razzall: Are different methods of assessment a possibility?
Tom Waters: Yes. Our assessment has not massively changed, so if we are trying to explain the change, we need to find something that allows for it. It is possible, for example, that because we have a different kind of assessment, when the cost of living crisis hits and people’s incomes fall, it is a more plausible response for people to try to apply for these benefits than it might be in other countries. But that is pure speculation; I have no idea whether that is the case. It is certainly puzzling. It is certainly the kind of thing that DWP ought to be trying to figure out the answer to.
Lord Razzall: Do you have a better thought about what it might be?
Tom Waters: I do not have one that I would venture, no.
Q23 Lord Burns: Could I take this back to my original question? Are there big differences between inactivity rates, and developments in inactivity rates, between the other major European countries and the UK? We have been addressing the health aspect of it, but I go back to my issue about whether this is just a change in the share of people who are inactive being classified in different ways, or whether it is a problem of having different inactivity problems.
I presume that everybody has the same problem about the measurement of their labour force statistics. We cannot be the only people who are having difficulty doing that. However, going back and taking our HMRC numbers, our inactivity is back to more or less where it was in 2020. Is that not also the case for other European countries, broadly speaking?
Eduin Latimer: On the change, we were definitely exceptional in seeing prolonged increases in inactivity and falls in employment. Even if you take an optimistic view of the figures and say that we are back to where we were pre pandemic, it is worth noting that before the pandemic we were broadly on a positive trend where we saw the employment rate increasing and the inactivity rate decreasing. So quite a lot—not all, but some—of the comparable countries have continued to see similar trends. They saw a Covid shock and then went back to roughly their trend pre pandemic, but we have not seen that.
Lord Burns: Do we not have a lower level of inactivity than the average of competitor countries? I thought we had higher activity in that 16-to-64 age group.
Eduin Latimer: I do not have the exact figure. In terms of employment rates, we are broadly towards the top of the middle of the pack. Again, it is similar to health-related benefits: we were not completely exceptional coming in but were broadly average. It is just that we have seen a shock in a different way from other countries.
Q24 Baroness Liddell of Coatdyke: We see now that the Government have launched a Labour Market Advisory Board. What successful programmes can that board draw on that have helped long-term sick people to get into employment? What works and does not work? How many people who have been in receipt of incapacity benefit or PIP for a period of something like five years have managed to go back into work? Do you have figures on that?
Eduin Latimer: That was a range of questions. On the first one—the flows back into work—we do not have specific figures for the people who have been out for five years, but overall about 2% to 3% of people on these benefits move into work each quarter. That is close to 10% over the year.
It is likely that there are some different cohorts on these benefits. Some people are on them for a fairly short period of time and then flow back into work, and then there is definitely a group that stays on them for quite a long time. For instance, for personal independence payments, about two-thirds of people who start a claim are still on five years later, so it tends to be that people stay on these benefits for quite a long period.
On what works, I would not say that our expertise on this is quite as strong as it is in other areas, but from my reading of the literature and the evidence in the UK there has been a range of different employment support programmes in the UK that have tried to help to support people into work—for instance, the work and health programme. There is a mix between finding some modest positive effects and finding no effects, which is quite disheartening. So I would read that literature as saying that you can have some effect, but it is not huge.
Then there are some international randomised controlled trials of things like individual placement and support. The idea of that is to place someone in a job and provide support alongside that to help them keep the job. Those tend to show fairly positive results but on a small scale. A similar trial that was done in the UK did not show quite as positive results, which is fairly disheartening.
There seems to be tentative evidence that there is stuff that you can do, but more experimentation is needed to find exactly how to make it work in the UK. DWP should continue doing as it is doing—trialling these programmes and finding out how to make them work.
Baroness Liddell of Coatdyke: Are there many international examples of where it works?
Eduin Latimer: Outside of those studies, I am not aware of any at the moment, I am afraid.
Q25 Lord Verjee: What changes to the benefits system, if any, would you advocate to get people back to work? Is there a case for greater delineation between benefits and income? Do you consider benefit changes alone to be sufficient in looking to reduce health-related inactivity? As a general question, if you had a magic wand—if you had one wish to solve this problem—what would it be?
Tom Waters: This kind of relates to what Eduin was just saying. We have evidence that some of these sorts of support programmes can work, and at other times it does not look like they do work. We need to know what works in the UK in the current situation, and somewhat modest differences between these sorts of programmes can change their effectiveness. DWP should be quite aggressive in trialling different things to figure out what works. It can run pilots with 1,000 people, 2,000 people or something to try to figure out what is effective at getting people into work or improving their health. That is the big piece of the puzzle that we are missing: what are the very strong, effective programmes?
