diff --git a/public/images/posts/repealing_the_two_child_limit/calibration.png b/public/images/posts/repealing_the_two_child_limit/calibration.png new file mode 100644 index 000000000..50223f0f0 Binary files /dev/null and b/public/images/posts/repealing_the_two_child_limit/calibration.png differ diff --git a/public/images/posts/repealing_the_two_child_limit/decile_chart.png b/public/images/posts/repealing_the_two_child_limit/decile_chart.png new file mode 100644 index 000000000..531be0819 Binary files /dev/null and b/public/images/posts/repealing_the_two_child_limit/decile_chart.png differ diff --git a/public/images/posts/repealing_the_two_child_limit/hh_impact.png b/public/images/posts/repealing_the_two_child_limit/hh_impact.png new file mode 100644 index 000000000..2455381a9 Binary files /dev/null and b/public/images/posts/repealing_the_two_child_limit/hh_impact.png differ diff --git a/src/images/posts/two_child_limit.png b/src/images/posts/two_child_limit.png new file mode 100644 index 000000000..ccbf56c97 Binary files /dev/null and b/src/images/posts/two_child_limit.png differ diff --git a/src/posts/posts.json b/src/posts/posts.json index 4f5a4cff5..7ccf78aee 100644 --- a/src/posts/posts.json +++ b/src/posts/posts.json @@ -592,5 +592,14 @@ "tags": ["us", "us-nm"], "image": "new-mexico-income-tax-launch.png", "authors": ["max-ghenis"] + }, + { + "title": "Repealing the Universal Credit two-child limit", + "description": "How removing the limit of some benefits to two children would affect the UK in 2023.", + "date": "2023-08-07 16:00:00", + "filename": "repealing_the_two_child_limit.md", + "tags": ["uk"], + "image": "two_child_limit.png", + "authors": ["nikhil-woodruff"] } ] diff --git a/src/posts/repealing_the_two_child_limit.md b/src/posts/repealing_the_two_child_limit.md new file mode 100644 index 000000000..70393526f --- /dev/null +++ b/src/posts/repealing_the_two_child_limit.md @@ -0,0 +1,251 @@ +_[See the full, customisable impacts on PolicyEngine +here.](https://policyengine.org/uk/policy?focus=policyOutput.netIncome&reform=18304®ion=uk&timePeriod=2023&baseline=1)_ + +## Summary + +Introduced in 2017, the two-child limit in Universal Credit restricted +parents from receiving financial support for more than two children +(with children born before 2017 exempt). Using the PolicyEngine +microsimulation model, we estimate that [repealing it would cost £1.8 +billion in +2023](https://policyengine.org/uk/policy?focus=policyOutput.netIncome&reform=18304®ion=uk&timePeriod=2023&baseline=1), +rising to £2.8 billion in 2025 as non-exempt age cohorts replace exempt +children. The repeal would also lower absolute child poverty before +housing costs by 310,000 this year. + +While the Cameron-led Conservative government introduced the two-child +limit, last month, Labour Party leader Sir Keir Starmer [confirmed that +a Labour government would keep the +policy](https://www.theguardian.com/politics/2023/jul/16/labour-keep-two-child-benefit-cap-says-keir-starmer) +due to the cost of repealing it. + +In this analysis, we examine how the policy currently affects +households, and use PolicyEngine to estimate the distributional and +poverty impacts of both full and partial repeals proposed by the Child +Poverty Action Group and the Fabian Society. We also attempt to +reproduce claims made using other microsimulation models. The +[open-source code powering the custom analyses in this report can be +found +here](https://gist.github.com/nikhilwoodruff/447d86032ff481bdeb1e35aeeb3ea18c). + +[**_See how repealing the two-child limit would affect your household +here._**](https://policyengine.org/uk/household?focus=intro&reform=7226®ion=uk&timePeriod=2023&baseline=1) + +# How the policy affects households + +Households claiming Universal Credit, or the legacy Child Tax Credit, +currently do not receive additional benefits for their third or +subsequent children. With benefit levels recently uprated as of April +2023, the two-child limit reduces benefits by up to £2,935 per child +(lowered with increased parental earnings as the family reduces their +Universal Credit entitlement). The cap applies regardless of whether a +household is in or out of work, but its impact changes with earnings due +to the normal Universal Credit taper. + +Figure 1 shows the impact of removing the two-child limit under a range +of employment incomes for a single parent family. The gains are highest +(and equal) for families under around £30,000 in employment income, +after which point the taper rate begins to reclaim the extra benefit +value. For a single parent with 5 children, this value will not be +reduced to zero before more than £60,000 in earnings. + +![A graph with numbers and lines Description automatically +generated](/images/posts/repealing_the_two_child_limit/hh_impact.png) + +_Figure 1: the impact of removing the UC child limit on net income for a +single parent by number of children and employment income. Note: this +does not incorporate housing costs, which would extend the phase-out +region to the right._ + +## Repealing the cap + +The most straightforward way to repeal the cap is to remove it entirely, +at a cost of £1.8bn in 2023. [^1] This net cost rises over time due to +age cohort transitions: with each year, the minimum age required to be +exempt under the 2017 transitional protection rule increases.