Axing two-child limit ‘most cost-effective move but no silver bullet on poverty’

Scrapping the two-child limit would lift more than half a million out of absolute poverty at an eventual cost to the Government of £2.5 billion a year, but would “do nothing” for the poorest households caught by the remaining benefit cap, a think tank has said.

Doing away with the two-child limit would be the single most cost-effective way of reducing child poverty, according to the Institute for Fiscal Studies (IFS), but it said that such a policy change is “not a silver bullet”.

Scrapping both the two-child limit and the benefit cap would lift 620,000 children out of absolute poverty but would cost more than £3 billion annually, the organisation said.

Prime Minister Sir Keir Starmer has been under pressure, since he came to power in July, to remove the two-child policy, and some of Labour’s own MPs were suspended after backing another party’s motion to do so.

The Government has cited spending controls as a reason for not being able to immediately ditch the policy, indicating there would be no change to it without economic growth.

The two-child limit was first announced in 2015 by the Conservatives and came into effect in 2017. It restricts child tax credit and universal credit to the first two children in most households.

In a new report setting out estimates for the costs and effects of scrapping different policies, rather than recommendations, the IFS said reversing the two-child limit would lift 540,000 children out of absolute poverty.

These are defined as households below 60% of the median income in 2010/11, uprated by inflation, rather than relative poverty, which covers a household below 60% of the current median income after housing costs.

The economics think tank said this would come at an initial cost of £1.7 billion a year, rising to £2.5 billion a year, a sum it described as “significant” and equivalent to £4,500 per child taken out of poverty.

But the IFS said that any gains from scrapping that policy would be partially or fully wiped out for 70,000 of the poorest households, who would either be newly subject to the benefit cap, or others who would see no change to their benefits as a result.

That cap, introduced in 2013 under the then-Conservative and Liberal Democrat coalition government, as a way of “restoring fairness to the welfare state”, sees the amount of benefits a household receives reduced to ensure claimants do not receive more than the cap limit.

Some campaigners have called for both policies to be scrapped to help lift children out of poverty.

The IFS said scrapping the benefit cap alone would cost about half a billion pounds annually, and that while it would not take as many children over the poverty line, it would help the poorest “and give the average affected household a proportionally larger increase in income”.

Scrapping both policies “would have a larger effect still” but at a “significantly increased eventual cost of £3.3 billion a year”, the think tank added.

The IFS said: “Among the options available to the Government on benefits policy, removing the two-child limit would be the single most cost-effective policy at reducing the number of children classified as in poverty.”

The current benefit cap levels were last increased in April 2023 and are £25,323 for couples or households with children in Greater London and £22,020 per year for the rest of Great Britain.

The latest official figures, published in July, showed there were 1.6 million children living in UK households affected by the two-child limit as of April this year, up from 1.5 million as of April 2023.

There were a total of 123,000 households across England, Scotland and Wales who had their benefits capped as of May, Government figures published in September showed.

Figures published in March showed the number of children living in poverty across the UK had hit a record high, at an estimated 4.33 million children in households in relative low income after housing costs, in the year to March 2023.

The figures also showed a rise for the second year in a row, with 600,000 more people, half of them children, living in absolute poverty – equivalent to 25% of children.

The phrase “no silver bullet” is one which has previously been used by Sir Keir when speaking about efforts by his Government to end child poverty.

Anna Henry, an IFS research economist, said: “The recent rise in measured child poverty is entirely driven by higher rates of poverty among families with three or more children.

“Scrapping the two-child limit would be a cost-effective way of reducing child poverty, at a lower cost per child lifted out of poverty, than all the other obvious changes to the benefits system, but it is not a silver bullet.

“Scrapping the two-child limit would eventually cost the Government a significant sum, about £2.5 billion a year. It would do nothing for households affected by the household benefit cap, who are among the poorest.

“In fact, removing the two-child limit would lead to 70,000 more households being affected by the household benefit cap, wiping out some or all of its effect for those households.”

The Government has set up a Child Poverty Taskforce, made up of ministers from across government, which will publish its strategy in spring 2025.

A Government spokesman said: “No child should be in poverty, that’s why our new cross-government taskforce is developing an ambitious strategy to reduce child poverty and give children the best start in life.

“Alongside this, we have extended the Household Support Fund to support the most vulnerable with essentials this winter, and committed to reviewing universal credit while we deliver on our plan to tackle inequality and make work pay.”