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26 November 2015, 17:42

Insights on the Spending Review from the IFS

Today I attended the Institute for Fiscal Studies (IFS) analysis of the 2015 Spending Review. The IFS is keen to emphasise that Britain is still facing austerity. IFS’s Paul Johnson notes that if the Chancellor is unlucky over the next five years, then ring-fenced cuts will have to be revised, the benefit cap will be exceeded and growth and wages will not rise as quickly as the Treasury hopes. Government departments will see average cuts of 17%, with local government seeing a cut of 55% by the end of 2020 and impacting on public service contracts. While there was a lot of scope for changes in this spending review, I will focus on the two main issues potentially affecting charities.

The devolution revolution

While the press are busy focusing on the U-turn in tax credits by Mr Osborne, it is the changes to local government that the IFS are keen to focus attention. Dubbed the ‘devolution revolution’ by Mr Johnson, the reforms to make local government financially autonomous could radicalise the way grants work across England. The impact for charities could be huge but at the moment is largely unknown. The news that local authorities will soon have full control of their business rates, a change in school funding is seen by many as a radical shift in how councils gain money.

The IFS was keen to emphasise that the change to business rates was not actually a new policy, but rather a rebranding of an underused policy. However the wider scope for control of business rates given to councils, and the reduction of government funding over the next parliament, does mean that this ‘new’ policy will have to be used by all. As we’ve noted in both CFG’s live blog and briefing, it is still unclear whether this policy will mean that councils will have full control over charity rates and this will have to be carefully watched.

While much has been made of the 2% councils can increase their taxes by in order to support adult social care, there are issues around this. Firstly, the IFS are keen to point out the uncertainty around how central government will be able to monitor that the 2% increase will be spent on adult social care. There is a worry that as councils see cuts and squeeze in other areas, they might divert funds, thus weakening other public services that need funding, placing greater strain on charities.

Additionally, as local authorities are moved into being financially autonomous the rates that they can raise through the business rates will vary greatly across England. Once a council has sold of their assets, they might be stuck without the ability to generate additional finances. While the Chancellor has promised that councils will only keep 50% of business rates and with the other being distributed around the country, the IFS note that by 2020 councils will be able to keep 100% of business rates. This raises the question of whether funding in the long term will have to be reintroduced to help deprived areas. The IFS predict that in real terms council spending power will be reduced by 7% over the next parliament, though this could widely vary across England. The differences are down to two key policies, one the business rate policy as highlighted above and the reduction of grants.

Unsurprisingly, the areas of most deprivation in the UK will probably face the hardest struggle. Already subjected to cuts of up to 40% compared to more affluent councils, deprived areas can see this pattern continuing. For charities, this shows a repeated pattern of local authorities that need their services the most being the least likely to afford them. Mr Osborne’s desire to make devolution across the UK a key part of his legacy could have serious consequences for charities. While cuts will still be felt across the government departments, and with the risk that economic growth is not guaranteed, charities helping local authorities with public services are likely to still feel the strain.

The caring Chancellor?

George Osborne has long trumpeted the belief that he was going to change the benefit system to help working families, but investigating below the surface reveals that this might not be the case. Though the Chancellor’s U-turn on tax credits is being highlighted as him listening to the people, the IFS are quick to point out that this U-turn was pointless as the impact of the introduction of universal credit will be just as much as the proposed restructuring of tax credits. The legislation that was passed in July 2015 was not met with the criticism of tax credits, despite the fact that it will mean that an estimated 2.6 million working families will be worse off by £1,600 while 1.9 million will be better off by £1.400. For 1.8 million non-working families there appears to be little change in the negative effects.

While in the short run low-income families will not feel a change in their income, but the long term impact could be huge. The poorest families could face up to 8% reduction in family income in the long term. While the IFS predict that economic growth is based on 50% luck, this means that if the UK dips again families that are already struggling under the continued recession will severely suffer. As charities are already coping with the strain of supporting these people and with potential issues around charity rates and reduced funding we could see charities being unable to support the poorest families in the long term.

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