‘I’d love to work again, to have a reason to get out of bed in the morning,” says Michelle. The former accountant from Barnsley has been out of work since the pandemic, but has found jobhunting tough amid a battle with the depression and anxiety she has faced since her teenage years.

“I’ve come out of a 30-year marriage. I got my first sicknote at the age of 57, first time unemployed. And everything went down hill from there,” she says, wringing her hands under the table in a dimly lit room at the town’s adult learning centre, alongside a dozen others in a similar position.

Across the country there are more than 9 million people like Michelle who are not employed or currently seeking a job – a position statisticians describe as “economically inactive”. For almost 3 million, the main reason is long-term ill-health, which is near to its highest level on record, fuelling the sharpest decline in Britain’s workforce since the 1980s.

Next week, Rachel Reeves is expected to prioritise the issue in Labour’s first budget since 2010. Getting more people back to work is seen by the chancellor as one of the most powerful ways to reboot economic growth, while her tax and spending decisions – alongside plans to fix public services – will be geared up to boost workforce participation.

In Barnsley, the problem is particularly acute: an economic inactivity hotspot, it was visited by Liz Kendall, the work and pensions secretary, in July for a landmark speech setting out how the newly elected government would reform employment support.

For decades, the South Yorkshire former coalmining town experienced mass unemployment and above-average deprivation – the legacy of pit closures. But in the past four years, for the first time since deindustrialisation, Barnsley has a new challenge: more vacancies than people looking for work. While 3,000 residents are unemployed and seeking a job, 10 times as many are economically inactive – more than a third because of a health condition, significantly above the national average.

“You couldn’t dream about that 20 years ago. But suddenly employers are struggling to get people, and there aren’t enough around,” says Steve Houghton, leader of the local Labour-run council, who set up a groundbreaking commission, Pathways to Work, to investigate the issue.

Drawing together some of Britain’s top experts in employment and health, and chaired by the Blair-era health secretary Alan Milburn, the commission this summer recommended a four-year pilot scheme to help 2,200 people into work. The town, alongside the three neighbouring districts – Doncaster, Rotherham and Sheffield – is asking for £47m from Reeves’s budget to get it off the ground.

“We’re hoping there’s a line somewhere in the budget statement that says a pilot for South Yorkshire. If it confirms that, then we can crack on with the detail,” Houghton says.

“Economic inactivity is a big thing holding Barnsley back, particularly the health issues scarring the community. Some of that is long-term, from coalmining and industry, but there’s also a wider problem.”

Experts debate the causes of rising inactivity, but crumbling public services are agreed by many to be one of the driving forces. NHS waiting lists have surged to record levels, with more than 6 million people awaiting treatment, while employment support has been slashed.

The pandemic also had an impact. Even though inactivity was rising beforehand, the additional pressure on an already overwhelmed health service has made it harder to keep the nation fit for work. And while Covid had a direct health impact for many, the resulting recession and lockdowns had far-ranging consequences that are still being felt.

Outside the new Glass Works shopping centre there is a reminder that Barnsley suffered more than most – in a bronze memorial to the key workers who kept the country going, with words on its plinth by the local poet Ian McMillan: Barnsley’s fierce love holds you forever in its heart.

“Covid hit here really hard. Over 1,000 died,” says Houghton. “We got hit hard, as did most economically deprived areas, and why is that? Because the health was poor to start with, and this just came off and finished people off in some cases.”

Research by the Resolution Foundation shows the rise in economic inactivity has been “U-shaped by age”, fuelled by those aged 16-24 and 50-64, who account for 90% of the increase. Mental ill-health – particularly among younger adults – plays a significant factor for a generation interrupted by the pandemic and growing up under the spotlight of social media.

Sitting next to Michelle at the adult learning centre, Jess, 19 – who, like all those in attendance, did not give her surname – says her mental health held her back from completing her education. She left school when the pandemic struck and struggles to get help from the NHS.

“I’ve been out of education since I was 14. I tried to go to Barnsley college when I was 17, but I found it very, very overwhelming. I feel a lot more comfortable coming here – with a lot less people. They’re more focused on individual needs.”

Another pattern is clear in the rise of inactivity: the areas hardest hit lie outside Britain’s big cities, in smaller towns and former industrial areas. While the legacy of heavy industry is often blamed – leaving people with musculoskeletal and respiratory problems – the UK’s failure to spread the proceeds of growth, and a lack of good jobs, are also significant.

“There can be a lack of aspiration, and an acceptance for some people that ‘we’re deprived, and therefore I have to fit that mood of being deprived’,” says Anne Marie Holdsworth, who runs Barnsley’s adult skills and community learning service. “Nobody has helped them see beyond that. Our job is to do that. To try to move people forward. We can help them to see their potential.”

Barnsley was devastated by the loss of coalmining in the 1980s, despite the best efforts of one of its most famous sons, Arthur Scargill, who led the National Union of Mineworkers – headquartered in the town – into strikes that failed to prevent Margaret Thatcher dismantling the industry.

Unemployment hit 50% in the 1990s in some local pit villages, including Grimethorpe, known for its world-renowned colliery band. Many of the new jobs are in the same places winding gear once stood: in call centres and warehouses, with big employers including Asos and Evri.

