Are you a government spending anorak? If so, I am sure that like me you spent all night reading through the Whole of Government Accounts (WGA) 2013-14 which was published last Thursday.
WGA consolidates the audited accounts of around 5,500 organisations across the public sector, to produce a comprehensive, accounts based picture of the financial position of the UK public sector. They are different from the National Accounts, because they use the International Financial Reporting Standards that charities and private sector bodies often use. So the WGA includes future spending to meet current obligations, PFI liabilities, pension liabilities and the value of other assets that are not put into the National Accounts.
This WGA is for last financial year, rather than this financial year, so there is a lag but the data is very useful to understand some trends in the government’s finances.
Local government revenue from taxes is not growing
Interestingly in the context of a review into business rates which the government has just launched (and CFG is working with other sector bodies to respond to), the WGA reports that revenue from local government taxes has not increased (as have tax revenues everywhere else) but has actually fallen by 5.6% from £55.9bn in2 012-13 to £52.8bn in 2013-14.
The fall in council tax revenues by £1.9bn between the two years is explained by reforms to the benefit system as the locally defined Council Tax Support schemes is now subtracted from the revenue generated by Council Tax to give a more accurate assessment of the real income councils are receiving. Councils have also not been able to significantly raise revenue through increasing council tax, due to strict referendum criteria. Business rate income has also fallen, due to the cost of appeals now being factored into the accounts. The government has just introduced measures to make appeals less costly, which may help to improve this figure in the medium term but hope that the Business Rate Retention Scheme would lead to more income for councils has not been realised.
The accounts indicate that councils are not generating significant additional revenues through taxation, meaning that the pressure on local government spending is unlikely to let up.
The squeeze on grant spending continues
One of the much discussed topics in the sector is the level of grant funding that charities receive. NCVO’s Almanac has showed how this has fallen substantially over the past decade, replaced by contracts for services in most cases. But if you strip out the UK’s contribution to the EU Budget, grant spending by the government increased by just £300m between 2012-13 and 2013-14. The 0.7% GNI target for international development spending was responsible for the biggest increase and there was increased investment in capital investment for social housing. But ‘other revenue grants and subsidies’ which likely impact most of the sector, showed a fall from £7.8bn to £7bn. So grant spending is tight everywhere, not just in the voluntary sector. It’ll be interesting to see if this figure creeps back up as government spending increases towards the end of the decade.
Public sector pension liabilities loom on the horizon
The biggest rise in the government’s liabilities came not from borrowing (i.e. the deficit) but from public sector pension liabilities. Liabilities increased by £130bn between 2012-13 and 2013-14. The government has tried to get on top of these liabilities over the past few years through implementing the Hutton Report’s recommendations on public sector pensions which led to increased contributions from public sector employees. However continued increases in life expectancy are increasing liabilities and there is a danger that even with spending constraints, savings on the spending side are going to be eaten up in the future by the increased costs of servicing pensions.
There is a lesson here for charities about the need to get on top of pension liabilities as soon as possible. The sector’s net pension deficit has risen to nearly £1.5bn according to the latest data, and without steps to tackle this issue many charities could see more of their income diverted from charitable objectives towards paying down pension deficits.
As the General Election starts, it seems clear that there are still significant challenges facing the public finances which are likely to impact charities in the years ahead. The WGA is an important tool for charities to be able to understand these challenges, presented in a way that many finance professionals will readily appreciate given their own reporting experience.