Scrapping the two-child benefit cap could risk keeping parents on benefits for life, a leading think tank has warned.
Removing the limit would pull 540,000 children out of poverty at a cost of £2.5bn a year, according to a new report by the Institute for Fiscal Studies (IFS). However, the think tank warned such a change would also likely reduce incentives for parents to work.
The authors Anna Henry and Tom Wernham wrote: “Such policies may deter some parents from entering work, further increasing the costs to the exchequer beyond the direct cost of providing the additional benefits.”
Labour has promised to “get Britain working” and is trying to grapple with a surge in economic inactivity since the pandemic.
The two-child benefit cap was introduced in 2017 as part of then-Chancellor George Osborne’s benefits reforms and means that parents cannot claim universal credit or tax credit for more than two children.
Prime Minister Keir Starmer has come under significant pressure from within his party to scrap the policy. In July, he suspended seven rebel MPs from the Labour party who supported an amendment to abolish it.
The Government has said it will not make “unfunded promises” to scrap the cap and has pointed to other measures in place that are designed to reduce child poverty.
Ms Henry and Mr Wernham said: “The policies that are most directly targeted at lower-income families, and therefore at reducing poverty or its depth, are likely to be the ones that weaken those incentives the most.”
IFS analysis suggests that this effect can be offset by increasing in-work benefits, thereby boosting the incomes parents receive when they take up a job.
However, at a time when the Chancellor is scrambling to fill a £22bn black-hole in the public finances, it would be “very challenging” for the Government to provide any kind of cash injection like this, the report warned.
The child poverty rate surged from 27pc to 30pc between 2010 and 2022, meaning an extra 730,000 are now living below the relative poverty line.
This increase has been largely driven by an increase in relative poverty amongst families with three or more children, who are hit by the two-child benefit cap.
Amongst families with at least three children, the relative poverty rate has climbed from 35pc to 46pc. Half of all children in poverty come from families with at least three children.
Scrapping the two-child limit would immediately pull more than half a million children out of relative poverty, at a cost of £4,500 per child, the IFS found.
The Government could also bring children out of poverty by helping more parents get into paid work, the IFS said.
The IFS estimated that between 200,000 and 350,000 children would be lifted out of poverty if the Government achieved its target of increasing the employment rate to 80pc.
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