[^2] + +Under a full abolition, we estimate that the number of children in +absolute poverty before housing costs would fall by 255,000 in 2023 +(relative, after housing costs child poverty would fall by 162,000). The +overall absolute, before housing costs poverty rate for all individuals +would fall by 0.7 percentage points, bringing just under 450,000 people +out of absolute poverty. + +Table 1 shows a range of other estimates made by the Child Poverty +Action Group using the UKMOD microsimulation model, and PolicyEngine's +replications for comparison. The appendix contains more details about +the reasons PolicyEngine's microsimulation modelling differs from other +estimates. + +| Estimate | CPAG/UKMOD | PolicyEngine | Difference | Relative | +| ------------------------------------------------------------- | ---------- | ------------ | ---------- | -------- | +| Net cost | £1.3bn | £1.8bn | +£500m | +38% | +| Child poverty reduction (relative, AHC) | 250,000 | 162,000 | -88,000 | -35% | +| Children in affected households | 1,500,000 | 1,780,000 | +280,000 | +19% | +| Children benefitting but remaining in poverty (relative, AHC) | 850,000 | 1,320,000 | +470,000 | +55% | + +_Table 1: comparisons between CPAG's UKMOD-based modelling results and +PolicyEngine's replications_ _for 2023._ + +## Alternative repeal methods + +The Fabian Society's 2021 report _"Going with the grain"_ proposes +instead repealing the two-child limit for families with a parent who +meets one of the following conditions: + +- Having employment or self-employment income + +- Receiving disability benefits + +- Having a child aged two or under + +We estimate this partial abolition would cost £1.3 billion in 2023, +saving £500m compared to the full repeal. The Fabian Society modelling, +based on the IPPR tax-transfer model, projected that the number of +households hit by the two-child limit would fall by 94% from 790,000 to +75,000. This projection assumes a full roll-out of the policy as it +would be in 2035, where the transitional protection rule does not occur. + +PolicyEngine estimates in 2023 that 333,000 households are affected by +the two-child limit (close to [estimates by the House of Commons Library +in April 2021 that 317,500 families were +affected](https://commonslibrary.parliament.uk/research-briefings/cbp-9301/)), +and that this would fall by 302,000 to 31,000 (a reduction of 93%, close +to the Fabian Society estimate). + +## Conclusion + +PolicyEngine's modelling largely aligns with the findings from other +microsimulation models but finds around 30% lower net costs and poverty +impacts than CPAG. + +Funding proposals also feature in the discussion around the two-child +limit. Tom Clark, fellow at the Joseph Rowntree Foundation, [pointed to +a 1p increase in the higher rate of income tax as a possible +option](https://twitter.com/prospect_clark/status/1680875250542575618?s=20). +Given our higher net cost estimate for the two-child limit repeal, we +estimate this would leave £470m deficit (distributional impacts shown in +Figure 2). + +![A graph of a graph showing the amount of income decile Description +automatically generated](/images/posts/repealing_the_two_child_limit/decile_chart.png) + +_Figure 2: [the distributional impacts of funding the two-child limit +repeal with a 1p higher rate +increase.](https://policyengine.org/uk/policy?focus=policyOutput.decileRelativeImpact&reform=18067®ion=uk&timePeriod=2023&baseline=1)_ + +PolicyEngine's microsimulation modelling is completely open-source. [See +the full analysis for the repeal on PolicyEngine +here.](https://policyengine.org/uk/policy?focus=policyOutput.decileRelativeImpact&reform=7226®ion=uk&timePeriod=2023&baseline=1) +If you have feedback or questions on the results in this report, please +do [get in touch](mailto:hello@policyengine.org). + +## Appendix: reconciling administrative and survey data + +When first estimating the impacts of this reform, we used our Family Resources Survey-based +microdata and reached impacts of lower magnitude. However, +administrative statistics suggested that the true impacts may in fact be +larger, so we extended our data enhancement process to repair the +specific biases remaining present in the FRS under the guidance of the +administrative statistics. + +Microsimulation models based on survey microdata often reach estimates +differing from administrative data, due to sampling or measurement