Einblicke
Working doesn’t pay in the UK
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Insight Article
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Oktober 06, 2025
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Working doesn’t pay in the UK
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Oktober 06, 2025
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Working doesn’t pay in the UK
Working doesn’t pay in the UK |
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The UK gilt market is nervous about November’s fall budget. Will Rachel Reeves, Chancellor of the Exchequer, be able to come up with measures to hit the government’s fiscal target without violating explicit public promises not to raise certain taxes?
The near-term nervousness just underscores broader market concern over the UK’s ability to generate productivity and growth. This has been a recurring theme in the UK, as real growth has essentially flatlined since the pandemic (see chart below).
Even if Reeves manages to hit the UK’s fiscal target for this year, there is no clear path for how she will be able to pull that off next year or in the ones that follow. The big problem is that while the Chancellor is working diligently, the same cannot be said for the broader population. Since 2019, the number of people who are inactive has risen by roughly 400,000, to 9.1 million people, per the Office for National Statistics.
In our view, British workers are not to blame – they are just responding to (dis)incentives in government policies that disable and demotivate the workforce. Consider the damages from three policies:
The pensioner triple lock. This policy indexes pensioners’ income to ensure that they will receive at least a 2% increase each year – if CPI and/or wage growth exceed 2%, they get whichever is greater. This optionality is even more unreasonably generous than it appears at first glance. Around 2021-2023, a CPI inflation shock was followed by a lagged spike in wages. So, in the first year pensioners accrued the CPI spike, and in the next they got the follow-on increase based on the wage spike. Double up! While that is clearly a boon for the pensioners, the extra income ultimately comes from the pocket of the working age population. A policy that demotivates workers by forcing them to pay away ever increasing chunks of their earnings to support pensioners is clearly flawed.
National Insurance Contribution (NIC). This past year the government raised the NIC, a tax assessed on employee earnings and paid by the employers. In any circumstance, the more a government taxes labor the less labor there will be in the economy, all-else-equal. This NIC hike had an outsized effect because it came on the back of large real increases in the minimum wage. The result? A one-two punch that is burdensome on all businesses, but particularly in hospitality and retail, where hiring has become de facto prohibited. It’s a safe bet that many readers of this blog had their first job in these sectors. It is economically self-defeating to deprive new entrants into the workforce of these opportunities and yet another challenge for job seekers in a difficult economy.
Welfare. Following a restructuring of the welfare system, the number of economically inactive Brits has risen substantially. While there is a lively debate whether the design of the welfare system is structurally reducing the labor supply, what is clear is that the system is stuck. The political backlash to even modest reform to the system earlier this year almost cost the Chancellor her job. And so welfare recipients are also stuck—the government is explicitly telling them that the status quo of not working is in their interest.
The bottom line: The UK’s current policies provide a host of disincentives for British citizens to work. These policies impose great costs at the individual, microeconomic level and are a major drag on GDP. It’s hard to envision a bullish scenario for UK assets until there’s more outrage and less apathy about economic policy.