Environmental, social, governance (ESG)

Budget Focus: Warning signs for charities in years ahead

It is universally agreed that this has been a very spartan Budget for charities, with good news thin on the ground. My colleague Anjelica Finnegan has been putting together a live blog which goes through the spending announcements bit by bit – as well as expert corporate analysis.

A few big measures may impact on the sector (for example, the £2bn cash injection into social care over three years) but overall there was little directly relevant for charities. However, as is frequently the case, it is not the headlines which will really shape the operating environment for charities but the wider economic trends. These latest trends are contained in the Office for Budget Responsibility’s Economic and Fiscal Outlook March 2017. As usual, CFG has analysed the document for you and here are some key takeaways for charities.

Household disposable income squeezed again It has only been a few years of relative respite, but higher inflation and government policies such as auto-enrolment and the Apprenticeships Levy which are reducing wage growth, mean that real household disposable income growth has been revised down (as you can see from image above). This means that households are going to have less money to spend in the years ahead, then when the OBR last looked at this issue in November. What does this mean for charities? Well on the demand side, households with less money mean that there may be increased demand for services. On the income side, households with less money are not going to be in a position to donate or purchase goods from charity shops. This may compound regulatory and legal changes in fundraising and create a much more challenging environment for charities, particularly smaller organisations, to operate within. Real disposable household income is still growing, which is positive and we not in the recessionary environment we were a few years ago, but charities need to bear in mind these pressures when making plans for the future.

Risk of economy overheating? One of the things that economists often debate is something called the ‘output gap’. What the output gap means is the difference between how fast you are growing today versus how much you could potentially grow without creating significant levels of inflation. An economy which has a negative ‘output gap’ has ‘spare capacity’ to grow. An economy with a positive ‘output gap’ is growing too quickly and this growth is not likely to be sustainable over time. Since the recession, the UK has been judged to have a lot of spare capacity but we have made up some ground since then. However, now the OBR believes that we are reaching the end of that period of ‘spare capacity’ and the levels of growth that we are experiencing are pretty much as fast we can hope for. This means that any chances of faster growth eliminating the deficit and avoiding the need for extra tax rises or spending cuts are rapidly diminishing. If anything, the OBR believes that we are growing just a little bit too quickly (0.2% of GDP). This isn’t anything to worry about it in the short term, but over the coming years, if the performance of the economy does not improve (i.e. we don’t get more productive or sell more goods/services) then we are at risk of higher inflation or the economy overheating and falling into recession. It is generally accepted now that we are probably closer to the next recession then we are to the last. This data is another warning that we are past the time where the focus was merely for growth for growth’s sake in the recovery from the financial crash and moving into a period of greater economic instability, with the risk of recession becoming higher.

Inflation is not predicted to increase any further…for now A piece of good news for charities (and households) was the OBR’s view that inflation was not likely to increase any faster over the coming years when compared to its previous forecast in November 2016. Inflation is still set to increase, peaking at 2.4% in 2017, and then returning to 2% by the end of the decade. However, further increases would have been damaging for the charity sector and further erode income. That being said, the OBR’s prediction is still based on relatively low oil prices and no significant falls in the pound. If either of these changes, then we could see further spikes in inflation. Charities need to be prepared, particularly for post-Brexit currency instability.

Business rates rising – good and bad  Business rates income for councils is set to increase significantly towards the end of the Parliament, as local authorities collect 100% of the business rates income their raise. On the one hand, this is positive, as councils are facing large funding pressures and rising business rates income will be needed to meet demand. For charities that receive local government grants or contracts, this is welcome news. On the other hand, as charities are increasingly paying business rates significant increases in this bill are going to have an impact on the income available in the sector. We are predicting that the charity sector’s expenditure on business rates could hit over £400m by the end of the decade. This data confirms that the profile for business rates is a getting stepper in years ahead.

Brexit – where is the money going? There was a lot said about Brexit, but not much was said about where the money given to the European Union is going to go. This may be due to nervousness about what any ‘divorce’ might cost. But to end on a bright note for charities, the £12.6bn which the OBR thinks we are spending on the EU in their view is being “recycled fully into extra domestic spending”. Where that money goes, who knows? But there is a potential £12.6bn in 2018/19 that is as of yet, unallocated…maybe we can convince the Chancellor that some of that should be invested in social infrastructure, such as charities and social enterprises, not just robots and roads. Dare to dream?

This post was last reviewed on 27 February 2019 at 16:40
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