The Economic and Fiscal Outlook has been published by the Office for Budget Responsibility and this gives a picture of the future shape of the economy, this is important for charities, in some ways more important than the spending measures and tax changes announced by the Chancellor. So what have we learnt about post-Brexit Britain? And what does it mean for charities. Here are my thoughts on the key graphs/statistics.
Reducing the deficit is really important...until it isn't
Its a bit of a cliche, but every Chancellor seems to want to be virtuous when it comes to public spending...just not yet. As this graph above indicates, although Brexit has damaged the public finances (with the deficit calculated to be £18.1bn larger than it was in March) Mr Hammond hasn't decided to make additional cuts. He has borrowed his way out of trouble, and is actually increasing the amount spent by government departments over this Parliament (over £2bn this year, and £1bn a year in 2019-20 and 2020-21) so he has eased up on Austerity. Despite the rhetoric. - although there is a crunch in 2021-22 this is more because the government doesn't have a plan rather than because it is actually planning to cut that spending. This is positive for charities as it means that additional cuts will not be needed and there may actually be some slack, if the government is prepared to pump more money into services if the economy further detriorates. There are some very big spending pledges here as well particularly a £6.7bn business rates reduction road map (details in Spring). As our Chief Executive said on Twitter: This should give us confidence for the rest of this Parliament - if a strong enough case can be made, there is the potential for flexibility and now that the Chancellor has given himself a very loose framework for cutting the deficit ("as soon as is practicable") there are opportunities.
The economy is weaker, pay is weaker, inflation is higher
What has been the impact on Brexit? The OBR is roughly in line with the City and Bank of England in terms of growth forecasts, but it also makes estimates on what the size of the economy could be and how close we are to reaching that (or if we are rushing ahead too quickly and risking higher levels of inflation). Ultimately, since March it believes that the output gap has got bigger, this means that there is more slack in the economy and ground to be made up. A larger output gap over a long term could make us permanently poorer, but it seems the OBR is assuming for now that the Brexit will just lead to a short term impact on or economic potential but that this can be made up over time. Charities depend on a strong economy, and this means that the impact on fundraising and donations may be short-term from Brexit. But there is likely to be an impact due to rising inflation, weaker productivity and, therefore, lower average earnings. The OBR has revised down its level of average earnings in all but the last year of its forecast period, and this will have an impact on the amount households have to give and spend with charities. The past couple of years of low inflation have given some respite to households, but the collapse of sterling is bringing an end to that. Household disposable income is due to increase this year (2016) but fall by 1.8% in 2017, 0.6% in 2018 and 0.2% in 2019. Charities need to prepare for that, and perhaps also more pressure from staff to increase wages.
Its all a bit funny in local government
Local government accounts for around half of all the money that charities receive, so what happens in local government really matters for charities.
First of all, it seems that the 100% business rate retention scheme is not going all that well. The Treasury and OBR clearly can't agree what the current proposals for business rates are, yet this is going to be critical to the future of local government. We need to see more detail about this, and any potential top ups for local government, and we'll be watching the pilot schemes closely.
On the plus side, the business rates pool of funding has done better than central government receipts. Last time I noted that central government income streams such as income tax and NICs were doing very well, and business rates (in part due to reliefs given away by George Osborne) were falling income streams. Brexit has switched this the other way around, with income taxes and NICs going down and business rates income going up. This is good news for local authorities, as stronger business rates growth will give them more funding. But business rates income isn't evenly spread, and CFG has significant concerns about business rates retention as a system. Council tax has already performed strongly, in comparison to March.
Also there are some interesting spending changes. It looks like local councils are going to be spending more over the next five years (£3.3bn) in comparison with March - which again is positive news. A lot of this will be on adult social care, for which they have been granted the ability to raise council tax. On the one hand, this may mean that local authorities are reaching a fiscal pinch-point where funding sources are getting tighter but demand for services is increasing. Yet, the OBR is not assuming that local authorities are going to spend more from their reserves, they actually assume that local authorities are going to add more to their reserves in the short term due to uncertainty. Charities should be approaching their local authorities and putting the case to them that preventative spending now will help them over the long term. It is also another opportunity to state that 'austerity' rhetoric doesn't necessarily mean that there is no money, it just means that there are tough choices. It is also interesting to note that welfare spending is expected to increase over this period, again due to lower growth but the Chancellor has also not decided to make any further cuts. National Lottery grants are also expected to be slightly smaller, but the change is very small, and depends on people's spending behaviour's post-Brexit.
What did you find interesting?
What did you find most interesting about the statement? How do you think the economy will impact charities? Leave a comment below... PS. You can also download for FREE our latest Economic Outlook Briefing which has more charity specific analysis on the impact of Brexit.
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