Like many others, I was surprised by the Chancellor’s sudden change in approach at the last Autumn Statement. Helped by the Office for Budget Responsibility’s data revisions which found £27bn in additional revenues (mostly from increased VAT receipts), the government was able to reduce the level of spending cuts and even give a number of surprising giveaways.
While the economic situation hasn’t changed much since November, what has changed is the impact on the UK. GDP growth and wage growth have slowed which, combined by the poor performance of the stock exchange, have had a negative impact on tax receipts. This means that the Chancellor is now facing a £18bn black hole in the public finances according to sources within the Treasury.
Mr Osborne’s usual response to such challenges has been to increase cuts in spending, including welfare. The government is nominally following a 80/20 split between spending cuts and tax rises in order to balance the books. But as many economists have warned, after the first wave of cuts under the Coalition, savings in public spending are becoming much harder to find. For charities, which have seen £1.9bn in cuts in government income from its peak in 2009/10, spending cuts have had a big impact.
However, reports over the weekend have indicated that the Chancellor is not going to go down the road of trying to significantly more spending cuts. Yes, he has hinted at extra cuts worth around £3.8bn a year. Although these will be challenging, they are not as large as previous form would anticipate. The primary method that he appears to be using to cut down the deficit is tax increases.
The government is committed to pursuing tax cuts for personal taxation, it has even passed a law saying that they cannot raise VAT, National Insurance or Income Tax for individuals. It has also committed to further cuts in corporation tax over this Parliament. So the Chancellor is fairly limited in the number of taxes he can raise get him back on his deficit cutting track. Given the unpopularity of tax rises on individuals within the Conservative Party, the focus is squarely on employers, including charities.
Although the Chancellor has dodged significant reforms to pension reliefs for individuals, rumours over the weekend suggest that he could be considering cutting or even scrapping Employer’s National Insurance Contributions relief for pensions. This would be a big cost increase for businesses, with the Guardian estimating the cost of the relief at nearly £14bn a year.
Another well-trailed measure has been increases to Insurance Premium Tax – a tax that was also increased in the last Budget. The government wants insurance companies to take the hit, but they are likely to pass the costs down to customers. Charities, which like other businesses, take out insurance for their activities are likely to see costs increase. At a time when the funding of the sector is ever more volatile, cutting back on insurance is simply not on option for many organisations.
The government is also going to be changing tax loopholes for individuals that set up personal service companies. Reports say that this will only affect civil servants or public employees, but it could cause charities significant issues if it is extended more broadly. Many organisations have had to adopt more flexible employment practices in the midst of precarious funding environments, and this tax change could increase costs for charities.
Glimpses of the new form of austerity could have been seen in the decisions made in the last Budget. The National Living Wage for example, whilst a welcome move to help the lowest paid, was an effort to cut the welfare bill by increasing costs for employers. It is estimated that increases will cost charities £500m by 2020. Increasing the burden on businesses will have an impact on charities, as far as their operations are concerned. Changes of this nature would also have a wider impact than cuts in public service spending.
Reform to business rates, and the all-important business rate relief for charities, could be another way for the Chancellor to pay down the deficit. We’ll need to watch the outcome of the review closely.
All Chancellors keep a few surprises up their sleeve for Budget day, but the shape of things so far seems to indicate that the next phase of austerity could see the operating costs of charities increase.
Andrew O'Brien is Head of Policy & Public Affairs at the Charity Finance Group