Analysis: Charities need to prepare for a local government funding revolution

Andrew O'Brien
Andrew O'Brien

Every quarter CFG, with the support of Kingston Smith and James Hambro & Partners, compiles a free Economic Outlook Briefing for charities that analyses how the latest data impacts our sector. We also try and delve into a particular topic that affects charities and provide expert analysis. For our most recent edition, we’ve been looking at local government which remains the most important source of government income for the sector.

While Ministers have been talking a lot about Northern Powerhouses and elected Mayors, there has been a quiet revolution when it comes to the future funding of local government in England. Before the Coalition, around 60% of local government’s income came from central government grants and 40% from council tax. Already this has fallen by half, with only 30% of funds coming from central government. By the end of the decade, it will be close to 0%. Why should charities worry?

Well for those that rely on local government income things are going to be much more unpredictable, as if it wasn’t enough already. For those working in affluent areas, the upside risks (i.e. tax revenue outperforming expectations) will outweigh the downside risks (i.e. tax revenue underperforming expectations). Charities could see more funding become available as less is clawed back by the Exchequer. But for those working in disadvantaged communities, this could less a long slow strangulation of government funding as government it won’t compensate areas if they see shallow drops in tax revenue or if revenues stagnate. Despite the fact that demand for services is likely to increase over time.

Unfortunately, the good work that charities do is often first on the chopping block when councils need to make quick savings. So the risks that come from this arrangement are likely to be pushed down the chain by councils towards charities and other providers of services. For organisations already operating in a challenging operating environment, it will only get more challenging.

But as Head of Social Sector Engagement at Big Society Capital, Geetha Rabindrakumar, points out local authorities are getting much more innovative when it comes to using their limited resources. Social Impact Bonds, loans for asset purchases, using pension funds to public service reform and working capital to deliver preventative services are just some of the ideas.

However there is a concerning lack of accountability when it comes to the ‘devolution revolution’, which Tony Armstrong, CEO of Locality, talks about in the briefing. Alongside NAVCA, they have come up with five principles for devolution to ensure that it prioritises social inclusion and strong local economies. At the moment, our sector is not well represented in these new devolved structures and this is likely to mean that social challenges are given less attention than business needs. This would be a big loss for beneficiaries and we need to do more as a sector to make our voices heard.

The latest economic data is also a mixed bag for our sector. Low inflation means that costs are not increasing significantly, but growth has slowed. On the jobs front, unemployment continues to come down. This should increase the pool of potential donors but wage growth has slowed, meaning that disposable income has not rising significantly. This means that households are still under a lot of financial pressure. Less wage growth is also going to have a big impact on public finances. A slowdown of just 1% compared with what was forecast last November will cost the Chancellor £5bn over the next four years. This, combined with other factors, means that most forecasters are predicting that the Chancellor will axe spending again in order to balance the books at the Budget. Even those charities with money to invest are finding it tough, with fears about Brexit and volatility in shares making it hard for charities to make a decent return.

As charities get ever more complex, it becomes ever more important to understand the key economic trends. Hopefully this briefing provides a useful starting point.

Andrew O'Brien is Head of Policy & Public Affairs at the Charity Finance Group

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