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Tax breaks for the over-50s are also being floated in a government push to end the country’s staffing crisis. Work and Pensions Secretary Mel Stride wants to incentivise people to return to the workforce to help boost the economy.
The Prime Minister’s official spokesman said an upcoming white paper will “shape” the Government’s approach.
He added: “The Prime Minister last week, and the Chancellor at the autumn statement, talked about addressing economic inactivity.
“He said there were a range of things we are looking at, but obviously it is for the budget to talk about these kinds of things.
“We will publish the health and disability white paper in the coming months, which follows consultation with disabled people and people with health conditions, which will help shape our approach.”
Employment lags behind pre-pandemic levels despite major labour shortages.
One option ministers are floating is allowing the over-50s to be encouraged back to work by being exempt from income tax entirely for six months to a year.
Around 565,000 more people were economically inactive in December than at the start of the pandemic.
Ministers believe the current system used to assess eligibility for sickness benefits is a “perverse incentive to prove how sick you are” and are considering scrapping it.
It could be replaced with a process that instead asks claimants to demonstrate what work they might be able to take.
But the new system would not allow people who are fully fit to claim sickness benefits while working.
Mr Sunak said last week the government is looking at a range of measures to tackle inactivity and said the welfare system was part of the work.
James Taylor, director of strategy at the disability equality charity Scope said: “It’s good to see the government acknowledge that the benefits system isn’t working for disabled people.
“The work capability assessment isn’t fit for purpose, and high levels of successful appeals against poor decision making continue year after year.
“For too long disabled people have been forced to fight for support in an adversarial system that causes overwhelming anxiety and stress.
“The Government desperately needs to restore trust in the system and commit to wholesale reform.
“Disabled people need a welfare system that works first time and treats them with fairness, dignity and respect.”
Torsten Bell, chief executive of the Resolution Foundation think tank, said: “People shouldn’t place much faith in changes to the benefit system leading to people who left during the pandemic returning.
“Once people have left the labour market for a large period of time they’re very unlikely to come back.”
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