Culture Secretary Matt Hancock said ministers had decided to “take a stand” despite dire warnings from the betting industry – which reacted to the announcement by saying 21,000 people were expected to lose their jobs as a result.
A review by the Gambling Commission in March had recommended a maximum stake of £30 or less for so-called non-slot machines such as roulette – by far the most popular FOBT game – but the government decided to go further.
Users can currently gamble away up to £100 every 20 seconds on the machines, which campaigners say are dangerously addictive and have been dubbed the “crack cocaine of gambling”.
Mr Hancock said: “When faced with the choice of halfway measures or doing everything we can to protect vulnerable people, we have chosen to take a stand. These machines are a social blight.”
The government’s findings showed that even cutting the stake to £10 would leave problem gamblers “exposed to losses that would cause them and their families significant harm”.
They showed that high-spending sessions that mounted up to thousands of pounds in losses persisted even at average stakes as low as £5, but there were no such sessions involving average stakes of £2 or below.
Sports minister Tracey Crouch said: “Problem gambling can devastate individuals’ lives, families and communities.
“By reducing FOBT stakes to £2 we can help stop extreme losses by those who can least afford it.”
Labour deputy leader Tom Watson said it “signals the end of the reign of destruction and misery that FOBTs have brought on the lives of gambling addicts and their families and communities for too many years”.
Campaigners for stronger restrictions on the machines also expressed delight.
The Bishop of St Albans, Alan Smith, said: “Fixed-odds betting terminals are a scourge on high streets that have taken advantage of the vulnerable for too long.”
But the Association of British Bookmakers (ABB) said the decision will have “far-reaching implications” and would cost the Treasury £1.1bn in lost tax revenue by 2020, as well as £290m in reduced payments on horse racing.
It said: “We expect over 4,000 shops to close and 21,000 colleagues to lose their jobs.”
Measures announced by the government also included tougher rules for internet gambling, including proposals on age verification limits on consumers’ spending.
William Hill said the changes presented a “tough challenge” and could result in around 900 shops – around 38% of its store estate – becoming loss-making and a “proportion” at risk of being closed, with gaming net revenues expected to fall by 35-45% and annual operating profits by up to £100m.
Sky News revealed earlier this week that the company had warned ministers that the stake cut could leave it vulnerable to a foreign takeover.
GVC said it was disappointed with the decision which it expects to have a £160m impact on annual earnings in the first full year after the change.
Paddy Power Betfair said it expected a 33% to 43% hit to gaming machine takings, or £35m-£46m on 2017 figures – around 2% of revenue for the total group.
Chief executive Peter Jackson said the announcement was a “positive development for the long-term sustainability of the industry”.
The government said it would need parliamentary approval for is reforms and would engage with the industry to give it “sufficient time to implement and complete” technological changes required.
The Institute of Economic Affairs (IEA), a free market think-tank, warned of “unintended consequences” from the changes, with taxpayers having to make up the fall in Treasury income.
It said the move would amount to a ban, with machines being taken out of bookmakers, shops closing, and thousands of jobs being lost – while gamblers would simply move online where there are no limits on stakes or prizes.
Christopher Snowdon, the IEA’s head of lifestyle economics, said the decision was the result of a “moral panic over something that accounts for just 14% of Britain’s gambling expenditure”.
He said: “There has never been any evidence to support this campaign. The government is weak and cowardly to have given into it.”