How do financial incentives affect household fertility decisions? Government policies—particularly their treatment of children in the tax-and-benefit system—change the costs and benefits of having children and thus may affect fertility decisions. However, the size of these effects will depend on individual and household preferences and other factors affecting family incomes. Our research examines the effect of a major change in the treatment of children in the benefit system of the UK: the introduction of the two-child limit for cash benefits to low-income families. While a handful of countries restrict benefits to the third or fourth child, the UK’s policy is the first instance of capping benefits at the second child.

The effect of this change on families’ fertility decisions is of considerable interest to policymakers and researchers. Unlike other changes to the UK benefit system for low-income families, it was justified partly by the argument that benefit payments to low-income families with children incentivized those families to have more children. Implicitly, the objective of the policy was not only to decrease spending but also to reduce fertility among low-income households.

In response, opponents of the policy argued that it was inappropriate for the government to reduce fertility among low-income households by cutting benefits. Moreover, if a certain level of benefits per child were appropriate, they argued, it should apply to all children. They also claimed that the policy change was unlikely to significantly affect fertility decisions. Opponents predicted that the main effect of the change would be an increase in poverty among larger families. Determining the validity of these arguments is essential to effectively evaluate the policy and inform wider debates on the future of the welfare system. It is also relevant to international debates about trends in fertility in advanced economies; the policy changed as the total fertility rate in the UK steadily fell—from 1.9 children per woman in 2011 to 1.65 in 2019. It has declined even further since then, to 1.44 in 2023.

The nature of the two-child limit makes it well suited to identify the effect of the welfare system’s financial incentives on fertility. It was a large change introduced at once, and it affected some groups but not others. In 2022, the policy affected 450,000 households, including 1.4 million children. It applies only to third or subsequent children who were born on or after April 6, 2017, and the change did not affect better-off families that were not receiving benefits. Our research leverages variation between children in their date of birth, birth order, and socioeconomic status to determine the effect of the two-child limit on fertility.

Our findings suggest that the effect of the policy change on fertility, if any, was relatively small. There were steady decreases in the overall number of births in the UK before and after the change. However, our research does not find evidence of a substantial reduction in the relative number of births among the families affected. These findings are surprising because they differ from the findings of most prior research, which typically analyzed increases in benefits rather than reductions in benefits.

One interpretation of our findings is that families may not respond symmetrically to changes in benefits: Benefit cuts may not have equal and opposite effects to benefit expansions. Our results also undermine the implicit rationale for the reform: Rather than causing a major reduction in the number of children born to low-income families, cuts to benefits mainly increased the prevalence and severity of child poverty. Drawing on other research on the two-child limit, we speculate that lack of awareness of the policy, the persistence of fertility attitudes (particularly among larger families), and a misunderstanding among policymakers about how parents make decisions in fertility matters may have contributed to the policy’s failure to affect fertility decisions.

Our findings—and the possible drivers behind them—have significant economic implications. The fertility rate is lower than the death rate and declining in almost all advanced economies, so the effect of financial incentives that may address these trends is increasingly important. Our research demonstrates that financial incentives interact with broader socioeconomic conditions; thus, policies that focus on these incentives alone are unlikely to deliver the desired results.

Note
This research brief is based on Mary Reader et al., “Does Cutting Child Benefits Reduce Fertility in Larger Families? Evidence from the UK’s Two‑Child Limit,” Population Research and Policy Review 44 (March 4, 2025).