Today , the Secretary of State for Work
and Pensions, announced that the ‘two-child limit’ in tax credits
and Universal Credit will not apply to children born before April
2017, though it will continue to apply to those born after. This
observation summarises the key facts about the two-child limit,
today’s change to the way it is planned to be rolled out, and
their effects.
The two-child limit, first announced at Summer Budget 2015, means
that the child element of tax credits and Universal Credit is
limited to the first two children in a family (with a small
number of exceptions), and so families do not see any increase in
entitlement for third and subsequent children. Prior to the
two-child limit, a family could receive the child element of
child tax credit – currently worth £2,780 per year – for each
child, subject to a means test. This is in addition to child
benefit, which is currently worth £1,079 per year for the first
child and £714 for each subsequent one and which, subject to its
own rather different form of means test, continues to be
available for all children. In combination this means that, in
the absence of the two-child limit, an out-of-work family with
three children would be entitled to £10,840 per year from these
benefits; one with four children would be entitled to £14,330.
Many of these families are also entitled to other benefits, such
as housing benefit and Jobseeker’s Allowance. By capping the
number of child elements that a family can receive at two, the
two-child limit reduces benefit entitlements for the typical
affected family by £2,780 for every child they have beyond the
second.
The first part of the policy came into effect from April 2017 and
applied only to children born after that date. The original plan
was, starting next month, to apply the two-child limit to any new
claimant of means tested benefits, regardless of when their
children were born. Under today’s policy change, the two-child
limit will continue to apply only to children born after April
2017. This addresses the issue of ‘retrospection’ that some had
objected to – it will no longer be the case that those who had
decided to have three or more children before the policy was
announced will be affected (apart from in respect to any children
they have had since).
Today’s announcement makes no difference to the long-run
generosity of the benefit system. Eventually all children will be
born after April 2017, and so the two-child limit will apply to
all families with more than two children. What this reform does
do is to slow down substantially the speed of the rollout of the
policy – its long-run impact will now not be fully felt until the
mid-2030s.
That long-run impact is the issue we turn to now. Its actual size
will be is dependent upon a number of factors, including how many
large families there are in the mid-2030s and beyond, what their
incomes are, what future reforms are made to the benefit system
and so on. If the population then looks similar to now, and there
are no further benefit reforms, around 700,000 families would be
entitled to less support than they would have been in the absence
of the two-child limit. Of those, around one-third would be lone
parent families and around 70% would have at least one adult in
paid work. Those affected by the two-child limit would be getting
an average of £3,000 per year less than they would have got
otherwise – equivalent to 10% of their income on average, and
representing a saving to the Exchequer of about £2 billion per
year in today’s terms.
We previously
estimated that the policy would increase child poverty
(on the government’s official measures, and after deducting
housing costs) by roughly 300,000, depending on precisely which
measure of poverty is used. This is a sizable effect for a policy
saving £2 billion, and there are three reasons why it is so big.
First, it has a large impact on the incomes of those affected.
Second, after adjusting as poverty measures do for the fact that
these families have many people to support, the affected families
(and bigger families more generally) are relatively likely to be
close to the poverty line. 90% of those affected are among the
poorest half of families with children (measuring their incomes
after adjusting for household size and composition), and 45% are
in the poorest quarter. Third, the policy by definition only
affects families with three or more children, so the impact on
the number of children in poverty is large relative to the number
of families affected.
’s reform announced today
certainly addresses the issue of ‘retrospection’ that had
attracted criticism. But it does nothing to change the fact that,
in the long-run, the two-child limit substantially reduces the
extent to which the benefits system supports poorer families with
three or more children.
