What do the latest Budget 2017 economic numbers mean for charities?

November 23, 2017 at 09:10

The Budget is out, the CFG Budget Briefing for charities is available to download from our website, the dust appears to have settled pretty quickly on this Budget. But what does the wider economic picture mean for charities?

As usual, the Office for Budget Responsibility has produced its forecasts for how the economy will perform and the impact on the public purse. This data is useful for charities for planning financially and make decisions. The document is free to download, but here is a quick analysis of some of the more interesting numbers for charities.

It’s going to be a tough few years

Unsurprisingly, given the headlines this morning about the Chancellor failing to “lift the gloom”, the medium term numbers are not great.

GDP has been revised down substantially for pretty much every year over the next five years. Rather than growing between 2-2.5% a year, we are now likely to grow only 1-1.5% for the rest of the Parliament. This isn’t about Brexit necessarily, but because after several overoptimistic forecasts about productivity, the OBR has finally called time and said that we have to get used to the fact that the UK is not going to produce as much as it used to before the financial crash.

Fundraising climate is not welcoming

Higher inflation means that average earnings are not going to grow as strong as they were predicted to back in March. Rather than earnings rising by around 3-4% per year, it is now predicated that earnings will only rise by around 2-3% a year. This might not sound like very much but it is a big difference. The cumulative impact is also significant.

All this means that real household disposable income, the money that is left in your pocket after taxes and rents etc., is not going to grow stronger (as the red boxed area below shows).

RHDI1

Interestingly, a lot of the growth is made up by dividend income and it will be interesting to see whether any wider economic instability caused by Brexit will have any impact on these figures. It also highlights how fragile household incomes are.

Given how income from individuals is for our sector (around 45% of all our income is through fundraising and income earned from individuals) this is not good news. Revising fundraising targets and the rate of return for fundraising expenditure would be advised.

The OBR’s forecast for consumer spending growth over the Parliament is also significantly lower than in March, with cumulative growth between the first quarter of 2017 and first quarter of 2022 down from 7.7 per cent in March to 6.2 per cent in this forecast. This may have a positive impact on charity shops which tend to do better when people have less money but are still looking to spend.

What is going on with public spending?

He might not have said anything, but actually, the Chancellor loosened the purse strings again in this Budget. Government spending (not on buildings but on services) is going to go up by £7.5bn over the Parliament, compared to what he had planned in March. This is due to a combination of giveaways in the Budget to the NHS but also due to predicted increases in public sector pay. At least half of this amount is going to go away in pay, but this loosening will be welcomed by charities which are delivering services in the public sector.

I am always interested to know what is happening at the local level, because that is where many charities have financial relationships. Once again, local authorities are spending more than they were expected to do so. They have spent nearly £3bn more this year than was expected, although much of that was borrowing. They are also spending down their reserves after several years of prediction that this would happen. This is good and bad news, good news that they are spending them and keeping services funded, bad news that the financial situation has forced them to do so.

The OBR has also broken down where the overspending and underspending is taking place at a local level, which gives an interesting insight into councils spending. Children’s social care (which Children England have highlighted in their work recently) and adult social care are unsurprisingly overspending due to a lack of government investment. The environment, transport and cultural services appear to be bearing the brunt. As these are discretionary, this isn’t surprisingly. The OBR is particularly concerned about children’s social care spending and whether this will impact the quality of services.

LASpending1

Overall, local councils are expected to spend £4.4bn more over the next few years, likely to be concentrated on care services. For charities that are working with local authorities, this is likely to be diverted to core statutory services. But drawing down on reserves and more borrowing may delay cuts in other non-statutory services for a few more years.

There is a bite in the tail for central government spending, however. In order to meet his deficit target, the Chancellor has booked in £4.7bn in cuts in 2022-23. Will these be delivered? Where will the axe fall? This is far in the future at the moment, but this indicates how changeable the public spending landscape is. As this is would be at the start of the new Parliament, the Chancellor is leaving a nasty surprise for whoever the next government is.

The OBR has also estimated that the government will have £2.1bn in additional funds to spend after leaving the European Union, although that disappears in 2021-22. Is this because the government is not planning to continue propping up those services or because no decisions have been made? It is assumed that this spending is merely continuing existing EU projects, but charities need to make sure that some of this new funding comes their way.