Starmer to scrap two-child benefit cap as Treasury told to find money

With Labour MPs threatening to rebel over the government’s welfare reforms, the prime minister has privately made clear that he is determined to axe the limit in order to drive down child poverty. “Keir wants to end the two-child cap – he thinks it’s the right thing to do,” one minister said. “It’s the best and most cost-effective way to reduce child poverty. The alternatives cost more and are less effective.”

The change, which would cost £3.5bn a year, would be the second big welfare U-turn after last week’s reversal on the winter fuel allowance.

Starmer’s endorsement will be seen as a victory for Liz Kendall, the work and pensions secretary, and Bridget Phillipson, the education secretary, who have been pushing for the cap to be abolished as the flagship policy in the government’s child poverty strategy.

They have been backed by Wes Streeting, the health secretary, and Angela Rayner, the deputy prime minister, as concern grows around the cabinet table that without the shift, Labour will end up presiding over the highest levels of child poverty since records began.

Last week it was reported that the child poverty strategy, which was due in the spring, has been delayed until the autumn. The Observer understands that this is to allow the benefit changes, and the funding of the reforms, to be set out in a fully costed way in the budget.

Some aspects of the plan will be announced before summer. Although no final decision has been made, Whitehall sources say this is likely to include a commitment to end the two-child cap as part of an attempt to show that welfare reform is a “moral mission” for the government rather than simply an austerity drive. Dozens of Labour MPs are threatening to rebel over the government’s proposed changes to disability benefits.

Rachel Reeves, the chancellor, is concerned about the cost of removing the cap at a time when the public finances are severely constrained, but ministers believe Starmer is insisting that a solution should be found. “Keir is becoming more assertive with the Treasury,” one senior figure said. “You can see that with the winter fuel allowance. He is more determined to drive through the things he wants.”

One idea being discussed in Whitehall is to fund the measure through a levy on online gambling companies, which are already the subject of a Treasury review.

A Treasury source said tackling child poverty was “a very important part” of the chancellor’s agenda “but she can’t commit to something without saying where the money is going to come from.”

Speculation that the two-child limit could be amended rather than abolished – by raising it to cover three children, for example, or exempting parents of disabled children or those in work – is understood to be wide of the mark. “There’s no point just tweaking it, that doesn’t solve the problem,” one minister said. “You need to scrap it. If we don’t do that the analysis is that child poverty will go up.”

The cap, which prevents parents from claiming child tax credit or universal credit for more than two children, was introduced by the Conservatives in 2017.

The Resolution Foundation thinktank has warned that, unless the policy is reversed, the number of children in poverty will increase from 4.5 million to 4.8 million by 2029-30. More than a third of children and half of all children in large families would be living in poverty by the time of the next general election.

Scrapping the cap would lift 470,000 children out of poverty, according to the thinktank’s analysis. Torsten Bell, the former chief executive of the Resolution Foundation, who has long argued for the two-child limit to be abolished, is now a minister in the Treasury and the department for work and pensions.

Gordon Brown, the former prime minister, urged the government last week to abolish the “cruel” two-child limit, claiming it treats third children as “second-class citizens”. He recently met Starmer to press the case.

There have been reports that the prime minister is at odds with Morgan McSweeney, his chief of staff, over the approach to child poverty, but senior sources said the mood was shifting in Downing Street.

Rachel Statham, Starmer’s policy adviser on children and young people, repeatedly called for the “punitive” two-child benefit cap to be scrapped when she was at the Institute for Public Policy Research before taking up her government job.

A No 10 spokesperson said the prime minister had insisted that the option of scrapping the two-child cap “remains on the table” during discussions about the child poverty strategy.

Scrapping the limit would be a significant climbdown for the prime minister. Last year, seven Labour MPs, had the whip withdrawn after voting against the government on the two-child cap.

Starmer announced at prime minister’s questions last week that the threshold at which the winter fuel allowance is withdrawn would be raised so that more pensioners would get the payment.

About 1.6 million children are affected by the two-cap limit, and more than 100 are pulled into poverty by the policy every day, according to the Child Poverty Action Group.

Photographs by Katherine Anne Rose/The Observer