Report finds that legacy of hollowing-out of manufacturing in 1980s is far more people claiming incapacity benefits

The enduring impact of closing factories and shutting coalmines in the 1980s has been revealed in new research showing that the drain on the exchequer from former industrial areas is responsible for up to half the government’s £55bn budget deficit.

The legacy of leaving old industrial Britain to rot is becoming clear | Larry Elliott Read more

In the first comprehensive analysis of the cost to the state of the de-industrialisation that began three decades ago, Sheffield Hallam University said the annual bill was at least £20bn and was perhaps as high as £30bn.

The report found that the cumulative legacy of the hollowing-out of manufacturing and the year-long miners’ strike of 1984-85 was a far heavier concentration of people claiming incapacity benefits than in the richer parts of Britain and a more widespread use of tax credits to top up the wages of those in low-paid jobs.

The report’s co-author, Prof Steve Fothergill, said: “The long-term effect of job destruction in older industrial Britain has been to park vast numbers out of the labour market on incapacity benefits, these days employment and support allowance (ESA). The cost to the Treasury is immense, especially if all the top-up benefits are included.

“Added to this, low wages in these weaker local economies have jacked up spending on in-work benefits such as tax credits and reduced income tax revenue. None of these impacts have diminished over the years, despite the recent upturn and efforts to cut claimant numbers.

“We estimate that the ongoing cost to the exchequer, in extra benefit spending and lost tax revenue, is at least £20bn a year, and possibly nearer £30bn. To put this another way, approaching half the current budget deficit is the result of job destruction in Britain’s older industrial areas.”

The report – Jobs, Welfare and Austerity – said there was a continuous thread linking what happened to British industry in the 1980s to the welfare cuts being borne by communities in the north, Scotland and Wales today.

The loss of manufacturing jobs fuelled spending on welfare benefits which in turn had added to the financial problems of successive governments and led to pressure for cuts.

“The welfare reforms implemented since 2010, and strengthened since the 2015 general election, hit the poorest places hardest,” the report said. “In effect, communities in older industrial Britain are being meted out punishment in the form of welfare cuts for the destruction wrought to their industrial base.”

The report comes as Theresa May’s government is coming under increasing pressure to delay cuts in disability benefits announced by the former chancellor, George Osborne, as part of his now abandoned plan to put the public finances back into the black by the end of the parliament.

May has raised expectations of action to help Britain’s manufacturing heartlands by stressing the need for the country to have an industrial strategy and by emphasising the difficulties faced by working-class families in the speech made in Downing Street on the day she became prime minister.

Last week Michael Fallon guaranteed 20 years of work for the BAE Systems shipyard on the Clyde when he announced that work on a new generation of warships would begin next summer.

But the Sheffield Hallam study found that Scotland, along with Wales and large areas of the north of England, still bore the scars of the period in the early 1980s when high interest rates and a strong pound led to the loss of 2 million jobs and a fifth of the UK’s manufacturing capacity.

Subsequent recessions in the early 1980s and the late 2000s have meant that the number of people working in industry has fallen from a peak of 8.9 million to 2.9 million over the past 50 years – a far bigger decline than in other advanced economies.

The report found that the increase from 750,000 to 2.5 million in the number of people on disability-related benefits reflected hidden unemployment and that 18 of the 20 districts with the highest incapacity rates were in older industrial Britain. In Blaenau Gwent and Neath Port Talbot in South Wales, and in Glasgow, the incapacity claimant rate was 11.9%.

In areas where the local economy was strong, there were much lower incapacity claimant rates. Only one London borough, Islington, featured in the top 100, with only four other districts in the south-east featuring, all of them seaside towns.

Fothergill and his co-author, Christina Beatty, said the UK spent £34bn a year on working-age incapacity benefits once housing benefits and tax credits were added to ESA. Of this, they said £10bn-£14bn was the cost of job destruction in older industrial Britain.

They added that higher claimant count unemployment in the old industrial areas was costing the exchequer a further £1bn-£1.5bn a year.

The study estimated that the government was also subsidising the poorly paid jobs that had replaced those lost in manufacturing in the older industrial areas to the tune of £10bn a year. Spending on tax credits exceeded £850 per head a year, double the level in southern Britain.

As a result, the poorer parts of Britain were vulnerable to the freezing of non-pensioner benefits, including tax credits, which Osborne announced for the duration of the current parliament. The study estimated that the average working age adult in the older industrial regions would lose £750 a year by 2020-21, whereas the average loss in Cambridge would be £340.

It added: “The Treasury has misdiagnosed high welfare spending as the result of inadequate work incentives and has too often blamed individuals for their own predicament, whereas in fact a large part of the bill is rooted in job destruction extending back decades.”