Chancellor 'to scrap two-child benefit cap' and pledge welfare reform in Budget

Reeves writes that “fiscal restraint is a Labour value” and argues that keeping a tight grip on spending is essential to tackling inflation, which she calls a “fundamental ­precursor to ­economic growth”.

Writing in the Sunday Times, the chancellor also stressed that there is nothing “fair or progressive” about wasteful public spending or diverting “£1 in every £10 of taxpayer money” simply to service government debt.

Reeves is expected to defend the move by insisting that removing the limit entirely will help prevent poor children from facing a “lifelong cost of ­living crisis”, while ultimately saving the state money over time.

Her comments are being read in Westminster as a clear attempt to steady bond markets ahead of the politically sensitive decision to end the cap.

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The move is reportedly aimed at calming Labour MPs who blocked £5 billion of benefit cuts last summer.

Those MPs are expected to drop their resistance when the government brings forward further welfare reforms next year.

A full child poverty strategy will be published shortly after Wednesday’s Budget.

Key proposals for a sweeping overhaul of the welfare system will come through two major reviews: the Timms review of personal independence payments for disabled people, and the Milburn review into the nearly one million young people currently classed as “Neets” - not in education, employment or training.

Reeves has argued these reforms would shift the welfare system away from one “designed to punish, trapping millions of people on ­benefits rather than helping them into work, into a system designed to help people succeed”.

The chancellor is expected to warn that annual spending on health and disability benefits is on course to hit £100 billion by 2030 - almost double the current defence budget - accusing the previous Conservative government of leaving behind a “broken system” and spiralling costs.

But she is not expected to announce further welfare measures in the Budget, prompting questions about how determined Labour is to reduce the overall bill.

The optics of expanding welfare support while announcing tax increases are also likely to attract criticism, with opponents accusing Reeves of prioritising party unity over taxpayers.

To help plug the fiscal gap, the chancellor reportedly plans to raise tens of billions by freezing income tax thresholds for two more years to 2030; imposing national insurance on salary-sacrifice schemes above a new cap, affecting pension contributions; revaluing council tax for top-band properties and adding a surcharge for the most expensive homes; and bringing in a pay-per-mile scheme for electric vehicles.

The Treasury had insisted only months ago the move was unaffordable.

Reeves had been weighing a taper system that would have reduced payments for third and subsequent children, limiting the cost to the Treasury.

But, she has faced sustained pressure from Labour MPs to go further, with Sir Keir Starmer and education secretary Bridget Phillipson among those backing full abolition.

The chancellor has now agreed to scrap the cap entirely. According to government figures, the option favoured by MPs is only around £200m more expensive than the “lead” taper model previously under consideration.

One source said: “The truth is if you taper it you don’t save that much money anyway.”

Another source claimed that the cost per child under full abolition was actually lower than other models once long-term benefits and savings were included.

The Institute for Fiscal Studies has said ending the cap could lift 630,000 children out of absolute poverty.

Internal documents drafted ahead of the government’s forthcoming child poverty strategy link the decision to better educational outcomes, higher lifetime earnings and increased tax receipts.

Papers seen by ministers state that fewer than 25% of children in the lowest-income households achieve five good GCSEs, compared with 70% in the top two wealthiest groups.

Poor attainment is described as one of the “key risk factors” for becoming NEET, with children from the poorest third of families earning “around 50 per cent less” by age 40 than those from the richest third.

The documents conclude that “people in the UK are five times more likely to be poor as adults if they have lower educational levels”.

A government source said: “Growing up in poverty condemns children to a lifelong cost of living crisis as the evidence shows they do less well in school and end up earning less over their lifetimes.”

Scrapping the cap also allows Labour to say it has ended the controversial “rape clause”, which granted exemptions for children conceived without consent.

While the move will be warmly welcomed by Labour MPs who have pushed for it for years, senior party figures are warning of a possible public backlash unless Reeves signals clearly that wider welfare reforms are still planned.

One insider said: “She has to hint that something on cutting the bill is coming. There are so many other audiences out there, it’s not just the [Parliamentary Labour Party]. They have to say to the PLP ‘we will give you this, but you have to back us on other things’.”

Downing Street and the Shadow Chancellor have been contacted by LBC for comment.