What does the economic data mean for charities?

November 26, 2015 at 11:09

The Spending Review gets all the attention, but the most important document in many ways is the Economic and Fiscal Outlook by the Office of Budget Responsibility. This sets out the framework that the Chancellor is able to make his decisions and tells us a lot about the impact of the choices that he has made.

The full document is nearly 250 pages – but we at CFG have gone through it for you to pull out the key statistics that will impact on the sector.

Austerity slowed

There was general head scratching in the media and the in sector yesterday when the Chancellor made his statement. We had all been geared up to anticipate potentially bigger cuts in spending and potentially the loss of funding in key areas for the sector such as the Big Lottery Fund or business rate relief. However, none of that came to pass. The reason is simple – the Chancellor has decided to slow down and reduce the level of austerity.

As the OBR says:

“Over the full five years of our forecast, from 2016-17 to 2020-21, the Government’s decisions add a cumulative £18.7 billion to public sector net borrowing.”

The Institute of Fiscal Studies and other commentators strongly suspected that the last Coalition Budget (in March 2015) was never going to be implemented because the level of cuts were too high. In July, the Chancellor significantly slowed down and reduced the level of cuts. He did the same thing yesterday (as this graph demonstrates).

Changesingovernmentspending1

As the OBR says:

“Taking account of expected underspending against the Government’s plans, we expect RDEL spending to be cut by £10.4 billion in real terms by 2019-20. That is around 40 per cent less than the £17.9 billion cut by that year pencilled in by the Government in July and only around a quarter of the £41.9 billion peak cut pencilled in by the Coalition in March (which was to be delivered a year earlier in 2018- 19).”

This is the biggest news for the sector and is a positive development. It is still going to be very tough for charities on the ground, but as the graph demonstrates, it could have been a lot worse had the Chancellor not decided to make the cuts shallower. Slower and lower cuts will make it easier for charities to adapt and it should help government to implement the cuts better with more dialogue with organisations. Whether this translates into reality remains to be seen, given the historic issues that charities have reported due to poor commissioning practice. But unlike in the last Parliament, where cuts (particularly in local government) were initially frontloaded, commissioners won’t be able to blame the pace of the cuts.

 

Uncertainty for local government

The other key message for charities, given our connections with local government, is the continued uncertainty for this part of the sector. Although the Chancellor made a big announcement about the devolution of business rate income and the abolition of the uniform rate – the OBR says that there is still uncertainty about their future finances.

“Our business rates forecast is subject to some further policy-related uncertainty following the Government’s announcement of its intention to localise all business rates and to provide some additional discretion to local authorities in setting business rates. However, the Government has told us that this intention does not yet constitute Government policy, so we have not reflected it in this forecast.”

While overall spending by local government will rise over the Parliament in cash terms, local government are still facing £10bn of demand-led additional costs and £4bn of cuts that still need to be implemented – so the spending environment at a local level is never going to disappear.

However, the business rates devolution may compound the difficulties for local government. Whilst the business rates income is predicted to rise by over £5bn in cash terms, the OBR has actually revised down the level of business rates income over the Parliament (see the red highlighted below).

Businessratesconcern1

One of the concerns that many have about the devolution of business rates is that it could compound inequalities of funding across the country. As the green boxes show, forecasts of central government receipts have improved since July – but business rates have actually declined (the OBR expects them to raise £2.5bn less than they predicted in July). The structure of business rate devolution as announced so far also means that there is a power to cut business rates, but no power to raise them. With the big cut (50%) in the central government grant, local government finances may become a lot more volatile and this will have a big impact on charities that depend on local government.

The uncertainty also means that the OBR expects local government to save more money:

“…the uncertainties associated with the Spending Review changes to funding and other Government reform intentions will prompt local authorities to reduce spending and to add greater amounts to reserves again from next year. We assume that they will increase their reserves by £2.4 billion in total between 2016-17 and 2018-19, which is higher in each year.”

The government has said that it wants to ‘encourage’ councils to use these reserves. The OBR doesn’t appear to hold much hope out for that. However, it does show the considerable levels of reserves that local government are generating and that could be used for preventative services that would reduce long term demand and save local government in the long term. However, with increased volatility of funding, councils are likely to become more (not less) risk adverse. The movement from grants to more outcomes based funding (i.e. dependent on local economic growth) could actually reduce innovation and change in commissioning in the local government and be more costly in the long term.

A few other interesting pieces of data

  • Apprenticeships Levy – 2017/18 is the starting point for the Levy generating income. So this will give large charities time to adapt their business models before it comes into place. But we need to make sure that it is structured in a way that supports the work of the sector and gets the right skills into charities.
  • Real disposable household income growth slows – the OBR has slowed its forecast for growth in real disposable household income per capita. As you can see in the graph below, it has taken a long time for this to recover and there is a strong relationship between disposable income and fundraising income (if people have more disposable income, they have more they can potentially give). The slowdown means that the potential for fundraising income from the public is smaller than was predicted in July. Although the overall picture remains positive, the slowdown shows that household finances are still in flux.Realhouseholddisposableincomepercapita revision1
  • 100,000 civil service job cuts – general government employment is going to fall by 100,000 not the 50,000 that was predicted in the media. Although this is still an improvement on the 400,000 jobs that were predicted in July – it will still have an impact on the capacity of government to engage with the sector. This has been driven by increased spending (relative to July Budget) and the decision to limit public sector pay awards to 1% over the period.