Scotland's two-child benefit limit is set to spark a poverty crisis among larger families if not addressed urgently, experts warn. A new analysis by the Institute for Fiscal Studies (IFS) has revealed that plans to mitigate the UK Government's cap on Universal Credit and Child Tax Credit payments could inadvertently harm work incentives.
The IFS report highlights that the two-child limit, introduced in 2017, restricts means-tested benefits to the first two children in a family, with some exceptions. The Scottish Government's proposed mitigation would see families in Scotland receive additional payments through the Scottish Child Payment to compensate for this cap, but current design flaws may have unintended consequences.
The analysis shows that if implemented as planned, the policy could create a 'cliff edge' effect where families lose support at a fixed rate regardless of their earnings. This would result in an effective marginal tax rate exceeding 100% when combined with other benefit reductions and income tax, potentially discouraging working parents from increasing their hours or taking on better-paid jobs.
The IFS recommends that the Scottish Government redesign its policy to maintain stronger incentives for employment while reducing child poverty. A more gradual withdrawal of the Scottish Child Payment as earnings increase would align with broader efforts to support low-income households and mitigate potential economic consequences.
This policy divergence between Scotland and the UK highlights fundamentally different approaches to supporting families. While the Scottish Government prioritises direct poverty reduction, the UK's two-child limit aims to encourage smaller families for fiscal sustainability reasons. The IFS findings pose a challenge for the Scottish Government to balance social objectives with potential economic implications.
The policy's impact extends beyond individual families, potentially influencing labour market participation rates and the long-term sustainability of Scotland's welfare system. As the Scottish Government continues to develop its policies, the IFS analysis will be crucial in shaping the future of welfare support for low-income households.