Is Welfare Spending Out of Control? – Not What You Think

Over the past 12 years, welfare spending in the UK has risen by £100 billion, with forecasts suggesting it will continue to grow. Health-related benefits are at record levels, and by the end of the decade, sickness-related spending alone could exceed £100 billion a year. Headlines warn that 6.5 million people are on out-of-work benefits, and recent political debate following the scrapping of the two-child limit has stoked claims that the system is spiralling. But is the welfare budget really out of control, and where does the £313 billion actually go?

To understand this, it helps to put spending in context. As a share of GDP, welfare spending is lower today than it was in 2010. Welfare costs rose significantly between the mid-1950s and the mid-1980s, but since peaking at around 12% of GDP in 2012, the proportion has actually fallen. It is important to note, however, that welfare spending is cyclical: during recessions, rising unemployment and falling GDP automatically push up the welfare share. A deep recession in 2026 would therefore cause another spike.

The largest component of welfare spending by far is the State Pension. Pension Credit adds another substantial amount. The next biggest area is Universal Credit, which incorporates a wide range of support for low-income households, the unemployed, housing costs, disability, and children. The amount an individual receives varies widely depending on local housing costs. For example, a single unemployed person in Oxford might receive £400 a month in basic allowance plus up to £900 in housing support, totalling around £1,300. Meanwhile, someone in Blackpool might receive only about £770 because of much lower rental prices.

A major area of recent growth is in health-related benefits. An individual assessed as having limited capability for work and eligible for Personal Independence Payment (PIP) could receive as much as £497 a week—over £25,000 a year. Someone with a lower level of disability might receive around £262 a week. Given the variety of eligibility scenarios, it is difficult to pin down precise amounts, but estimates from research organisations show possible annual totals ranging from £12,000 for an unemployed adult to £27,000 for a claimant with incapacities and a child.

This raises the question: can the UK afford such support when a growing share of the working-age population is not in employment?

Since 2010, governments have deliberately limited increases in working-age benefits. While pensions enjoyed the protection of the triple lock, working-age benefits were often only increased in line with inflation—sometimes by less. As a result, the real value of unemployment support has fallen. Housing support has also been squeezed despite rents rising significantly.

Housing is, in fact, one of the most important drivers of welfare spending. Rents have risen sharply in recent years, affecting both working-age claimants and increasing numbers of pensioners retiring into the private rented sector. Low increases in benefit levels have kept some welfare spending down, but escalating rents continue to add pressure.

Another factor helping limit Universal Credit growth has been a reduction in low pay. While average wages have stagnated overall, the National Living Wage has risen quickly, boosting incomes for the lowest-paid and reducing the need for benefit top-ups. Yet this has come with a caveat: underemployment has increased. More people now work fewer hours than they would like, partly because higher labour costs encourage employers to reduce hours.

At the same time, a widening gap has emerged between standard unemployment benefits and the higher support available for those classed as incapable of work. Since 2020, long-term sickness and health-related inactivity have risen sharply—from just over 100,000 to more than 600,000. Mental health issues among young people have been a major contributor, with depression rates rising significantly since the early 2010s, coinciding with the widespread adoption of social media.

However, the increase in incapacity benefits cannot be explained by mental health alone. The rising State Pension age means more older people remain in the workforce for longer, even though many struggle with health problems. Those over 65 who continue working receive less support than they would if they had already retired, which can push some towards health-related benefits. The changing nature of employment also plays a role: the decline of long-term, stable jobs and reduced willingness among employers to offer light duties or adjustments mean more people fall out of work due to ill health.

Much media coverage focuses on claims that millions are out of work, but this picture is complicated by changes in the way benefits are counted. Adjusted for consistent measurement, the rise in out-of-work claimants is far less dramatic than headline figures suggest. Nevertheless, health-related benefit spending is undoubtedly rising and will continue to be a significant cost.

Yet even this increase is overshadowed by the long-term growth in pension spending. The triple lock has significantly boosted pension income. If pensions had only risen with inflation since 2011, they would be up 56%. Because of the triple lock, they have risen by 87%—a faster increase than average earnings. And demographics are shifting dramatically. In 2022, 26% of the population was over 65; by 2050 this is expected to rise to around 43%, and possibly higher given falling fertility rates. Pension spending is projected to rise from around 4% of GDP to 8%, meaning roughly one-fifth of all government spending could go toward pensions in the future.

If welfare spending as a share of GDP has been steady—or even falling—why has total government spending risen? The main drivers are healthcare costs and debt interest payments, both of which have increased significantly. Defence spending may also rise in coming years.

Overall, welfare spending is certainly increasing in cash terms, particularly for health-related benefits and pensions. However, relative to GDP, it has not grown as dramatically as public debate sometimes suggests. That said, the long-term outlook points to substantial increases, driven primarily by demographic change and the guaranteed protection of pension incomes. Rising sickness levels also add short-term pressures.

This presents the UK with a major long-term challenge: how to fund future pension commitments, how long people will need to work before receiving a pension, and how the system will cope with economic downturns that inevitably swell welfare demands. The ongoing rise in housing costs only magnifies the challenge.

Understanding these pressures is essential for any realistic discussion about the future of welfare and public spending in the UK.