Reform wants to save £50bn. But how?

Reorganising the welfare system is not the same as cutting the welfare bill

“The purpose of a system is what it does.” This is a dictum attributed to Stafford Beer who observed that a system’s true function is defined by its results, not by the intentions or mission statements of the people who built it.

If we follow this rule of thumb, Britain’s welfare system is pretty good at keeping people out of work. In March 2026, about 3.5 million people were on Universal Credit with a health condition or disability that restricted their ability to work. In December 2025, 42 per cent of people who were out of work and in Universal Credit’s ‘Searching for work’ regime had been in it for at least a year. Of those who started the specialist Work and Health Programme early enough to have a full 24 months of follow-up, only 31 per cent achieved a job outcome.

Given the state of Britain’s public finances, the level of national debt and the annual cost of servicing it, taxpayers have a strong interest in how the state performs its functions and spends public money.

Two big questions follow from these observations. First, how much should the government spend? Second, who should administer protection against unemployment, sickness, disability and old age, and how?

Reform UK published a report today setting out how it would ‘make welfare work’. The report chiefly addresses the second question whilst largely avoiding the first. Judged by the incentives and responsibilities it would create, the proposals would mainly reallocate existing costs and duties. It would alter eligibility under a set of new criteria and shift some responsibility for ‘getting people back to work’ to councils and employers.

Local authorities, for instance, may be required to run what I can only describe as a favourite of British policy makers, namely the ‘Welfare Recipient Hubs.’ Just like the oft-proposed Youth Hubs, welfare recipients would have to attend these facilities where they get assigned supervised work in places such as libraries. The purpose would be to foster an appreciation of work and help recipients return to the labour market. Whilst there is evidence that this could help, such schemes are usually administered by more empowered local governments, with more independence over their budgets and better aligned incentives. Without any further context, it is unlikely that another ‘Hub-shaped’ policy could do much better.

The worst part about this proposal is that it would create a new statutory spending requirement for local councils. This is in the context of many councils already struggling with the pressures of social care requirements and requiring exceptional funding to comply with existing duties. So it’s hard to see how adding additional burdens without commensurate funding would work.

Some responsibilities would also pass to employers. Under a scheme called ‘Return to Work Cover,’ employers would be required to administer sick pay and support people back into work. Reform UK’s report estimates the resulting benefit liability at £1.6 billion, to be balanced by a cut to employer National Insurance contributions.

But a uniform tax cut cannot offset that cost evenly, because firms would not be affected evenly. Businesses with healthier workforces than average could come out ahead, whilst those whose employees do more strenuous work, or that employ many older or less healthy workers, could lose out significantly.

The proposal is very likely to raise employment costs significantly and may introduce perverse incentives to a labour market which is already overregulated. For example, ‘Return to Work Cover’ could strengthen the incentive to avoid hiring people thought likely to fall ill and make a claim. No amount of changing anti-discrimination law can cope with the economic incentives such a system would create.

Photo by Vitaly Gariev on Unsplash

What is more, the evidence that the Dutch system works is a bit questionable. The DWP carried out a review into the Dutch reforms and observed that indeed disability application rates in the Netherlands fell by 40 per cent and labour-market participation rose by 1.2 percentage points. However, unemployment-insurance claims rose by 1.1 per cent following the reforms. The OECD has also warned, following its own analysis, that Dutch employer liabilities discourage permanent contracts.

Even if these changes improved employment, they would not answer the first question, namely how would the government actually cut £50 billion from welfare spending? The report offers no clear mechanism for controlling spending. It simply assumes that spending will fall once the new system is in place. That may be true, but the savings could be much smaller than predicted.

This is an issue hard to overlook given the sheer size of promised savings. To give a sense of scale, if the government wanted to achieve £50 billion in savings right away, it would have to cut the state pension benefit by roughly a third. This would spread the cuts across the widest recipient base and therefore minimise the cut per person, though it would hardly be painless.

By contrast, the entire projected budget for disability benefits in 2026–27 is almost exactly equal to £50 billion. The report assumes that tighter eligibility criteria for PIP and the health component of Universal Credit will yield savings of £20.15 billion by 2033–34, but it is unclear how these savings and more are meant to be sustained without making broader alterations.

The issue with policies which don’t explicitly reduce spending is that they are unlikely to reduce spending today or in the future. The only sure way to control public spending is to create an explicit commitment to limit spending without further qualifications. For instance, the government could ‘cap and freeze’ the welfare budget at its current nominal level until the end of this Parliament.

Once this spending brake is firmly in place, we can discuss how to redesign the system. If we want to reduce future spending rather than just current spending, we must decide which functions the government should stop performing, which is the safest way to avoid future cost disease.

There is already, for instance, a private insurance market for loss of income through unemployment. A person can buy cover worth £1,500 a month for a full year for a premium of less than £50 a month. This is an absolute bargain, and broader participation in a competitive market could improve it further.

The same is true for critical illness, injury and life insurance, which offer good cover at reasonable prices. Private insurers can offer this cover because they face hard budget constraints and market discipline. Perhaps many of these functions should be handled entirely by private insurers, allowing the government to shrink its welfare provision to exceptional cases in which premiums would otherwise be unaffordable.

Under the current system, some people try to defraud the state with false claims, whilst genuine claimants can face the humiliation of being questioned at length by civil servants about their illness or condition.

A private system would allow the individual to tailor their own protection against unemployment, long-term sickness, and other risks on their own terms according to their own needs and preferences. Fewer claims would pass through the government, reducing its exposure to fraud and the recurring political argument over who is deserving enough, suffering enough or disabled enough to receive support.

This could both radically simplify and reduce welfare spending on the government’s part and improve outcomes for the vast majority of individuals who could have these conversations in a dignified manner without the labels applied to them by the political circumstances of the time.

No current or future government can avoid these questions for too long. The best way to proceed would be to set firm spending limits first, then have a conversation on how many of these responsibilities the government could realistically just phase out and leave to the private sector.