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Why Jeremy Hunt has his work cut out to balance the books

Jeremy Hunt - Stefan Rousseau/PA Wire
Jeremy Hunt - Stefan Rousseau/PA Wire

One in eight working age Britons will be claiming disability benefits by 2028, according to official forecasts.

Five million people will be receiving welfare payments because of a health condition within five years, according to forecasts from the Office for Budget Responsibility (OBR).

Trends since the start of the decade suggested a million more people were on course to start claiming “at least one” health-related benefit by 2028.

The prediction is a blow to Jeremy Hunt's ambition to get more sick Britons back to work and will put more pressure on public finances as welfare costs rise rapidly.

Welfare bill swells

The OBR said the “continuously rising path” of claimants meant the share of adults aged between 16 and 64 who receive health benefits was on course to rise from 7.8pc in 2019-20 to 12.5pc by the end of its current forecasts.

The Government's tax and spending watchdog said NHS backlogs were partly to blame but there were more persistent underlying causes.

The number of people successfully claiming for mental health and musculoskeletal conditions has risen by an average of 6,700 and 4,500-a-month respectively since the pandemic.

A rapid rise in claimants both in and out of work is expected to push the disability benefits bill for working age people to almost £70bn-a-year, from just under £40bn last year.

The total health and disability benefits bill is also expected to rise from just over £50bn in 2022 to £83.5bn by 2028.

The OBR said: “This would be consistent with a continuation of recent trends for both the rising prevalence of disabilities in the population and rises in the prevalence of disability benefit receipt among that group.”

The Centre for Policies Studies (CPS) think-tank has previously criticised “perverse incentives for people to remove themselves from the workforce” because they risk losing their entitlement to benefits in the future once they start work.

Changes to the benefits system and how people are assessed fit for work are expected to increase the number of people in employment by 10,000, but the OBR said recent data suggested the rise in the disability will continue.

“Over the past decade, the share of the working age population reporting a disability has risen by 36pc, while the share in receipt of a health or disability related benefit has risen by 40pc,” the OBR added.

Overall welfare spending is also on course to jump over the next five years after Mr Hunt's decision to uprate benefits by 10.1pc in the Autumn while freezing tax thresholds for workers until 2028.

Total welfare spending is expected to jump by 12.6pc to almost £300bn in the coming financial year, which the OBR said was the biggest increase since the 1990s.

The Public Accounts Committee (PAC) has highlighted that £8.5bn in benefits was lost to fraud or paid out in error in 2021-22, almost double the annual pre-pandemic total.

The OBR expects “fraud and error” to cost taxpayers an extra £1.6bn a year on top of this by 2028.

Higher spending on health and disability benefits also means Mr Hunt will breach his own welfare cap by £4.1bn.

Hunt’s debt problem

Surging welfare costs are just one of the problems Mr Hunt will have to face in the years to come, as outlined by the OBR and think tanks such as the Institute for Fiscal Studies (IFS) in response to the Budget.

The Chancellor faces a serious challenge in meeting his fiscal target to get the ratio of debt-to-GDP falling by the end of the forecast period.

The OBR said: “It is now harder for this Chancellor to deliver a falling path for the debt-to-GDP ratio in the medium term than it has been for any of his predecessors since the OBR was established in 2010.”

As things stand, Mr Hunt will only be able to meet his goal by a tiny margin: the OBR forecasts he will have just £6bn of headroom by 2027-28.

Paul Johnson, director of the IFS, said: “Mr Hunt was hemmed in by his own fiscal target to get debt falling in the last year of the forecast period.

“That has led him to rely on a combination of tight spending plans, imaginary future increases in fuel duties, and a fiscal gain from unwillingly undoing his corporation tax change at the end of the period, in order to appear to meet his rule.”

Even with very tight spending pencilled in from 2024, debt is barely falling.

Carl Emmerson, an economist at the IFS, said: “These margins are absolutely tiny relative to the uncertainty and projecting the change in debt on that timescale.”

Hunt has only a quarter of the fiscal headroom compared to the last three Chancellors. He would not be able to meet the fiscal targets set by Rishi Sunak, Philip Hammond or George Osborne, the Resolution Foundation said.

He has been constrained by Britain’s £2.4 trillion national debt, which has left the Government with hefty interest payments to make as interest rates rise. Sluggish economic growth means the Chancellor has little leeway if interest rates rise faster than expected or growth disappoints.

Legacy of repeated economic shocks

Mr Hunt’s biggest problem in getting the debt-to-GDP ratio down is Britain’s poor growth prospects, the OBR said.

Growth rates have been weak since the financial crisis, while the triple shocks of Brexit, the pandemic and the energy crisis further damaging the outlook.

Michael Saunders, senior adviser at Oxford Economics analysts, said: “The Chancellor is boxed in by the legacy of low growth, which partly reflects the legacy of Government policy choices of the last 10 years or so.”

Energy support measures, high inflation, high interest costs and weaker nominal GDP growth mean that public sector expenditure will hit 46.8pc of GDP in 2023. It will only have declined to 43.4pc by 2028, the OBR believes.

These levels are lower than the 53pc peak reached during the pandemic but are still high by historical standards. Public sector spending on this level has not been seen outside of a crisis since the 1970s.

Mr Hunt has shown no signs of wanting to radically cut back on spending.

In November, he borrowed to cover the £45bn funding gap the OBR forecast had in his financial plans.

Now, the OBR believes the gap will be £18bn less than previously thought. Rather than use the windfall to reduce his debt, the Chancellor has spent on childcare reforms and energy support.

Mr Johnson, of the IFS, said: “Mr Hunt decided to spend the larger part of this windfall.”

