Rachel Reeves could lift the two-child benefit limit in her Budget and replace it with a tapered system to please agitated backbenchers in the Labour Party.
The Chancellor is thought to be considering how the Government could change the system to mean parents receive less money for each subsequent child they have.
While the Treasury has warned it would cost too much to abolish the system, Ms Reeves is now looking at lifting the cap to appease unhappy MPs in her party.
The cap was introduced by the Conservative Party in 2017 and allows families to claim Universal Credit and tax credits for up to two children.
Ending it is expected to be the main recommendation of a review of child poverty in the UK which is due to report before the Budget in November.
What is being proposed?
Rachel Reeves is poised to scrap the two-child benefit limit at the Budget and replace it with a tapered system.
The under-pressure Chancellor is said to be looking at a system which would hand parents less money for each subsequent child they have.
What is the two-child benefit limit?
The two-child cap or limit was first announced in 2015 by the Conservatives and came into effect in 2017.
It restricts child tax credit and universal credit (UC) to the first two children in most households.
Why might she make the change?
Charities and many within the Labour Party have long called for the policy to be scrapped, criticising it for dragging children into poverty.
Campaigners argue that 109 children across the UK are pulled into poverty by the policy every day.
Why is it not being scrapped?
Ms Reeves is under pressure to lift the cap to appease a growing number of her own MPs who are frustrated by the Government lurching from crisis to crisis.
She is said to have been warned by Treasury officials that it would cost too much, in the region of £3.5billion, to simply scrap the system.
What are the possibilities?
The Treasury is said to have been looking at different options including whether additional benefits might be limited to three or four children.
Officials are also allegedly considering a taper rate, meaning parents would receive the most benefits for their first child and less for subsequent children.
Another option believed to be under consideration is lifting the cap only for working parents on Universal Credit to encourage more people into the workforce.
While scrapping the cap entirely would please Labour Party members, the Treasury is said to be wary of the costs of large families. Those with more than six children would be entitled to thousands of pounds more in benefits if it was lifted entirely.
How much could the changes cost?
The Resolution Foundation think tank previously estimated that easing the two-child limit so families received support for the first three children they have would cost £2.4billion in 2029/30 and would lift 280,000 children out of poverty.
The organisation said abolishing the two-child limit completely would be the most cost-effective way to reduce child poverty and that none of the previously rumoured options would be an ‘acceptable long-term solution’.
Estimates of scrapping the policy completely vary, with the Resolution Foundation estimating a cost of around £3.5billion by the end of this Parliament (2029/30).
The Child Poverty Action Group and Joseph Rowntree Foundation have lower calculations of around £3billion by then.
What has Ms Reeves said about it?
The Chancellor was questioned yesterday about whether she will make an announcement in her November statement, and did not deny such a move.
Asked about a Guardian report that she will lift the cap at the Budget, she told a fringe event at the Labour conference: ‘Keir said in his speech today that we will reduce child poverty in this Parliament, but we will set out the policies in the Budget.
‘I think we’ve been pretty clear this week that we can’t commit to policies without us explaining where the money is coming from.’
Adding that there were ‘real financial constraints’ due to persistent inflation, tariffs, global conflicts and increased borrowing costs – along with expected changes to OBR (Office for Budget Responsibility) forecasts – she said: ‘I would be the first person to want to find some money down the back of the sofa to pay for lots of different things.
‘But I have to be Chancellor in the world as it is, not in the world as I might like it to be.’
Asked directly if she was considering replacing the cap with a taper system, she told the Daily Mail: ‘We’ll set all that out at the Budget. I’m not going to set that out now.’
Ms Reeves has also indicated that she would raise gambling taxes in November – a move advocated by former Prime Minister Gordon Brown that could pay for scrapping the limit.
What has the Prime Minister said?
Sir Keir Starmer and many of his Cabinet ministers have said that they would like to lift the cap – including Bridget Phillipson who co-chairs the poverty taskforce.
In his conference speech yesterday, Sir Keir said Labour had lifted 100,000 children out of poverty by extending free school meals and described this as a ‘first step’ on the ‘journey to end child poverty’.
He added that a ‘Britain where no child is hungry, where no child is held back by poverty, that’s a Britain built for all’.
What do the rival parties think?
Reform UK leader Nigel Farage has previously said his party believed lifting the two-child benefit cap was ‘the right thing to do’.
Conservative leader Kemi Badenoch insisted the policy remains right even though it ‘may not be popular’, and said she would reinstate it if it was scrapped.
Shadow chancellor Sir Mel Stride, said: ‘Scrapping the two-child benefit isn’t just irresponsible – it’s unfair. Rachel Reeves must come clean: where’s the money coming from?’
Steve Darling, the Liberal Democrat work and pensions spokesman, said the Government must ‘turn words into action and scrap the unfair two-child cap’ without any further delay.
How are campaigners reacting?
Campaigners welcomed the news the limit might be lifted, but said the cap must be scrapped entirely.
Lord John Bird, Big Issue founder and crossbench peer, said: ‘We must build on this bold first step to smash the systems that entrench children in poverty and rob them of their potential – which means scrapping the cap in full.
‘Tapered versions of the cap will not be enough to deliver Labour’s ambitious promise to reduce child poverty. We need proper, measurable targets to keep up this promising momentum and propel further action that can truly shift this malignant poverty crisis.’
A spokesperson for the Children’s Charities Coalition – Action for Children, Barnardo’s, The Children’s Society, National Children’s Bureau, NSPCC – said: ‘Removing the two-child limit entirely would immediately benefit hundreds of thousands of children and be a huge step forward in tackling the shameful levels of child poverty in this country.’
What other benefits could be targeted?
The Government is under pressure to bring the spending on benefits down, with the figure rising by £20billion since the start of the Covid-19 pandemic. The projected increase by the end of the decade is £70billion.
It has said the number of working-age people claiming a sickness or disability benefit could reach 4.3 million by 2030 unless changes were made.
Earlier this year, the Government decided to abandon proposed changes to personal independence payments (Pip) and universal credit’s health-related benefits.
The Universal Credit Bill cleared the Commons after elements to restrict eligibility to Pip were scrapped, with any changes postponed until after a review led by disability minister Sir Stephen Timms which is not due to be finished for another year.
Meanwhile Ms Reeves is also planning a ‘youth guarantee’ scheme where out-of-work young people could be stripped of their benefits if they refuse to take a job.
Today, Sir Keir questioned whether the Government spends too much on benefits for people with mental health illnesses, rather than funding more wider support for the conditions.
The Prime Minister said he was concerned that people on benefits in their 20s could end up in a life of welfare dependence.
Sir Keir has also criticised Reform’s new plans to prevent migrants claiming benefits in the UK, which would involve deporting some people previously given leave to remain in this country if they are not deemed to be contributing enough to the economy.
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