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Fog of uncertainty makes post-election planning difficult for charities

Today the Institute for Fiscal Studies unveiled its Green Budget 2015.

Post by CFG

The Green Budget is an attempt by the IFS to analyse the impact of spending cuts, tax rises and other policy decisions of the government and parties. It is well worth of a read (though perhaps not all 300 pages of it!), but I think that there are three key messages for charities.

1)  Government spending with charities is likely to be squeezed by more than we think

There has been a lot written about the impact of government spending cuts on the sector over the past few years, and with good reason. Income from government is worth over £13bn to the sector (2011/12), and many charities are engaged in the delivery of public services in order to improve communities and achieve their charitable objectives. However, whilst you might think that the second half of the government's spending reductions would be kinder to charities, in fact it is likely to be even tougher than the first. Why? Because the  current government has taken the decision to increase capital spending through departments, putting a greater squeeze on resource spending. In crude terms, this means that the government is going to be focused on building more things rather than spending more on services. Charities are not usually engaged in the capital side of governmental spending (although if the Social Value Act was extended to goods and works, maybe it would be!), so this could have a big impact on how austerity impacts the sector. In the next parliament (if we follow the Coalition's Autumn Statement plans) overall cuts to government spending will be around 2.3% between 2015/16 and 2019/20 (in real terms). However, this is masked by a rise in annually managed expenditure (which includes pensions and other benefits) of 9%. Take this away, and departmental spending  (i.e. education, transport, justice, defence etc.) will be cut by 14.1% over the same period. But if you peal away this layer and look at resource and capital spending within departments, the figures are stark. Capital departmental spending over the next parliament is planned to increase by 7.3%, but resource (i.e. service spending) departmental spending is due to fall by 17.3%. This means that the operating environment for charities is likely to be much more choppy, than the overall spending cuts may indicate.

2)  By how much can the UK economy grow? 

How much the next government will need to cut is very much linked to the question of how much the UK economy can grow over the next five years. A lot of this discussion focuses on the jargontastic phrase "the output gap". The concept itself is relatively simple. The output gap is the difference between how big the economy is now with how big it could be, without creating inflation. The Office of Budget Responsibility (OBR) has calculated this gap at 0.5% of GDP  in 2014/15 (i.e. the economy could be 0.5% bigger  in 2014/15 without creating any adverse effects) and the Coalition's deficit reduction plans are built on this assumption. This has an impact on deficit reduction because the bigger the economy can grow, the smaller the 'structural deficit' is (i.e. the bits of the deficit that is left behind after accounting for increased tax revenues, reduction in welfare spending due to growth) and the fewer spending cuts the government needs to make. The bigger the output gap, the smaller the structural deficit and thus less cuts are needed. The smaller the output gap, the bigger the structural deficit and thus more cuts are needed. But as was pointed out by the IFS today, it is very difficult to measure the current size of the UK economy, let alone what the potential size of the UK economy may be. So the OBR's predictions may be wrong. 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). As we get more data, we'll be in a better position to judge how big the output gap is. But in terms of the cuts, let's hope that the OBR has been overly cautious. Otherwise, the next Chancellor may be forced to cut spending even further over the next five years.

3) There are real differences in approach from each party

I recently made this point at an Institute of Fundraising debate on the election, but for the first time in many years, there is a real difference between each of the parties in terms of approach to government spending. None of the major parties is proposing to end the cuts completely, but the pace and scale of the cuts is different depending on whether the Conservatives, Labour or Liberal Democrats are in charge. Its hard to spell out exactly what the difference is, because the parties may change their policies during or after the election campaign. But focusing on the main bit that counts for charities that receive income from government (departmental resource spending), if the Conservatives lead the next government the IFS predicts cuts of 8.8% between 2015-16. If the Liberal Democrats lead the next government, the IFS predicts cuts of 3.5% to departmental budgets. If Labour leads the next government, then the IFS expect cuts of 2.7% to departmental resource spending. These are significant differences. Again, there may be changes made during or after the election campaign but the changes at a departmental level can be stark. Looking at the Ministry of Justice for example, departmental spending (this includes both capital and resource spending) under the Conservatives could fall by 18.3%. Under the Liberal Democrats it could fall by 14.1%. Under Labour, it could fall by 7.2%. These are merely illustrative, but they do demonstrate that the significant uncertainty that charities face in planning for the future, particularly if they are engaged in public service delivery.

A fog of policy uncertainty

As we head to the next election, therefore, charities are operating in the midst of a fog of policy uncertainty. Whilst we know that there will be more cuts to come, the scale and pace of these cuts is not clear. Moreover, this blog has only considered the spending side. If we take into account the tax side, there are other risks to the sector. It is common for governments of all colours to raise taxes shortly after an election. A rise in VAT, for example, could increase the cost of irrecoverable VAT, adding to the sector's already sizeable burden. CFG will be looking at the election closely, but if you have any views or thoughts, please leave a comment below or email (policy@cfg.org.uk).

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