This week I attended the IFS’s Green Budget 2016 event, which provides an essential commentary on the economic issues facing the current government over the next Parliament. The report comes at a pertinent time as the world economy faced a turbulent week in the stock markets. I’m going to look what this could mean for the charity sector by 2020.
Growth or recession?
First, it’s important to look at the overall analysis of the country’s finances. While the UK in 2015 experienced another year of small growth at 2.2%, (and is predicted to maintain this level of growth till 2020) the instability of some the global economy paints a much riskier picture. A potential slowdown of the Chinese market, continued recession in emerging markets like Brazil and Russia, along with the low price of the oil affecting some key economies, has alarm bells warning of a future recession.
So what does the IFS make of this? They do not think that the UK will be likely to fall into another recession, though do warn that the UK’s economy is in a precarious position. Well why is this? Apart from the global issues mentioned above the IFS has argued that Osborne has forced himself between a rock and a hard place in his commitment to deliver his £10 billion surplus by 2020 which could result in sudden tax rises or budget cuts.
It’s interesting to note that the UK government (and most advanced economies) are not often in a surplus, with the UK only achieving this feat 8 times and only once for more than 3 years in the last 60 years. If the economy does not maintain at least the small growth of 2% then there would be another strong chance of a UK based recession.
This would see a similar cycle of cuts to departments which are not ring fenced and are important to charities like the Department for Communities and Local Government. With cuts to departments from 2010-2015 already at 10.5% this means there isn’t any fat left to cut.
For this Parliament the government wants department cuts to be at 2.3% and with quite a few departments ring fenced for protection the resulting cuts will have to come out of the other departments, like Civil Society and the DCLG. All of this is predicted to result in the biggest cuts in spending to public services since 1948.
So what areas will mostly affect charities?
Another key area of concern for charities is the effect on household income under the current Parliament. While consumer spending is high at the moment, with certain manifesto pledges and a drive to see the mystical surplus households real spending power could be greatly reduced with an expected £12.5 billion to come out of household income by 2020 due to cuts.
The government committed in their 2015 manifesto to cut the income tax and provide services for an aging population will cost. This could result in an unaccounted £8 billion cost. If the Chancellor wants these policies to work, he’ll look for savings in other areas.
It is not unsurprising to say that this financial pressure will affect people on the lowest income the most. This is potential for great concern for charities as more services are cut and the population has less disposable income to spend on donations.
The other elephant in the room is the government’s attempt to change the benefit system. The new universal credit system will again see people in the lower income being the most affected. It is expected that the welfare budget will exceed the government’s cap, which has already happened for 3 years between 2010-2015 Parliament. If this breach does occur the Chancellor will be looking to make savings through other departments. Again, charities will fill the strain of needing to support communities as they face continued funding issues through austerity.
But is there a silver lining?
But what if this is the usual British diet of pessimism? The Oxford Economics did argue that any potential recession affecting the world could be limited in Britain because our exposure to emerging (and shaky) markets is limited in terms of trade and our stock market is relatively stable.
If the world economy remains favourable, growth could be at 3% by 2020. This would help to naturally close the deficit gap and would potentially allow the government to relax austerity and let the economy run at a normal rate.
But whatever happen it is going to be a nervous time for charities as unknown and unpredictable events could have dramatic impact on both the funds available to provide the services we champion, the numbers needing our support and whether we’ll have the ability to do so.