#volsecbudget 2015 – CFG Live Blog

July 8, 2015 at 09:12

09/07/2015 – 19:16 – AF

This afternoon I attended the IFS post-budget briefing. Given the scale of the changes introduced it covered a lot of ground in a relatively short amount of time so will I provide a more detailed update later. But for now, I am going to briefly summarise the key issues that I think are relevant to charity finance.

I do also recommend that you take a look at the materials available on their website. The opening remarks made by director of the IFS, Paul Johnson, neatly provides the IFS’s over-arching narrative: that it is hard to see any theme or strategy in the tax reforms and welfare cuts will hit low-wage workers the hardest.

The increase in the minimum wage will not subsidise cuts to tax credits

Over the last couple of days the CFG blog has discussed concerns that the increase in the minimum wage will not be reflected in the value of grants and contracts. Today the IFS argued that cuts to welfare cannot be subsidised by the minimum wage. The reduction of the work allowance will mean that people in work will be the biggest losers in the cuts to welfare spending.

It’s all about the autumn now

We know that there will be a Spending Review in the autumn. But we don’t know what time period this will cover. The Chancellor should also then formally set out how much departments will have to spend. IFS analysis shows that, as it currently stands, departmental spending excluding protected budgets (NHS, aid, schools and Defence) will be just shy of 13%.

But at least the cuts are introduced more slowly…right?

Whilst it’s true that the smoothing out of the cuts across this Parliament will give charities a bit longer to adapt to the squeeze on their income, this does not represent a let up in the overall scale of the cuts (except, of course, for defence spending).

Although I have confidence in the sector’s resilience, this budget for me represents further difficult times ahead for charities. A financially secure sector is vital to ensure that charities can continue to provide the essential services to people and communities that it already does, and adapt to the changing nature of demand of their services as the welfare state is rolled back.

09/07/2015 – 16:38 – AOB

Tube strikes and other things have tied our time a bit today, but my colleague Anjelica will be putting up an analysis of the IFS’s views on the budget and the impact on charities shortly.

I have been pouring over the Office of Budget Responsibility’s Economic and Fiscal Outlook (the more important of the two documents released on budget day) today and here a few things for charities to keep in mind.

1) Osborne the Keynesian 

As I said at NCVO’s EVOLVE Summit recently (see slide 4), Osborne has a habit of easing up on austerity because he knows the damage it can do economically and politically. As the OBR says in the first lines of its EFO

“The new Government has used its first Budget to loosen significantly the impending squeeze on public services spending that had been penciled in by the Coalition in March. This is being financed by welfare cuts, net tax increases and three years of higher government borrowing.” 

Alongside the welfare cuts, this is the most significant change in government policy that will impact charities from this budget. Of course where the cuts fall will determine how much time the sector has to adapt to them. Last Parliament, the Chancellor frontloaded cuts on local authorities which hit charities particularly hard. We’ll see if he does the same thing again in the Autumn Statement. It also doesn’t remove the fact that cuts will be coming, although not on the same scale that had been outlined in December 2014 (£18bn compared with £41bn).

2) What if history repeats itself?

The OBR are pretty honest about their ability to predict the future, they know that they often make mistakes. As the first report in a new Parliament, they have tested their figures by looking at ‘alternative scenarios’. They have three, but one of them is ‘history repeats’ and assumes that the OBR makes the same mistakes that it did in 2010.

“We assume that employment would be around 1 million higher by the start of 2020, implying total growth of around 2 million over the next five years, but that GDP and productivity growth would be significantly weaker than in the central forecast.” p.22

According to this scenario, the Chancellor would miss his targets to run and surplus and have net debt falling. This is pretty significant, because just as in the last Parliament, this may mean longer austerity, and more cuts. The message for charities is: don’t assume that this is the limit of austerity, it may be worse.

3) Consumption is likely to outstrip income growth over this Parliament

This is something for fundraisers to keep in mind over the near future, but according to the OBR, household consumption is going to outstrip household income over the coming years. This is concerning because it effectively means that disposable income is going to be squeezed. This graph below is one I have constructed (apologies for its amateurish nature) and plots medium equivalised disposable household income versus individual donations over the period 2003/04 to 2011/12 in real terms. As you can see, up to the recession, they rise and fall in a pretty similar manner. After the recession, it seems that the generosity of the British public and work of fundraisers managed to keep donations on a level playing field.

