Budget Focus: What was hidden in the numbers for charities?

March 17, 2016 at 17:48

The Office for Budget Responsibility’s Economic and Fiscal Outlook is where the real detail of the Budget resides. What was hidden in the numbers for charities this time around?

Here are three things that we should take away.

It ain’t over, till its over…

The killer line from the Office for Budget Responsibility comes early on, on page 6.

“Given the size and distribution of past forecasting errors…the probability of meeting the surplus target in 2019/20 [is] only slightly above 50 per cent.”

Basically, given the challenges in predicting what is going to happen in the economy years ahead and all the risks that have been identified to the UK (Brexit, China, Eurozone etc.), there is a strong chance that the Chancellor will need to come back for more cuts.

This has always been a possibility, but the OBR’s report indicates that the Chancellor is cutting it very fine to meet his deficit target. In order to achieve this he has also had to pull off some accounting tricks and make some very big promises when it comes to tax avoidance (£12bn to be raised over the last Parliament). As I said in my pre-budget blog, we should be skeptical when it comes to tax avoidance revenue.

For charities that have already had to deal with significant cuts in government income, this will send a shiver down the spine. The Chancellor is also gambling that the economic situation will improve significantly over the coming years.

He has now pencilled in £8.1bn of additional cuts in “resource departmental expenditure limits” in 2020-21. If things improve, he hopes not to have to make these cuts. Given that this would also be election year, it is a fair guess to say that he would probably postpone them into later in the next Parliament either to give himself more breathing room or set a trap for the opposition. He has also tried to smooth out the cuts in order to help the economy and will be spending £3.7bn more between 2017-18 and 2018-19, which would be helpful for charities as it will give more time for cuts in spending to be made, leading to better decision making.

For charities, it looks like we’ll have to wait till mid-way through the next Parliament before public spending stabilises and working with the public sector becomes more predictable.

Households’ finances are tight

One of the key messages that has come out of the Budget is that productivity is down and therefore wage growth is likely to be slower than expected. Average earnings in 2016 have been revised down by 0.7% in 2016 and will be 2.6%. It has also been revised down for the rest of the Parliament.

But this only tells one part of the story. The OBR says that households are running an ‘unprecedented’ financial deficit, with unsecured lending (credit cards, lending for car purchases etc.) increasing by over 9% in the year to January 2016. All this extra borrowing combined with poor wage growth means that Real Household Disposable Income will be lower than expected (see graph below):

HouseholdIncome1

Household disposable income has also fallen significantly since July 2015, when post-election there were even more optimistic projections about wage growth.

This data is important because charities have to raise more income from individuals in order to make up for cost pressures and cuts elsewhere. As you can see from this graph on the relationship between disposable household income and income from individuals, there is a strong connection between changes in disposable income and what individuals end up giving (or spending) with charities. I have also projected a little ahead of the latest Almanac data, indicating that income from individuals grows in line with disposable income, then charities should hopefully see significant improvements in income from individuals – we’ll see if this holds true shortly. But the OBR’s downward forecasts means that the overall potential growth for income from individuals will be lower than it was in November. Effectively, we should be revising down our targets for growth from individuals over this Parliament.

HouseholdIncomeFundraising1

Source: ONS & NCVO Civil Society Almanac 2015

Additional pressures on household finances are also likely to make the public more sensitive to fundraising requests – this may have a further impact on complaints about the sector’s fundraising.

A hospital pass to local government

Despite promising to devolve business rate income to local authorities and taper away central government grants, the Chancellor couldn’t help but tinker with it. According to the OBR, this will mean around £6.4bn less income in business rates over the course of the Parliament.

There will be a £3bn increase in Council Tax receipts (to pay adult social care costs amongst other things) over the Parliament, but this won’t offset the cost of the business rates cut.

Given that over 50% of the sector’s income from government comes from local government, this is a worrying decision. Combined with the 6.7% additional cuts in local government budgets between 2016-20 announced in the financial settlement with councils earlier in the year, this leaves councils is a very tricky position.

Not only that but many local authority leaders believe that the Treasury will come knocking again in order to contribute towards the £3.5bn in additional spending cuts over this Parliament that the Chancellor announced yesterday.

Check out our latest Economic Outlook Briefing for more information on the long term impacts of devolution on the sector’s finances.

UPDATE (22/03/2016): 

As you have probably seen already, the Chancellor has climbed down on welfare reform and now has a £4.4bn hole in his Budget. Whilst there has been no indication so far that this is going to be made up in order to protect the overall surplus target, there are some worrying numbers for charities.

Using figures from the Red Book (p.91) – I have made a stab at where he may be able to make those savings, with a whole bank of assumptions.

Assuming that the Chancellor continues to protect those departments which he has done so far (International Development, Education, Health etc.) and assuming that he doesn’t want devolved nations pay (Wales, Scotland, NI) and assuming again that he doesn’t cut capital budgets (because the government wants to invest more in infrastructure) and that he distributes any savings evenly across the remaining departments – here is how is how much in additional cuts to some departments he could need over the Parliament to make up for PIP changes.

Local Government – £595m
Culture, Media and Sport – £61m
Justice – £342m
Cabinet Office£32m

There is also a potential risk for the Charity Commission. ‘Small and independent bodies’ such as the Commission would be required to make £78m of additional savings over the Parliament. Although the budget has been frozen in cash terms for the Parliament, the Chancellor may need to come knocking again for more cash.