Andrew O'Brien: Budget focus - warning signs for charities in years ahead

The head of policy at the Charity Finance Group reports on a threadbare Budget for the sector

Andrew O'Brien
Andrew O'Brien

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 that goes through the spending announcements bit by bit and includes expert corporate analysis. A few big measures might affect the sector (for example, the £2bn cash injection into social care over three years), but overall there was little of direct relevance for charities.

However, as is frequently the case, it is not the headlines that will really shape the operating environment for charities but the wider economic trends. These are contained in the Office for Budget Responsibility’s Economic and Fiscal Outlook for March 2017. As usual, the CFG has analysed the document for you and here are some key takeaways for charities.

Household disposable income squeezed again

It has been only 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. This means that households are forecast to have less money to spend in the years ahead than when the OBR last looked at this issue in November.

What does this mean for charities? On the demand side, households with less money mean there might 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 might compound regulatory and legal changes in fundraising and create a much more challenging environment for charities, particularly smaller organisations.

Real disposable household income is still growing, which is positive, and we are 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": the difference between how fast you are growing today and how much you could grow without creating significant levels of inflation. An economy with 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, the OBR now 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 we are growing just a little bit too quickly (0.2 per cent of GDP). This isn’t anything to worry about it in the short term, but if the performance of the economy does not improve in coming years (in other words, if we don’t get more productive or sell more goods and services), we are at risk of higher inflation or the economy overheating and falling into recession.

It is now generally accepted 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 when the focus was merely on growth for growth’s sake in the recovery from the financial crash and are moving into a period of greater economic instability, with a greater risk of recession.

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 with its previous forecast in November 2016.

Inflation is still set to increase, peaking at 2.4 per cent in 2017, then returning to 2 per cent by the end of the decade. But further increases would have been damaging for the charity sector, further eroding 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, 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 keep 100% of the business rates income they raise. On the one hand, this is positive, because 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, 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 be more than £400m by the end of the decade. This data confirms that the profile for business rates is getting steeper 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 might be due to nervousness about what any "divorce" might cost.

But to end on a bright note for charities, the £12.6bn that the OBR thinks we are spending on the EU is, in its view, 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 yet, unallocated. Maybe we can convince the Chancellor that some of it should be invested in social infrastructure, such as charities and social enterprises, not just robots and roads. We can but dream.

Andrew O’Brien is head of policy and engagement at the Charity Finance Group. This article first appeared on the CFG website.

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