The Office for Budget Responsibility (OBR) recently released its second Fiscal Risks and Sustainability report with some thought-provoking analysis of the UK economy and government finances in both the short and the long term. The long-term analysis extends for 50 years and so has a multitude of provisos attached but the baseline projection is for UK public debt to rise from the current historical high of around 100 per cent to over 300 per cent by 2070.

Clearly, this can’t be allowed to happen so it has big implications for taxes and public spending. Not only that but the baseline projection understates a range of potential long-term pressures, including investments needed to make the transition to net zero, levelling up and ambitions to raise defence spending and business capital allowances. All very challenging but not on the radar for the UK and Scottish governments looking to the next general election in late 2024 or early 2025.

What will worry these governments is the OBR’s shorter-term analysis of how a post-Covid pandemic rise in labour market inactivity is becoming entrenched. The UK working-age employment rate rose from 70 to 77 per cent in the 2010s, but the pandemic saw a reversal of this trend, with the number of people classed as economically inactive rising by almost 650,000 at its peak. Today, the figure remains 350,000 above pre-pandemic levels. This pattern contrasts with the experience of most other advanced economies, where the numbers fell between late 2019 and late 2022.

While an influx of students into higher education and more early retirees added 390,000 and 80,000 respectively to the ranks of the newly inactive at their peaks in 2021, by early 2023 such surges had run their course and fallen back below pre-pandemic levels. In contrast, the growth in inactivity from those identifying as being long-term sick has turned out to be more durable, indeed it has continued to increase, reaching 440,000 in the three months to April 2023, making it the largest segment of the post-2019 rise.

OBR analysis of Labour Force Survey data for the UK shows that the increase in health-related inactivity has been concentrated in: those aged 50 to 64; those suffering from mental health problems; the relatively low-skilled; and those who previously worked in lower-paid, customer-facing service industries and occupations. Such a change in labour market patterns also puts added pressure on the UK’s public finances via three channels: higher healthcare spending; higher welfare spending; and lower tax revenues. So politicians need to find ways of reversing this trend, in order to avoid even tighter public sector budget constraints.

Unfortunately for governments, the OBR believes that increased NHS activity will have a limited impact on getting the inactive back to work. They estimate that halving the NHS waiting list over five years would only reduce working-age inactivity by 25,000.

In Scotland, the labour market picture is similar but with its own wrinkles. On the similar side, student and early retirement inactivity figures appear to have gone back down to pre-pandemic levels, but the number of people who are long-term sick remains elevated, and indeed is continuing to rise.

On the wrinkles side, while the Scottish unemployment rate (3.2 per cent) remains below that for the UK (four per cent), its employment rate has recently dropped from 76.6 per cent to 75.1 per cent, taking it from above to below that for the UK (76 per cent). This is explained by the rise in Scottish inactivity, from below the UK rate of 20.8 per cent less than six months ago to now being 1.5 percentage points higher, at 22.3 per cent.

So why the current differences in Scotland? Would that we knew! Unfortunately, Scottish data is only available from the Annual Population Survey, rather than quarterly as with the UK, and so the deteriorating Scottish position cannot yet be broken down. Of course, it could be that the Scottish survey data is temporarily skewed, as it tends to be more erratic compared with the UK, but we shouldn’t rely on that for an explanation.

More attention needs to be paid to the situation in order to avoid even greater fiscal pressures in Scotland, which will be bad enough as it is and have recently been compounded by the large income tax reconciliation agreed for 2021-22 of £390 million, which comes into effect in 2024-25. Even if Scotland simply ends up imitating the pattern being seen for UK inactivity, the signs are still worrying. Scotland’s population is ageing quicker than the UK’s and its health, in terms of life expectancy, for example, is notably worse, so Scotland can ill afford to have more long-term sick, working-age adults on its books.

And if, as the OBR suggests, addressing NHS queues is not a big part of the solution in getting these people back to work then the alternatives are likely to be even more expensive and longer term. This brings us back to issues over funding in relation to non-core NHS health services like mental health, drugs and alcohol rehabilitation, and preventative medicine.

Looking wider, the Institute for Employment Studies has found that the UK’s Jobcentre plus scheme is highly inefficient compared to other countries. They believe that it should be more focussed on helping the jobseekers find appropriate work, rather than searching for any job, as well as helping to support those who are on disability, rather than welfare, benefits.

We are faced with a hastening on from the pandemic without fully learning lessons and without undertaking the work necessary to repair the economic and social damage that was done in 2020 and 2021.

John McLaren is a political economist who has worked in the Treasury, the Scottish Office and for a variety of economic think tanks

Scotland's economy faces huge problems after Covid-related spike in long-term sickness – John McLaren

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