It is very unclear for incapacity benefit claimants what will happen to them if they get into work. Will they lose their incapacity benefits? It is so unclear that, in writing this, we spent a significant amount of time just trying to find out what the actual system is. It seems like the actual risk of being reassessed if you get into work, and therefore lose your benefit, is probably quite low, but, given the information that is available, people might legitimately think that it is very high. You can easily imagine that someone who is out of work and getting this benefit is thinking about getting a job, but they think, “If I get into work, am I going to lose this benefit? If I can’t keep the job, I’m really out of luck, because I don’t have the benefit or the job any more”. Making it clear to claimants what will happen if they get into work would be a very valuable thing.
The Chair: What should happen if they get into work?
Tom Waters: There are basically two ways of thinking about this. One way is that these benefits are supposed to be for people who cannot work; if you are in work, you can work, so we are going to take your benefits away. That means that your financial incentive to get into work is very weak.
Another way of thinking about it is to say that we are going to allow you to keep your health-related benefit when you get into work, maybe not for ever, maybe only for a year or for six months. Something that allows you to smooth that transition a bit would give stronger incentives to get into work, but it would mean that we would be giving these benefits to people who are capable of work.
Q26 Lord Verjee: If you had a magic wand, what one solution or idea would you choose? What would you be doing, from your experience?
Eduin Latimer: Again, we should try to do many trials to figure out exactly what works on the employment support side. There is also not much evidence on how much investments in health and supporting people with their health can end up having downstream benefits on this, so again that is something that should be explored.
Isolating to the benefit system, and relating it to what Tom was saying, there is another area where you could make it easier for people to move into work. Currently, if you are on the legacy benefit employment support allowance—that is still about 50% of people, and some people will remain on it even after full rollout—if you work more than 16 hours, you lose all their benefits. Again, this is quite a sharp loss, which might discourage you from taking the risk of moving into work.
So it is either about making it temporary, as Tom said, or somehow smoothing it out so that it tapers out as you work longer. Those are two ways in which you could smooth out some of those risks in the system.
Lord Londesborough: On that subject, it strikes me that the 16 hours per week rule is a good example of where the benefits system seems to be full of cliff edges and binary dilemmas: “Do I risk a reassessment by going back to work?”, et cetera. Is there scope for having sliding scales to incentivise work rather than having these cut-off points, which are, arguably, acting as a disincentive? You can imagine people who are feeling financially vulnerable not having the appetite for taking a risk like that and saying, “It’s safer to stay at home and stay on benefits rather than risk losing benefits by going to work”. It seems to me that there is a whole set of disincentives here, which is probably not the only reason but one of the reasons why we have rising inactivity.
Eduin Latimer: Recapping some of the points we have already heard, there is definitely this cliff edge in the legacy system. One of the advantages of universal credit is that it is partially smoothing out some of these cliff edges—that is the idea—so your benefits income gets tapered away as you earn more.
The thing that seems a bit strange in the system at the moment is that you face this risk of reassessment. If you get reassessed and you lose, you see a big drop. The latest statistics we have seen suggest that that does not happen very much, but the risk is still there. It seems that the Government have moved quite a lot in this way, but they have not publicised it well ormade it clear enough that that is the case. So there is a real case for deciding where you want to be and making that policy clear.
Tom Waters: You get the worst of both worlds then. If you do not reassess people, you are giving support to people who can work, but you are not getting the incentive effects. You need to tell people in order to get the incentive effects.
Q27 Lord Turnbull: Have the Government set a target for either the employment rate or a reduction of inactivity, or are they just trying to see what works and see how they get on?
Eduin Latimer: They have set a target for the employment rate of 80%, which is ambitious. For context, we are currently at 75%, so we would have to move 5% of the working-age population from inactivity or unemployment into work to meet that target. They have not said when they plan to reach that target.
For context, in terms of employment rates internationally, we are currently broadly towards the middle among other rich countries, if not slightly above average. Four of the OECD countries have employment rates of 80%, so if we were successful here we would move right to the frontier. It is possible, but it is a very ambitious aim, and it is not clear how the Government plan to get there.
Lord Turnbull: You say that we have 25% who are not employed. If you split that down, presumably it is split between the unemployed and the inactive.
Eduin Latimer: Yes, so 3% are unemployed and 22% are inactive. Among those who are inactive, there is a range of reasons for them being inactive due to long-term sickness. According to the Labour Force Survey, that figure is around 6.5% or 6.4%.