FundraisingGraph1

Its a concern because with grants and contracts likely to keep falling from government, donations have to pick up more of the slack. If the pool of donations isn’t growing significantly, then this will make the sector’s finances challenging to say the least.

4) Has George bitten off more than he can chew?

The Right-to-Buy extensions to Housing Associations and social rent cuts could force the ONS to reclassify housing associations according to the OBR. This is what they have to say:

If housing associations were to be classified as part of the public sector, their approximately £60 billion of debt would be added to PSND while the social rent reduction announced in this Budget would increase rather than reduce PSNB because the full amount of the rent reduction would then reduce public sector income, and outweigh the housing benefit and other expenditure savings.

In practice, housing associations legal form as charities would not be changed and the issues around independence would be unaffected. But is George really prepared to add £60bn to the public sector net debt and the associated costs to the public sector balance sheet? It’ll probably go ahead anyway, but I bet they didn’t think of that at the time…

08/07/2015 – 18:38 – AOB

We have now put up our briefing for charities on the Budget and its impact.

You can read it here (pdf).

08/07/2015 – 17:53 – AF

The policy team has finished our analysis of the Summer Budget for today. Apart from some targeted giveaways to a selection of charities, there were limited announcements directed towards charities. However, there were a number of announcements that will have a significant impact on charities that are worth noting – for more details see our post-budget blog.

1) A new National Living Wage to be introduced (NLW)
One of the biggest announcements, and one that will certainly impact charities, is the introduction of a NLW. This will be set at £7.20 from April 2016.We discuss the implications of this in our post-budget blog, but in short CFG believes that the introduction of the NLW will have a significant impact charity employers, particularly those that receive government funding. There has been no specific commitment from the government to reflect this wage increase in the money available in grant and contract funding, although these issues are likely to be decided in the Spending Review held this Autumn.

2) Employment Allowance increased

The government will increase the annual Employment Allowance from £2,000 to £3,000. This will come into effect from April 2016. This will mean that 90,000 employers will no longer need to pay National Insurance Contributions. Whilst this is welcome news it is not clear that this will offset the cost of rise in the minimum wage.

3) £12bn of welfare cuts
The Chancellor announced £12 billion of cuts to the welfare budget to be implemented by 2019/20. The cuts will predominately be made to working-age benefits which will be frozen for 4 years from 2016-17 to 2019-20. This will include Local Housing Allowance and Tax Credits but will exclude maternity pay and disability benefits. This is projected to save £4 billion/year by 2019/20.

4) New Business rates anti avoidance rules to be announced
The Government launched their summary of the responses to the Business Rates Anti Avoidance Review. CFG have today been made aware that the government will be announcing new Business Rates anti-avoidance rules. We will keep you updated.

In some good news, the £17 billion in spending cuts have not been front-loaded into this Budget. Whilst this means that charities will still face government funding cuts, these will be smoothed out across the Parliament and will hopefully be easier for charities to adapt to.

08/07/2015 – 15:06 – CB

Caron Bradshaw, CEO, (@caronlb) has made a quick reaction statement to the Budget:

“There are some really interesting elements which we need to watch out for and some hidden significant costs. 

Devolution risks making the landscape really complicated and uncertain when considering how variations in reliefs across the country might be applied. 

There were worrying undertones in terms of closing the tax gap.   We whole heartedly support a fair system and the minimising of loss to the public purse but this mustn’t mean that charities become the soft target of HMRC. 

The national living wage is to be welcomed but it begs the question will government increase its payments to those providing public services?  If not then this could seriously squeeze the budgets of those providing services to the most vulnerable in our society.

It’s a shame that there was nothing in the budget to address irrecoverable VAT or gift aid reform.  We’re disappointed that government didn’t take the opportunity to start some of these incredibly important and necessary conversations.”

08/07/2015 – 11:50- AOB

We are close to the Chancellor standing up and delivering the budget.

