The Institute for Fiscal Studies found that 83% of the 3.2 million working-age people claiming incapacity benefit have “limited capability for work or work-related activities,” meaning they are unable even to prepare for a job. Four in five have also been out of work for at least two years, making them statistically less likely to return, the think tank said.

The research set out just how difficult it will be for Labour to reverse the flow of people into welfare since the pandemic, which is central to its ambition to lift the UK employment rate to 80% from 75% and boost economic growth. Chancellor Rachel Reeves is looking at cuts to the welfare bill to find savings at the Oct. 30 budget but the IFS said measures to help the sick into work could prove costly.

One of the main obstacles the government faces is the system of incentives, the IFS said. As health benefits can be withdrawn above a £9,516 ($12,463) salary threshold, claimants may end up worse off if they take a job, the study showed. Someone who moved to a 35-hour working week on the National Living Wage could find themselves with an effective 89% tax rate.

“This is a large disincentive to enter a job paying above this threshold,” said Eduin Latimer, an IFS research economist. “Effective tax rates this high are likely to discourage work, especially for those with health conditions which make working difficult. It is also plausible that claimants might worry that even lower amounts of work could affect their entitlements.”

Since the pandemic, there has been a surge in the number of people dropping out of the workforce due to ill health, creating skill shortages in many sectors and limiting how quickly the economy can grow without stoking inflation.

Incapacity-benefit claims have risen by 28% to 3.2 million since 2019-20, two thirds of whom had already been out of work for more than two years before they made a claim. 

Labour is expected to unveil policies to tackle the problem, such as employment-support programs to help people into work. It could increase job search requirements for incapacity benefit claimants, but doing so would make life harder for those not able to work.

The government’s “Back to Work” plan proposes allowing claimants to try work out without the threat of losing their benefit, which would partially remove the disincentive, the IFS said. But it would be costly at a time when the government needs to find savings to balance the books because it would mean increases in employment do not yield as much in tax.