Lord Turnbull: The latest news is a big drop in fertility. So all other things being equal, we seem to be heading for an increase in the dependency rate. The Japanese are 20 or 30 years ahead of us in this. Instead of alleviating that, the growth in inactivity is actually exacerbating it. You have these combined effects: if inactivity continues to rise and the demographics are also running against you, you rapidly get into a position where the working population really struggles to carry the people who are not working.
Eduin Latimer: For some longer-term context, over the last decade, we saw the inactivity rate fall first. In 2010, about 23% of the population was inactive. In 2019, it was down to more like 21%. It has now gone back up to just below 22%. So this is not a long-run trend; it is just a post-pandemic blip or change. It is hard to know where we will be going forward.
You are broadly right that getting more people of working age into employment will help us to support our older population. Particularly worrying is people who are out of work at a younger age, because if they face some scarring effect from being out of work and that affects their employment throughout their lives, that will have a large cost to them, to the economy and fiscally.
Lord Turnbull: The Government are facing a familiar dilemma of spending money in order ultimately to save money. It goes to a more labour-intensive DWP, with less done on the phone and more actual coaching going on. It is the same dilemma for HMRC, but it may be a better trade-off in the long run, to spend more money trying to tackle this, rather than to find the cheapest way of doing it, which is to go online and on telephones.
Tom Waters: As Eduin was saying earlier, some of these programmes seem quite effective. At other times, they are not effective at all and are wasting money. It is all about whether the Government are able to design schemes that are effective in getting people back into work, when the upfront costs would be worth it.
Lord Turnbull: Do they have any schemes that they like at the moment, which they would like to roll out more? Are there other schemes that are not working any more, which they want to wind down?
Eduin Latimer: It would be better to ask that question of the Government. My sense is that they have made noises about doing more of this work on integrating employment support with the health service. The previous Government announced a system of universal support that was supposed to provide more support coming in from 2026 to around 100,000 people a year. I have not heard that the current Government are not going to go ahead with that.
They are doing trials of things similar to individual placement and support, in which they would put people into jobs and try to support them. They are trying to figure out how to do that. Disappointingly, the evidence on that is not positive so far. My sense is that they are still experimenting and might be able to find something that works.
Lord Turnbull: How significant is the overlap with the waiting list? Think of people who say, “I’ve got this bad hip. I can’t get it dealt with. I’m not going anywhere near applying for anything. Once I get it fixed, I’d be very keen to get back to work”. It seems that, on reducing waiting times, a lot of the people who are waiting are past retirement age anyway. I think there may be a lot of people who are dependent on some breakthrough in their health status, who would then be quite keen to get back to work.
Tom Waters: I am sure that that is right in some cases. One important fact about the waiting list is that quite a large fraction is of people who are already above state pension age, who are pretty unlikely to be going to work anyway. The OBR made an assessment of this, and thought it was a relatively small contributor to overall health-related inactivity.
It is fair to say that we do not have very strong evidence on it. A lot of it depends: if you have a wait of several months—six months or whatever—how much does that have a long-run effect on your health and therefore your employment? Or is it actually that, as soon as you are treated, you are back in a job the next day? If it is the latter, I suspect that waiting lists will not have very large effects, but if it is the former, they could, because they would have a long-running impact.
Lord Davies of Brixton: Is this all a statistical artefact? Can we actually believe any of these figures? As I understand it, the number in work is taken from the Revenue figures. The number out of work is taken from the survey that we cannot believe.
Tom Waters: Yes, but it is also about how many people are getting these health-related benefits.
Q28 Lord Davies of Brixton: That was my next question. What proportion of the 22% of people who are out of work are on public benefits?
Eduin Latimer: We cannot tell from the admin data how many of those people are in employment. Based on the admin data, 10% of the working-age population are on health-related benefits and most of those are out of work and inactive. So it is probably not 10%, but it is in that region—somewhere between 10% and 6% of the working age population, so a significant proportion. We have both the administrative data and government spending alongside it, so we can be fairly confident that that rise in health-related benefits is a genuine phenomenon.
Tom Waters: As we have statistics from HMRC about the number of people in employment, we can be pretty confident about that as well.
Lord Davies of Brixton: Do we know enough about the dark economy?
Tom Waters: That is a fair point. No, I suppose that would be missed. In looking at trends, if you think that that has not changed drastically over a short period of time, it would not matter too much. But that is fair.
The Chair: Thank you both very much. You have given a wealth of evidence and a lot of material. The transcript will bear a lot of scrutiny. You have answered a lot of questions, but every question seemed to raise more questions. Thank you for an excellent session.
