Two-child limit: Policy in Practice’s evidence to the Work and Pensions Select Committee

Policy in Practice was invited to give evidence to the Work and Pensions Committee in December about the potential impact of the two-child benefit limit, ahead of the policy’s scope being widened in February 2019.

Zoe Charlesworth, Head of Policy at Policy in Practice, was joined on the panel by policy experts from Child Poverty Action Group, the Institute for Fiscal Studies and Women’s Aid. We were asked to reflect on the aims of the policy, whether they are likely be met and the hardship that we expect it to cause.

Key findings from our evidence

Zoe Charlesworth, Policy in Practice, gave evidence to the Work and Pensions Committee on the impact of the two-child benefit limit.

The Autumn Budget 2018 confirmed that families with more than two children will move to Universal Credit from February 2019.

Families who had their third child after April 2017 will have their Universal Credit award assessed under the new 2-child limit, which means that their third and subsequent children will not be allocated a child element allowance under Universal Credit. Our analysis has found that:

• The two-child limit will worsen child poverty: an estimated 266,000 will enter poverty due to the limit on tax credits
• In-work households will be penalised: 70% of those at risk are in-work and they will face a higher average loss of income than out-of-work households
• There may be unintended consequences on household behaviour

Watch the evidence here.

Does the policy delivery match the policy intent?

The Government’s objectives in introducing the two-child benefit limit are as follows:

• Cost savings
• Fairness: primarily to those paying for the system (taxpayers)

Our evidence finds that there are limits to achieving these aims, and that the policy will cause avoidable hardship to families.

Savings to the Treasury come at a cost

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The primary driver of the two-child limit was the desire to cut costs from the social security budget.

The policy is likely to deliver savings to the Treasury. DWP’s own impact analysis predicted that the two-child limit is set to save the government £1bn per year by 2020 across the welfare system.

Policy in Practice’s own analysis in April 2017 found similarly, however we also concluded that this comes at a cost, and that the two-child limit will increase child poverty.

• Our analysis showed that the two-child limit when applied to tax credits would drive an increase in child poverty of more than 10%, with 266,000 additional children living in poverty by the end of the parliament.
• Over a quarter of a million children (256,000) already in poverty today will fall deeper into poverty as a result of this policy. This is neither fair to those parents struggling to support their families, nor the children who will be disadvantaged by this policy.

We plan to carry out analysis on the impact on Universal Credit specifically and will send any results to the committee.

Fairness for people in work?

The two-child limit was proposed as a measure to limit taxpayers’ spend and reinstate responsibility to those claiming support. Some of the tweets we received highlight why the policy is politically popular:

However, superficial support for the policy is likely to fall as it comes into effect, and a wider group of households, including all those in work, are impacted.

• Policy in Practice identified a 10% churn in households claiming support. These households are likely to have been in work and paying tax in preceding years.
• DWP figures have found that 56% of households claim state support (including child benefit and pension credit) while around a quarter claim an income related benefit or tax credit.
• Families who shape their decisions under financial comfort, for example whether to have more than two children, may find themselves penalised by a system into which they have long paid, when their circumstances change.

The policy affects all claimants with children, not simply those receiving out-of-work benefits. Working households will be hit the hardest among those affected by the two-child limit. Table 1 shows the financial impact of the two-child limit on Universal Credit awards, broken down by employment status. We modelled nearly 60,000 low-income families on Universal Credit, with and without the limit applied:

Table 1: reduction in award due to the two-child limit, by employment status

Families in work would face a greater reduction in income than their out-of-work counterparts. This is because out-of-work households are more likely to be impacted by the benefit cap, leaving a lower proportion of their income subject to the two-child limit.

In addition, 70% of the 2 million low-income families at risk of the 2-child limit, if they have another child, are currently working. The policy doesn’t only affect those on benefits, because social security is a form of insurance, under this policy, larger families are no longer ‘covered’.

Unintended consequences

Any savings made by the two-child limit are likely to pop up as costs elsewhere. Families with three or more children will continue to require support and have to rely on friends and family, or face financial hardship. Where families cannot meet the shortfall, then local authorities will have to shoulder an increased demand for support services as vulnerability increases, and they have to meet their statutory duties to relieve hardship. This doesn’t take into account the long terms costs of more children living in poverty, and the likely worsening of long-term outcomes in health and education for affected children.

The Work and Pensions Select Committee tweets highlights from the evidence session: see thread here.

Issues with the policy are further evidenced by a range of exemptions for affected families.

• Exemptions: The well-documented ‘rape clause’, inadequately responds to the psychological barriers which prevent survivors from seeking even the most basic support. Twins and triplets will be exempt, as will foster parents and kinship carers.
• Accidental pregnancies: These will remain a reality to attach an additional burden to individuals in such a situation is unfair, while the resulting financial incentive to seek a termination carries the potential of pressuring individuals and bringing complications into their lives.
• Couple penalty: Couples with more than two children will be better off if they split up. Financial stress caused by the policy may encourage the breakdown of families. Individuals with children from previous relationships will also be discouraged from uniting, and creating a new family unit.

Policy in Practice recommends the removal of the two child benefit limit

In her first appearance before the Select Committee on 19th December, Secretary of State for Work and Pensions, Amber Rudd committed to “carefully what action to take going forward” to restore confidence in Universal Credit. She shared the Committee’s concerns around the retrospective application of the two-child limit upon households who fall into unforeseeable hardship.

• Our primary recommendation is that the two-child limit should be removed altogether and support third and subsequent children reinstated. The benefit cap achieves the government’s objective to limit the amount of benefits which a household can claim, and better accommodates for household circumstances such as disability and employment status.
• Alternatively, given the government’s commitment to cutting costs one compromise could be to support third and subsequent children at a reduced rate, to prevent the likelihood of destitution. This will make reduced savings while better protecting children.
• If the government continues with this policy, an emergency support fund should be established for local authorities to alleviate hardship among families in crisis who are most negatively impacted. This would lighten the burden placed on local authorities’ budgets in supporting vulnerable households, while retaining a safety net for children.
• The government has failed to raise awareness of this policy, a necessary step if the aim of the policy is to change peoples behaviour. Its worth the government reflecting on why they don’t want to make people aware of these important changes.

In addition to the exemptions for children with a disability, exemptions could be put in place to provide support to those families who fall upon the social security net who already have more than two children, or those who form through a couple with children from previous relationships.

Weakening social insurance for households who have made life decisions in times of financial stability, whilst paying into the welfare system, stands in contrast to the government’s aim of fairness to the taxpayer.

Empower local authorities to identify and proactively support those likely to lose out

In the face of the two-child limit, local authorities can take measures to proactively engage households who may be impacted by the policy. Insight into their circumstances may better prepare families before they face a reduction in their income. We at Policy in Practice work to support local authorities do just that, by increasing the visibility of their low-income cohort and the impacts of individual policies on households’ finances.

Our dashboard drills down to identify which households are affected by the two-child limit, and how many are in financial risk or crisis.

In acknowledging the key role played by local authorities in supporting their most vulnerable residents, we urge the Government and Parliament to consider how to share Universal Credit data between the DWP and local councils across the UK.