20150708_100358

We’ve got our budget bingo ready to go. Looking out for:

  •  Libor fines for charities?
  • Business rates reform
  • £9 target for the national minimum wage
  • More details on tax avoidance clampdown
  • Gift Aid donor benefits review
  • 3 day volunteering leave
  • VAT rebate schemes and other ‘catch phrases’ from the Chancellor

Charities are unlikely to be the focus of the Budget, but measures announced today are likely to have an impact on the sector. The Chancellor is always likely to keep a few rabbits in the hat to pull out on the day, so expect a few surprises to be in the speech.

We will also get an update on the latest economic forecasts today. As I have blogged about previously, growth matters because the greater the level of growth, the less ‘belt tightening’ that the Chancellor needs to do to cut the deficit. We think that borrowing will be much lower than forecast due to higher tax receipts (particularly income tax and corporation tax) but will the Greek drama weigh on growth in the short to medium term? Will this mean that the Chancellor has to make even more cuts? This is quite important, as I wrote at the time:

“Assuming that the next government aims for run a balanced budget (both capital and resource spending by 2019/2020), if the OBR is right then 3.8% of cuts (as % of national income) are required. If we take the worst case scenario – that the economy is in fact 1.9% bigger than it should be and current growth is unsustainable – then 5.5% of cuts are necessary (1.7% more than on the OBR’s projection). If the OBR is being overly pessimistic and the output gap is bigger (the economy is 4.2% smaller than it could be) then only 1.2% of cuts would be necessary (1.6% less than on the OBR’s projection).”

08/07/2015 – 10:30 – AF

More rumours being circulated in the press about where the axe will fall on the welfare budget. As expected, it seems that children and young people will face significant changes to their benefit entitlements. The Daily Mail are reporting that families will only be able to receive child tax credits for the first two children, and the sun says that most benefits for the under 21s will be cut.

I discussed the potential impact welfare changes will have on charities in my pre-budget blog here

08/07/2015 – 9:12 – AOB

Good morning everyone, welcome to CFG’s #volsecbudget Live Blog. We’ll be regularly updating this throughout the day with insight from CFG’s policy team.

If you want a bit of background on the day, you can check out my colleague Anjelica Finnegan’s pre-budget blog post here and my blog post for Civil Society here.

Already we have a few stories in the morning newspapers which are of interest to the charity sector.

1) Osborne will stretch out the welfare cuts

Its looks like cuts to welfare are now going to take three years rather than two years as originally predicted. The Chancellor appears to have recognised that this would be too painful to implement quickly.

On the one hand this makes little different in the long term if the cuts are the same scale, but it may help beneficiaries that receive welfare payments to adapt and give charities more time to prepare. As Anjelica pointed out in her blog post, welfare cuts are likely to increase demand for the sector’s services. CFG/IoF/PwC’s latest edition of  Managing the New Normal reported that 70% of respondents have said that their charity has experienced an increase in demand for their services in the last 12 months. The same number said that they expected an increase in demand for the next 12 months.

We’ll have to wait and see what these ‘stretching’ of the cuts looks like in practice.

2) Tax avoidance and evasion

The Chancellor is apparently going to be seeking money from ‘tax planning’, suggesting a much broader definition of tax avoidance according to the Financial Times this morning.

Charities have a unique tax position and trustees have a right to engage in tax planning in order to minimise the liabilities of their organisation. This was reinforced in recent Charity Commission guidance on tax reliefs. Including ‘tax planning’ in avoidance would amount to simply increasing taxation say most experts, so we’ll have to look carefully to see whether there are any efforts to expand the definition of avoidance which may catch charities.

3) Public borrowing may be lower than we expected

The Chancellor may have room to reduce the scale of the cuts over the Parliament due to lower borrowing forecasts according to the FT.

Some economists think that the 2015-16 borrowing estimate may be reduced from £75bn to £60bn – that would be a lot of wiggle room for the Chancellor. However, he has already made some expensive tax cut promises such as the raising of the personal allowance (£5.6bn) and raising inheritance tax thresholds £1bn) which will probably eat into a lot of that. However, this could provide some welcome respite for government departments if some of that saving is used to slow down the pace of cuts over the next few years.

Keep refreshing as we’ll be posting new insight throughout the day. Have a good budget day!