But while these employers are criticised for offering low-paid, insecure jobs, Houghton says the work is not to be sniffed at. “It’s increasingly complex and technical, where they employ a whole range of people and a whole range of skills. We have to debunk the myths about some of these things.”

Still, Labour is pushing ahead with reforms to strengthen workers’ rights, including banning exploitative zero-hours contracts. Employers warn the changes will hit jobs, but most at the adult learning centre agree that rough employment tactics keep people out of work, not in it. “They should send employers on courses, in a room with people like us, so they know where they’re coming from,” says Michelle.

Tackling inactivity was a priority under the Tories, but with more focus than Labour on toughening up benefits, alongside tax cuts and a £4bn expansion of free childcare launched by the former chancellor Jeremy Hunt.

Michelle Williams, 40, juggles looking after her two children with study­ing at Barnsley college. Most jobs she has applied for in retail do not offer enough flexibility for her family, and so she is taking courses in coding, AI and cybersecurity to get the computer skills for a hybrid-based job. “The cost of childcare is just ridiculous. We’d need £1,000 a month. If I got a little job, it would have gone on childcare, and it kind of defeats the object. It’d affect the kids, too,” she says. Most employers “want you to be flexible, but they don’t want to be flexible”.

Britain is one of the few countries in the developed world with an employment rate lower than before the pandemic struck. Had the rate maintained its position, the Institute for Employment Studies estimates the economy would be £25bn a year larger and the public finances £16bn a year better off.

If trends continue, the Institute for Public Policy Research thinktank warns the number of people economically inactive owing to sickness could hit 4.3 million by the end of this parliament. In a report last month, it found fixing the nation’s health could save the NHS £18bn a year by the mid-2030s, but would also be the most important medicine for the economy.

“We can’t afford it, quite frankly. It’s costing the earth,” says Jennifer Dixon, the chief executive of the Health Foundation, who was also one of Barnsley’s 12 expert commissioners.

“The link with prosperity, if we fix this, is clear. The workforce was rising by about 1 million every four years. But in the last four years, in terms of number of workers, it hasn’t grown at all. Or if it has, it’s been down to immigration, which is a contentious issue, particularly in places like Barnsley.”

In the budget, Reeves is expected to announce billions of pounds in fresh NHS funding, both to support the nation’s health and provide the foundation for a fitter workforce.

Alongside the lost economic potential, rising inactivity is costing the government through a soaring benefits bill. Spending has already grown by £12bn since 2019 and is forecast to grow by a further £15bn by 2028, according to the Institute for Fiscal Studies.

The chancellor is expected to confirm that Labour wants to find £3bn in welfare savings, earmarked by the Conservatives by way of cuts to sickness benefits linked to the work capability assessment. Under the plans drawn up by Rishi Sunak’s government, the changes would mean about 450,000 people whose health prevents them from working would face a cut in benefits of up to £4,900 a year. Labour still wants to target the £3bn savings, but ministers are understood to be exploring alternative options to achieve them.

Charities warn benefit cuts would not do much to encourage work, and would impoverish already struggling communities. “It’s a punitive system – we know the UK’s benefit levels are the lowest in Europe – but nevertheless people are choosing [benefits] as they feel they have no other option,” says Dixon. “We need to flip the coin and help people into work.”

Alan, who grew up in Grimethorpe, worries his efforts to find a job will mean his benefits will be cut, putting his mental health at risk after years of battling drug and alcohol addiction.

“I haven’t worked in 22 years. I will be wanting to get a job, but I’m pretty scared,” he says. “If they find out you were trying to better yourself, they cut your benefits down, don’t they? You’re back to that problem, where your bills are tighter. People end up committing crime.”

Milburn, who is also advising the health secretary, Wes Streeting, says reforms to jobcentres will be vital, turning the network away from policing the benefits system and integrating it with health services. “People find it impossible to navigate. It’s a spaghetti soup of services. The jobcentre under the Tories increasingly became a benefit compliance agency rather than a work agency. That has to change.”

Michelle, the former accountant, says walking into Barnsley’s jobcentre makes her feel ashamed. “It’s like you’re not worthy. I Never thought I’d walk through these doors in my life, and here I am, in my 50s.”

Milburn says Barnsley could have lessons for the country at large – including integrating health services into jobcentres to unlock the hidden workforce of economically inactive adults.

Ministers are preparing a white paper this autumn, with ambitions to drive up the UK’s employment rate to 80%, from 75% currently. After her trip to Barnsley to announce the plans, Kendall says she wants to hand over more power to local leaders.

“[They] know their area best, can tackle inactivity through new work, health and skills plans, overhaul jobcentres, and make sure every young person is either earning or learning,” she says.

Oliver Coppard, the Labour mayor of South Yorkshire, is hopeful the budget will kickstart efforts to tackle inactivity at a local level, through a Pathways to Work pilot.

“At the moment the economy is standing on one leg of a three-legged stool,” he says. “You only have the south-east contributing to the exchequer. If you want to solve the economic problems of this country, you have to solve problems of places like South Yorkshire. It’s a huge opportunity.”