Abolishing the two-child limit would be a cost-effective way of reducing child poverty but is no silver bullet

Reversing the two-child limit would be a quick and cost-effective fix for bringing large numbers of children above the poverty line. But the benefit cap would wipe out the gains for some children in the very poorest families. Any strategy to reduce child poverty will come against a complex backdrop of high rents, other recent cuts to benefits and challenges in supporting parents into quality jobs.

The child relative poverty rate increased from 27% to 30% from 2010–11 to 2022–23 – an increase of 730,000. The rise in child poverty has been entirely driven by a large increase in relative poverty among families with three or more children (from 35% in 2010–11 to 46% in 2022–23). Half of children in poverty now come from such families. Two-thirds of children in poverty are in working households, and almost three-quarters are in renting households, which typically face the highest housing costs.

These are some of the findings of new research from IFS, published today as part of the IFS Green Budget, funded by the Nuffield Foundation and produced in association with Citi. Other findings from the report include:

• Reversing the two-child limit would pull 540,000 children over the absolute poverty line, reducing child absolute poverty by 4 percentage points. This would be at an eventual cost of £2.5 billion a year – a significant sum – or a cost of £4,500 per child brought out of poverty.
• But 70,000 of the poorest households subject to the two-child limit would see the gains from its reversal partially or fully wiped out by the household benefit cap, which limits the total amount of benefits an out-of-work household can receive. 
• Households affected by the household benefit cap are few in number (120,000 as of May 2024) but are often among the furthest below the poverty line – that is, they are the very poorest. Scrapping the benefit cap instead of the two-child limit would be cheaper. While it would lift very few children out of poverty altogether, it would significantly alleviate the depth of poverty for the few who would gain, boosting their household incomes by a third on average.
• Scrapping the household benefit cap and the two-child limit in combination would lift 620,000 children out of absolute poverty, compared with 540,000 from reversing the two-child limit alone. This would come at a substantially higher total cost, of £3.3 billion a year, and a higher cost per child lifted out of poverty, but it would ensure that the children furthest below the poverty line would see their incomes rise. 
• Any increase in benefits would come with not just a fiscal cost, but also wider costs – for example, potentially reducing parents’ incentives to enter work.
• Benefits policy is not the only lever the government can pull, and supporting parents into quality jobs must also play a role in reducing child poverty in the long run, but this is a challenge. Efforts in the past to move more parents into paid work have led to them entering low-paid jobs that are often insufficient to bring them out of poverty. Accounting for this, we estimate that around 200,000 to 350,000 children could be lifted out of poverty if the government were to achieve its – very ambitious – goal of increasing the employment rate to 80%. 
• Increases to the minimum wage are unlikely to move the dial meaningfully on child poverty. Many minimum wage workers are second (or third) earners in households that are already in the middle of the income distribution and so are already out of poverty. 

Anna Henry, a Research Economist at the Institute for Fiscal Studies and an author of the report, 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, around £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.’