Labour Chancellor Rachel Reeves Signals Full Removal of Two-Child Benefit Cap
The Labour Chancellor, Rachel Reeves, is poised to fully abolish the controversial two-child benefit cap in the upcoming November budget, a move projected to lift 350,000 children out of poverty at a cost exceeding £3 billion. This represents a significant shift in policy, reversing a Conservative measure and signaling a commitment from the Labour government to prioritize child poverty reduction.
A Pivotal Policy Reversal
The Chancellor is understood to be preparing a complete reversal of the cap, having initially explored options for tapering the policy based on family size or income. This decision follows direct pressure from Prime Minister Keir Starmer, who has repeatedly emphasized the importance of reducing child poverty as a key objective for the Labour administration. However, the move is also strategically aimed at appeasing Labour MPs who have voiced concerns about the political ramifications of potential income tax increases.
“I don’t think we can lose sight of the costs to our economy in allowing child poverty to go unchecked,” Reeves stated on BBC Radio 5 Live on Monday. “In the end, a child should not be penalised because their parents don’t have very much money.”
She further elaborated on the diverse circumstances families face, stating, “In many cases you might have a mum and dad who were both in work, but perhaps one of them has developed a chronic illness or one of them has passed away. There are plenty of reasons why people make decisions to have three, four children, but then find themselves in difficult times. But also you have things like adoption, or foster caring – lots and lots of different reasons why families change shape and size over time. I don’t think that it’s right that a child is penalised because they are in a bigger family, through no fault of their own.”
From Manifesto Caution to Bold Action
This potential policy shift marks a considerable evolution in Reeves’s approach since the last election. Previously, she and Starmer refrained from including a promise to remove the cap in their manifesto, citing affordability concerns and a reluctance to make “unfunded promises.” The Resolution Foundation estimates that fully removing the cap will cost approximately £3.5 billion by 2029-30.
Starmer initially defended this position even after assuming office, notably suspending seven MPs last year for voting in favor of a Scottish National Party motion advocating for the cap’s abolition. In response to that internal rebellion, Starmer commissioned Education Secretary Bridget Phillipson to lead a taskforce dedicated to developing strategies for reducing child poverty.
Phillipson is expected to publish her recommendations coinciding with the budget announcement, and sources indicate she has concluded that fully abolishing the cap is the most effective method for lifting the maximum number of children out of poverty. Allies of the Prime Minister have affirmed his long-standing commitment to this goal. “Keir has always said he wants to drive down child poverty in government. It would mortify him if it went up on his watch,” one source stated. “He’s adamant that it will dwarf what Blair did to reduce child poverty in government.”
Balancing Priorities and Potential Tax Increases
The decision to remove the cap is anticipated to be a central component of the November budget, alongside a likely announcement regarding a break from the party’s manifesto pledge to raise income taxes. Reeves signaled this possibility on Monday, explaining that adhering to previous commitments could necessitate “deep cuts in capital spending.”
“The reason why our productivity and our growth has been so poor these last few years is because governments have always taken the easy option to cut investment in rail and road budgets, in energy projects and [in] digital infrastructure,” she explained. “And as a result, we’ve never managed to get our productivity back to where it was before the financial crisis.”
Reports suggest Reeves is considering a plan to increase income tax rates by 2p while simultaneously reducing national insurance contributions by 2p, a move projected to generate £6 billion in revenue. However, there is discussion about limiting the national insurance cuts to individuals earning approximately £50,000 or less, effectively resulting in a significant tax increase for the top 25% of earners.
Alison Garnham, Chief Executive of the Child Poverty Action Group, lauded the potential policy change, stating, “The two-child limit is the biggest driver of rising child poverty in the UK and scrapping it in full is the right thing to do. All children are equally deserving of a good childhood and abolishing this cruel policy would give millions more kids a better start in life.”
Reeves finalized her plans after receiving the latest pre-budget forecasts from the Office for Budget Responsibility and following a meeting with former Prime Minister Gordon Brown, a vocal advocate for removing the cap. With just over two weeks remaining before the budget announcement, the Chancellor faces the challenge of balancing ambitious social goals with fiscal realities and navigating potential political backlash.
