FRASER OF ALLANDER BUDGET PREVIEW
One of the key decisions that UK Ministers will be making ahead of Rachel Reeves announcing the Budget later this month is what to do about the two-child limit (write Fraser of Allander Institute’s SPENCER THOMPSON and HANNAH RANDOLPH).
This policy, which limits Universal Credit to the first two children in a family, has been widely criticised for driving up child poverty rates. And given that the UK Government has pledged to reduce child poverty, with the publication of its child poverty strategy expected sometime around the Budget, the pressure is on to abolish the policy.
The Scottish Government has committed to mitigate the two-child limit by introducing a new benefit, the Two-Child Limit Payment (TCLP). If the two-child limit is abolished, this payment would no longer be needed, freeing up resource for the Scottish Government. The First Minister has pledged that the savings would be spent on additional measures to tackle child poverty, which he has stated is the Scottish Government’s top priority.
How much would the Scottish Government save?
The Scottish Fiscal Commission has forecast the TCLP will cost £155m in 2026-27. This represents the amount that the Scottish Government will directly save if the two-child limit is abolished.
There would however be some offsetting costs to the Scottish Government, coming through two main channels. First, removing the two-child limit would push more families onto the Benefit Cap – unless this was also abolished – which the Scottish Government mitigates through Discretionary Housing Payments.
And second, it would bring more families onto Universal Credit, namely those whose incomes are just too high to be entitled with the two-child limit in place.
These families would in turn become eligible for devolved benefits that are linked to receipt of Universal Credit, including the Scottish Child Payment, raising spend on these benefits.
We estimate that these spillovers would amount to around £34m in 2026-27.
Whether this cost is met from within the £155m pot or counted separately is a political question. The fiscal context, which will become even more challenging if the UK Government chooses to raise income tax in the rest of the UK, may encourage the former choice. But this would likely be seen by campaigners as penny pinching at a time when urgent, ambitious action is needed to tackle child poverty.
Even with the two-child limit abolished, we would still be a long way off meeting the statutory child poverty targets in 2030 – and these are approaching quickly, with the final Delivery Plan due in March.
How could the savings be spent?
If the spillover costs from the abolition of the two-child limit (£34m) were funded from within the TCLP budget (£155m), that would leave £121m to be spent on other policies. We have modelled the child poverty impacts of five illustrative policy options, all of which we estimate will cost about this much in 2026-27 assuming no changes in behaviour or administrative costs. Clearly, a £155m policy could go further than a £121m one, so this represents a conservative scenario.
Impacts of policy options on relative child poverty after housing costs, 2026-27
| Option | Raising the Scottish Child Payment to… | …and… | … would reduce child poverty by about… |
| 1 | £35 | – | 1ppt |
| 2 | £31 | extending Scottish Child Payment from children under 16 to include dependents aged 16-19 | 1ppt |
| 3 | £34 | increasing Best Start Grants and Best Start Foods by the same proportion | 1ppt |
| 4 | £30 | extending universal Free School Meals from P1-P5 to include P6-P7 | – |
| 5 | £34 | increasing the maximum discount on water and sewerage charges from 35% to 100% for families with children | 1ppt |
Source: FAI modelling using UKMOD.
Notes: Dash indicates that impact is too small to report. Scottish Child Payment is currently projected to be about £28 per child per week in 2026/27. Free School Meals count as income for purposes of measuring poverty. Technical details of modelling available on request.
The impacts of these policies would be over and above the impacts of the two-child limit being abolished, which we estimate to be around 1 percentage point in 2026-27. All else equal, each of the options would reduce relative child poverty after housing costs by a further 1 percentage point in 2026-27, representing an additional 10,000 children who would be kept out of poverty.
The exception is Option 4: extending universal Free School Meals to all primary school students would not have a measurable impact on aggregate child poverty levels, even when coupled with an increase to Scottish Child Payment of around £2 per child per week.
Although most of the policies are similar in terms of their aggregate impacts, under the surface there are some important differences:
- Option 1 is the simplest, but does involve steepening the so-called ‘cliff edge’, whereby households lose their entire Scottish Child Payment award if their incomes increase beyond the point at which they are entitled to Universal Credit – which could incentivise them to forego opportunities to earn more. This option also increases Scottish Child Payment for recipients who are not in poverty, including those kept out of poverty by the payment at its current rate.
- Option 2 is arguably preferrable in these respects, since it extends Scottish Child Payment to families who are not currently eligible while also benefitting many multi-child families who currently are, with the overall cliff edge not steepening as much. However, it does favour older children, when families with young children have been identified as a priority group.
- Option 3 targets younger children specifically – Best Start Foods is available until the child turns three, while Best Start Grants are paid to children at various points until the child starts school. This option would also channel some of the TCLP savings into one-off grants as opposed to recurring payments, which may be less distortionary when it comes to work incentives even though they have similar eligibility criteria as the Scottish Child Payment. By the same token, their one-off, targeted nature limits their direct impacts on overall levels of child poverty.
- Option 4 removes a cliff edge of sorts in the form of the means test for Free School Meals that applies to children in Primary 6 and 7, who are typically between 10 and 11 years old. Although this policy would benefit some households that lie just above current eligibility, it would primarily benefit those with higher incomes. On the other hand, the distributional impacts would depend on take-up, and there could be wider benefits such as a reduction in stigma.
- Finally, Option 5 is unique in featuring a gradient across households – both because discounts on water and sewerage charges are proportionately linked to Council Tax Reduction, which tapers with income, and because these charges themselves vary by council tax band. Other changes to Council Tax Reduction would also be possible, but these will tend to extend entitlement to higher-income households rather than just benefitting current recipients, most of whom already receive a 100% reduction.
These are by no means the only options available, but they highlight some of the factors that the Scottish Government will need to weigh up when reallocating the TCLP budget, along with the potential impacts of doing so, in a scenario where the two-child limit is abolished.
Time will tell
Whether or not that that scenario will transpire remains unclear. It is possible that the UK Government will take an intermediate approach by relaxing the two-child limit in some way without abolishing it entirely – for example by exempting certain groups, moving to a three-child limit, or introducing a taper.
Mitigating the remainder of the limit would cost less than the planned TCLP – meaning there would still be some savings – but may require more time to be designed and implemented. It is also possible that the Budget will include a commitment to eventually abolish the two-child limit, but not in the coming year, meaning the TCLP would be needed temporarily.
For now, all eyes are on Rachel Reeves – but the focus will quickly turn to the Scottish Government. Keep an eye on our website and social media for more analysis of the UK and Scottish Budgets over the next few months!