As well as driving up Britain’s debt, the triple shocks of Brexit, the pandemic and the energy crisis have had long-term impacts on the way Britain’s economy works.

Brexit has reduced the volume of UK imports and exports by 15pc, according to the OBR. This translates into a 4pc reduction in the potential productivity of the UK economy, according to the OBR.

Mr Saunders, who was a former member of the Bank of England’s Monetary Policy Committee, said the blow equated to about £40bn a year.

The pandemic subsequently shrank the size of Britain’s workforce, which has “reduced the potential output for the last couple of years,” Mr Saunders said.

Huge tax burden on households

To grapple with the Government’s high debt burden – and to come close to getting the debt-to-GDP ratio falling by the end of the forecast period – Mr Hunt is relying on a series of stealth tax raids.

The thresholds for income tax and national insurance are frozen until 2028, which will drag millions more people into higher tax brackets as a result of inflation.

By 2028, taxes as a share of GDP will hit 37.7pc – a 4.7 percentage point increase on today’s levels that will take the British tax burden to a 70-year high.

The looming stealth raid will be equivalent to every household in the UK paying an extra £4,200 in tax, according to analysis by the Resolution Foundation.

The blow will be magnified by low wage growth in relation to inflation. Altogether, households are in for the biggest drop in real household disposable incomes on record since at least the 1950s.

Mr Johnson said: “What households are going to feel over the next year will be continuing pain.”

Real disposable incomes – the amount of money households have after tax and adjustments for inflation – will fall by 5.7pc on average over the two years to 2024, the OBR has forecast.

After the drop, they will be slow to recover. In 2028, households will still have less money to spend than they did before the pandemic.

If real incomes had continued to grow at the average rate seen between 1948 and 2008, households would have £10,000 more per year by 2028, according to the IFS.

Even based on the slow growth rate recorded over the last decade, incomes would still be £1,800 higher than currently projected, the Resolution Foundation calculated.

Interest rates make everything worse

Not only is Hunt burdened with a much higher stock of debt than his predecessors, but the cost of servicing it has tripled over the last year to its highest level in a decade, according to the OBR.

High inflation has pushed the Bank of England to make 10 consecutive increases in the Bank Rate since December 2021, which has pushed up borrowing costs.

Debt costs have also risen because a large chunk of the Government’s debt is index-linked, which means it rises in line with inflation.

Mr Saunders said: “When you have had the interest rate rises that we have had over the last 18 months, it means there is no scope for tax cuts.”

Debt interest spending hit £114.7bn in the last financial year – an all-time record, according to the OBR.

This was a jump of £58.3bn compared to a year earlier. More than half of this increase (55pc) was due to the strain from index-linked debt.

This will be a huge burden for the Chancellor into the future. Even by 2028, the Government’s spending on debt will be £96.5bn a year – £40.1bn more than in 2022.

Chained to forecasts

Mr Hunt is chained to the OBR’s forecasts, which give him almost no room for future tax cuts.

However, without them the situation would be even worse, Mr Saunders said. Gilt yields would rise as they did following the mini-Budget in September. In turn, this would massively inflate the Government’s debt service payments.

He said: “If we didn’t have those, actually he would probably have even less scope, because markets wouldn’t trust him. The fiscal outlook would be worse.”

However, forecasters themselves have major limitations. The OBR’s GDP growth expectations are wildly different to the Bank of England’s.

Mr Saunders said: “That should tell you that these things are uncertain. I think the risk is potential growth may turn out to be a bit weaker than the OBR expects.”

If that is true, Mr Hunt and any future chancellor will have even less opportunity to reduce the national tax burden.


Migration has been hailed as a solution to Britain’s labour shortages, but OBR analysis suggests this could instead present a new problem for the Chancellor.

Half of migrants allowed to live in Britain are now neither studying nor working, official figures show, prompting demands for tougher visa rules to reduce net migration.

Some 680,000 non-work, non-study visas were issued last year to dependents, Ukrainians or Hong Kongers. That represented nearly 50 per cent of the total 1,437,000 visas granted in 2022.

It represents a trebling from the numbers under the pre-Brexit immigration system when just 31 per cent - or 233,000 - were neither studying nor working.

The biggest driver has been the surge in the number of dependents accompanying main visa holders, many of whom are the spouses or children of foreign students.

Of the 680,000 non-work, non-student visas granted, more than half - 379,000 - were to dependents. Some 40 per cent of these were family members brought in by students, eight times the number there were before Brexit.

The remainder were accounted for by arrivals under the two Ukraine refugee schemes (211,000) and the British National Oversea visas for Hong Kongers (54,000). Just 20 per cent of the total 1.4 million visas issued were for work, with 30 per cent for students.

Sir John Hayes, a former home office minister and chair of the Common Sense group of backbench MPs, said the Government should act to curb the number of family members that postgraduate students were allowed to bring with them to the UK.

Ministers are understood to be considering restricting the rights to bring in dependents to “high value” degrees and increasing the income threshold required for a family to be granted a visa.

They have contributed to net migration now projected to be 245,000 a year by 2025/26, almost double the level the OBR predicted last year and 40,000 higher than it projected in November.

Sir John said: “You cannot sustain population growth of 250,000 a year. The pressure it puts on infrastructure is in the end unbearable.”

The OBR said non-work, non-study visas were the “fastest growing category” since the pandemic. As a result, the watchdog has scaled down the impact the migrant population would have on jobs growth.

The OBR said: “It is likely that the participation rate of migrants under the post-Brexit regime will be lower than in the past, so we have assumed they will have the same participation rate as the resident population.”