bias +in the data collection process. PolicyEngine applies a calibration +process to adjust for this as much as possible by both imputing missing +income data and reweighting households to repair consistency with +administrative totals. + +To illustrate, take the following example (based on completely +hypothetical characteristics). + +| Household | Total income | Original weight | Calibrated weight | +| --------------- | ------------ | --------------- | ----------------- | +| High-earner | £80,000 | 2m | 5m | +| Low-earner | £25,000 | 25m | 22m | +| Original survey | £785bn | 27m | 27m | +| total | | | | +| Administrative | £950bn | 27m | | +| total | | | | +| Calibrated | £950bn | 27m | | +| survey total | | | | + +By adjusting survey weights, we can shift the distributions of survey +variables to reconcile them with more trusted administrative data. This +requires collecting as many administrative statistics as possible, and +calibrating as closely as possible to them all, together. In the example +above, it was possible to match exactly, but this often isn't possible +in practice because we are operating on a survey, and not a census. + +A key learning point in this report was the government's [administrative +statistics on households affected by the two-child +limit](https://www.gov.uk/government/statistics/universal-credit-and-child-tax-credit-claimants-statistics-related-to-the-policy-to-provide-support-for-a-maximum-of-2-children-april-2023/universal-credit-and-child-tax-credit-claimants-statistics-related-to-the-policy-to-provide-support-for-a-maximum-of-two-children-april-2023). +Using benefit administrative databases, the Department for Work and +Pensions estimated that in April 2023 around 1.5 million children lived +in households meeting two conditions: + +- The household claims Universal Credit or the Child Tax Credit. + +- The household does not receive a child element for at least one + child. + +Our initial model estimate was lower than this (around £1.3m children), +largely due to biases in the Family Resources Survey not fully countered +by our data enhancement process (although we included child counts and +Universal Credit caseloads in our calibration function, we did not +include this specific intersection). + +To correct this underestimate, we recalibrated the survey microdata, +applying an extra penalty to the algorithm for deviating from: + +- The number of households affected by the UC and CTC two-child + limits, respectively. + +- The number of children living in UC- and CTC-claiming households + with 3, 4, and 5-plus children, respectively. + +Figure 3 shows how this process operates for the first of these +parameters. Note that PolicyEngine still carries out this process for +the other 2,000+ statistics we target, ensuring that the model weights +do not over-calibrate towards this new set of statistical targets. + +![A graph of a graph Description automatically +generated](/images/posts/repealing_the_two_child_limit/calibration.png) + +_Figure 3: An example of PolicyEngine's calibration process, in which +survey weights are adjusted to shift the FRS projection of UC-claiming, +child limit-affected households towards the administrative estimate._ + +PolicyEngine now reproduces this 1.5m statistic. However, what we +subsequently found suggests that the 1.5m figure is an underestimate of +the true number of children affected by the reform. Because the +administrative data does not include households brought into eligibility +by reforms, it cannot include households who are not currently eligible +for Universal Credit but would be under an abolition of the two-child +limit.[^3] These households are represented by points on the diagonal +slope in Figure 1. + +We estimate 200,000 children fall into this category, bringing the +number of children living in households affected by the two-child limit +to 1.7 million. + +[^1]: + Our cost estimate of £1.8bn is 38% higher than the widely-reported + £1.3bn [estimate by the Child Poverty Action + Group](https://cpag.org.uk/sites/default/files/files/policypost/CPAG_Budget_Submission_March_2023.pdf), + drawn from the UKMOD microsimulation model. PolicyEngine [applies + machine learning-based algorithms to survey + microdata](https://policyengine.org/uk/blog/how-machine-learning-tools-make-policyengine-more-accurate) + to counter measurement and sampling bias present in the input data, + which could explain some of the disparity. + +[^2]: + For example, in 2019 only children aged below two could be + affected. This age of exemption increases until 2035, at which point + no children can be exempt under the transitional protection rule. + +[^3]: + Administrative data might in practice include a small number of + these households, because households whose income fluctuations mean + they move along the edge of entitlement might stay on administrative + databases.