The significance of what will be announced on 25 November cannot be understated. In combination with the changes announced in the summer Budget, the £20bn of departmental spending cuts Mr Osborne is set to announce will define the voluntary sector’s operating environment for the next five years and beyond.
Key commissioners’ spending settlements
The settlements agreed by the government departments that commission the most will largely define the nature of public services in the coming years. The scale of the cuts being trailed will likely mean fewer services being commissioned, further pressure on unit costs or outcome-based payments under new contracts, and a continuation in the trend of larger contract sizes.
Around a third of the sector’s income comes from government sources, of which over 80% is for contract delivery. If government departments are commissioning substantially less, this will have a knock on effect on sector income and dependent charity services. Where departments outsource more instead of commissioning, voluntary organisations will lose out as contracts increasingly go to large, private sector firms.
Some parts of the sector are more reliant on income from government sources than others, with many of the most dependent sub-sectors overlapping with the departments due to see large cuts. These sectors can expect to see the greatest falls in income from government sources.
Source: NCVO Almanac
Devolution and the local government spending picture
Perhaps the most dramatic changes to service delivery will occur at a local level. DCLG has already agreed to a 30% budget cut over four years, and the chancellor has announced that by 2020, local authorities will keep all of their business rates income, and be able to compete for business by lowering their rates.
The LGA data I discussed last week anticipates funding for everything outside statutory services to fall to 40% of current levels. As a consequence, public service delivery at a local level will increasingly focus only on the provision of statutory services. There are rumours (see BBC News) that the chancellor will allow local authorities to raise council tax by 2% specifically to fund social care costs, but some councils (see Guardian report) have already said that in practice this would raise only a fraction of the shortfall they are facing.
The likely effects on local voluntary organisations will be profound. Firstly, demand for a whole range of services currently provided for by local authorities will no longer be met by them, and there are already indications from some authorities that signposting people to voluntary organisations will form part of their strategy for service reduction.
Secondly, many charities operating at this level will be at least partly dependent on income from local government commissioning and grants – local government income represents over half of all income from government sources. As existing contracts and grants fall off after April 2016, these organisations will face a cliff edge in their funding as local authorities either choose not to recommission services, or increasingly employ single large contracts to reduce transaction costs, making them inaccessible to smaller charities. In this latter scenario, forming consortia will increasingly become one of the few viable ways for charities to secure local contracts.
A sigh of relief?
HMT’s business rates review is due to report by the end of the year, but it’s very likely we’ll hear more about it on Wednesday, as its conclusions will form part of the wider funding picture. We recently wrote to ministers (see Civil Society report) asking for clarity on the preservation of the £1.4bn mandatory relief charities receive, but did not get a conclusive answer beyond an acknowledgement of how important the relief is. We’ll be watching this space closely.
Any second thoughts, George?
The chancellor has been widely called upon – including by some in his own party – to change or slow the extent of the tax credit cuts announced in his summer budget. Any such climb-down will be welcome news for low-income households – but it should be noted that without further delaying his fiscal surplus target or raising taxes, Mr Osborne will likely have to cut even further elsewhere.
Another Summer Budget policy that may see further funding commitments is the so-called National Living Wage, which is going to lead to considerably higher costs in some lower-wage sectors. Representatives of the social care sector among others have called on the government to ensure that contracts are sufficiently resourced to pay the new minimum (BBC News). The Resolution Foundation have an interesting analysis of the figures. Given the high profile of both the policy and the care sector, Mr Osborne may have chosen to set aside funds to cover any shortfalls in government contracts, or may just leave it to the council tax measure described above.
What happens next
NCVO will be live tweeting as the autumn statement and spending review conclusions are announced from around midday next Wednesday 25 November, and following up with our analysis soon afterwards.