The two-child benefit cap: what is it, does it work and how much would it cost to scrap it? | Phillip Inman

The number of households affected by the two-child cap on benefits is giving the Labour party a headache.

Few Labour or Lib Dem MPs support the measure. The Greens and SNP are also against it. Many Tories now see it as impoverishing people without creating any incentive to work or to find higher-paid work.

A review is under way to examine its effects and the cost to the Treasury of abolishing it as part of a wider review of benefits.

How many people are affected?

There are 450,000 households and 1.6 million children affected by the two-child cap when they claim universal credit (UC) and child tax credit (CTC). This is up from 422,000 households and 1.5 million children last year, and 40,000 households when the policy was started in 2017.

Why has it gone up?

There is little evidence that changes in the circumstances of UK households with three children has triggered the rise in claimants affected by the two-child cap.

The Resolution Foundation says the number of people who already have three children, only to find that divorce, unemployment or the loss of rented accommodation meant they were eligible to claim benefits, and with that affected by the cap, was “unlikely to be significant”.

It has gone up because it affects third or subsequent children born after April 2017, so as more babies are born to welfare claimants, more households find their claim denied.

How many of them are in work?

Almost six in 10 claimants (59%) are in work, or 270,000 households, illustrating how near double-digit increases in the national minimum wage in recent years have failed to lift working families out of poverty.

Where are they in the country?

London, the north-west and the West Midlands have the highest number of households affected, says the Resolution Foundation, but the regional figures are sketchy.

How much would it cost to scrap?

It would cost £2.5bn this year, rising to £3.6bn once it is fully rolled out, which would be when it affects all families on UC or CTC with three or more children.

The foundation says: “Estimates differ because the calculation requires modelling using survey data, and different assumptions and methodologies are used when modelling – for instance, about the proportion of eligible families claiming UC or CTC.

What else could be done to ease child poverty?

The most effective measures are those that boost the incomes of families with children that are living in poverty, and the pandemic and 2008 financial crash have shown that the quickest and most direct way to do this is through the benefits system:

Lifting the benefit cap: This is a separate policy from the two-child limit. It caps the overall level of benefit support a family can receive and is set at £25,323 for couples and £16,967 for singles living in London. Outside the capital, couples receive £22,020 while singles get £14,753.

Related: ‘Will the kids eat or not?’ In Keir Starmer’s constituency, families struggle with poverty

Like the two-child limit, it also disproportionately affects families with children. The foundation estimates that abolishing the benefit cap would cost an additional £500m this year.

Increasing the base level of benefits: The real value of the base level of benefits has fallen by 7.6% since 2010 and is widely considered to be inadequate.

Boosting employment levels for the parents of children in poverty: The government plans to enhance the employment support available through Jobcentres, and recent investments in free childcare are designed to enable more parents to go into work.

• Phillip Inman is economics editor of the Observer and an economics writer for the Guardian