Scrapping two-child limit eases burden on families, but living standards still bleak
With two-child limit gone, the foundation is set for a bold child poverty strategy.
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Measures in the Budget, especially removing the two-child limit, ease some pain and significantly reduce child poverty, but incomes are projected to fall more in this parliament than any on record.
The November Budget has rightly placed greater emphasis on the cost of living. Measures announced yesterday will lower inflation by 0.4 percentage points in 2026/27 – via policies to lower energy bills by £150 per year and freeze rail fares – while child poverty is expected to fall by 400,000 over this parliament, the largest decline since at least the Wilson Governments (Figure 1), driven by the removal of the two-child limit which restricted eligibility for support in Universal Credit for third and subsequent children born after April 2017.
At a cost of £3.0 billion in 2029/30, not only is removing the two-child rule the most cost effective way to reduce child poverty, it will reduce demand on public services over the medium-term and increase the health and education outcomes of the 2.0 million children that would have been hit by the limit by the end of the decade. This is a very welcome change, with the removal the two-child limit a necessary step towards meeting the Labour manifesto commitment for an ambitious strategy to reduce child poverty, which is expected in the coming weeks.
Removing the two-child limit also improves the living standards outlook for low-income families, with disposable income after housing costs 1.1 percentage points higher over this parliament than if the policy was retained (Figure 2). This increase is substantial and shows the direct impact that investment in social security has on living standards.
Greater investment in living standards is required
A higher projected employment rate, as well as Government investment in social security through scrapping the two-child limit, has improved our income projection for low-income families compared to September. However, the broader outlook remains bleak.
For those in the lower and middle third of incomes, annual income is projected to be lower over the parliament by £140 (0.8%) and £300 (0.9%) respectively. Between November 2019 and 2024, households in the top third of incomes experienced income growth of £1,570 (2.1%). We project that those gains will be wiped out over this parliament, with this group seeing their income fall by £2,230 (2.9%).
While this projection is likely to reduce inequality – because richer households lose a greater proportion of their income than middle- and low-income households – the average (mean) household will be £850 (2.0%) per year worse off in November 2029 than in 2024 (Figure 3).
This bleak picture of living standards is consistent with projections of Real Household disposable Income from the Office for Budget Responsibility. When we adjust the OBR data to be on as consistent a basis as possible to JRF analysis, both series show a disappointing, broadly flat profile, which becomes a fall once we take account of rising housing costs.
Progress made, but families left with mountain still to climb
As we said after the Budget, the Chancellor has made a number of bold and important interventions: lowering energy bills, holding down transport costs and increasing the minimum wage, all of which will help families with life’s day to day costs. As we show, scrapping the two-child limit in Universal Credit is a necessary step towards meeting the Government’s manifesto commitment to reduce child poverty and give more children the best start in life. Delivering the biggest fall in child poverty over the course of the parliament wouldn’t be possible without it. But housing costs and bills are still too high, and incomes are still projected to fall over the Parliament. For progress to be truly felt by families, living standards need to improve to help people feel more positive about their future prospects. The Government’s and families’ prospects depend on the Chancellor's ability to deliver the change that’s urgently needed.
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