IFS warns plans to mitigate two-child cap could harm incentives to work

Plans to effectively end the two-child cap in Scotland would result in lower levels of child poverty but could harm incentives to work, according to a report.

The Institute for Fiscal Studies (IFS) said mitigating the policy in Scotland could see low-paid workers earn more money on welfare than if they chose to work.

The independent think tank said this could incentivise some families to work fewer hours.

Around 27,000 families in Scotland are impacted by the two-child benefit limit – a policy introduced by the previous Conservative government that limits Universal Credit to the first two children in most circumstances.

Last year, the Scottish Government announced it would effectively end the policy – which is controlled by the UK Government – in Scotland by 2026.

It is not yet clear exactly how the cash will be delivered but the Scottish Fiscal Commission has said one approach would be for top-up payments to be made to affected families.

The IFS said the average family impacted could see their income rise by £4,570, or 11%, leading to a fall in child poverty – the number one goal of First Minister John Swinney’s Scottish Government.

It said the move would benefit the biggest and poorest families, with 87% of those impacted among the poorest 30% of households.

But it has sounded the warning over a potential worsening of the welfare “cliff edge” for families who are only just over the eligibility for Universal Credit.

Any form of mitigation of the UK Government’s two-child limit policy is likely to be a cost-effective way of reducing child poverty in Scotland

If those families increased their income slightly, they could lose up to £7,500 from the Scottish child payment and the two-child top-up payments, the think tank said.

For someone paid the national living wage with three children, this could see them worse off if they worked an extra 18 hours per week.

For someone with four children, this could be true even working an extra 29 hours per week.

Sam Ray-Chaudhuri, a research economist at IFS and an author of the briefing, said: “The Scottish Government is in a difficult position.

“Any form of mitigation of the UK Government’s two-child limit policy is likely to be a cost-effective way of reducing child poverty in Scotland.

“Administratively speaking, making payments to affected recipients of Universal Credit is likely the most straightforward way to do this, but it has the unfortunate consequence of strengthening already substantial disincentives to work more for some families.

“Universal Credit was designed in part to avoid these sorts of disincentives.

“But they increasingly crop up – free school meals, food vouchers, free prescriptions and more can be lost if a family’s income slightly increases.

“Good policy should try to avoid such features and ensure that benefit recipients do not become financially worse-off as a result of working more.’

Scottish Conservative social security spokeswoman Liz Smith said the report “lays bare the urgent need for reform” of the benefits system.

“Under the SNP, Scotland’s benefit bill is spiralling out of control and is simply unsustainable going forward,” she added.

“The last thing ministers should be doing is introducing policies that put more Scots off from working more at a time when our economy is stagnating on the SNP’s watch.

“It is clear that the SNP have prioritised getting cheap headlines for this policy, rather than thinking of the deeply damaging consequences it could have, and how it could harm hard-pressed taxpayers.”