Budget 2015: What the voluntary sector should expect

Tomorrow may be the last Budget of this parliament, but it’s likely only the first of several ‘fiscal events’ this year. Depending on the election outcome, we may see an emergency Budget shortly after, and possibly a spending review – in addition to the autumn statement.

Much like in 2010, budgets are going to appear like buses, so it’s important that we are clear about the bigger financial destination in mind when commenting on tomorrow’s announcements. You can follow our immediate reaction to the chancellor’s announcements using the hashtag #volsecbudget, and we’ll be publishing further analysis and sector reaction in the coming days.

The leaky red box

Blogs and newspaper articles are buzzing with snippets of what might be announced. Now that we’re weeks away from the election, the focus is on whether the chancellor will use the budget to shore up his ‘long term plan’ message, or go for a pre-election giveaway, or try to do both.

With that proviso in mind, the government has previously indicated it intends to make a further £12bn of cuts to welfare spending. Excluding pensions, these cuts will have to come from the remaining £99bn pot. There aren’t yet any details on where within that pot the cuts will fall, but they’ll undoubtedly lead to even greater demand on voluntary sector services.

The minimum wage is set to rise to £6.70 an hour, which may have some impact on the cost base of the sector, particularly for charities operating in the social care sector. However, NCVO UK Civil Society Almanac data shows that at the start of 2013, the lowest paid quarter of sector employees on average earned £7.78 an hour. With these charity employees already earning more than the minimum wage, many charities may be unaffected by the rise. Either way, in its voluntary sector manifesto NCVO has argued that charities should be enabled to pay the living wage, particularly via commissioning that recognises social value. This should remain a priority for the coming years’ budgets.

Also leaked is a likely rise in the inheritance tax threshold for married couples from £650,000 to £1m. The government has done good work (particularly earlier) in the parliament to encourage giving generally and legacy giving in particular (eg support for the Legacy10 campaign). Our hope is that there continues to be a long term view of how to increase legacy giving at a time when government funding is tightening. We’ll be looking closely at what the threshold increase means for legacy giving.

Allegedly due too is the appearance of the long-awaited £40m local sustainability fund, announced this time last year. What initially began life as the blue light fund, this seems to have taken rather a long time to appear, for reasons not entirely clear. £40m isn’t going to transform the voluntary sector; nevertheless, the investment is very welcome and as such NCVO set out its vision for the fund as a grants-based model, focusing not only on financial strength, but also building capacity to demonstrate impact, bid for contracts and grants, build paid-for services, and promote good governance. We’ll be blogging further on how closely the fund meets our hopes for it.

In with the old…

Surprise giveaways aside, we’re likely to see several updates on existing policy commitments.

Chief among them will be the business rates review announced yesterday. The Treasury discussion paper envisages a major overhaul of business rates, potentially away from a pure property tax model. The paper recommends no changes to the existing exemption for charities, but there are potential implications for local government income, which could have a knock-on effect for voluntary sector organisations. We’re of the view here that this is really important: business rate relief is hugely significant to a wide range of charities. NCVO will be responding to emphasise the importance of the exemption, but probably more than ever we’ll look to your support on this to let us know what the relief means for you.

We’re also due an update on donor benefits and gift aid, announced in the autumn statement. HMRC will be consulting the sector and other stakeholders over the next year as part of a wide-ranging and thorough review of the current system. It’s going to take some time though – the earliest any changes are likely to make it into law is in the Finance Bill 2017. And – ahem – it would do small charities the power of good to reform and improve what for us was a brilliant idea, the Gift Aid small donations scheme. Our manifesto (PDF, 1.6MB) has some suggestions (see page 10), but bringing forward the planned 2016 review would be a good way to start polishing this rough-cut stone into the diamond we all saw.

We’ll be keeping a close eye on whether the introduction of the mooted diverted profits tax includes an exemption for charities, which may otherwise have serious implications for trading subsidiaries.

Lastly, further VAT exemptions for parts of the sector (as we saw in the autumn statement for air ambulances) would be helpful, but more welcome would be the start of a wider debate about reducing the irrecoverable VAT burden the entire sector carries. Similarly, there’s a conversation to be had about changing corporate Gift Aid to better benefit charities.

The taxman cometh

Whatever giveaways the chancellor announces tomorrow, their impact is likely to be incidental compared to the scale of the cuts planned over the next five years. Most analysts are also predicting tax increases in the early years of the coming parliament.

The speed and severity of the cuts will depend greatly on the election outcome. Under current plans, the IFS estimates that 98% of the deficit reduction for the next parliament would come from spending cuts, with the remaining 2% from tax rises (compared to an 82:18 split during this parliament). The bulk of this will have to come from departmental budgets. If health, pensions and foreign aid remain ring-fenced, then the cuts needed from remaining departments will be transformative – estimates range from around 40-50%. The emerging consensus is that the first five years of fiscal consolidation has seen the majority of ‘low-hanging fruit’ claimed in terms of efficiency changes. Further substantial cuts to departmental budgets will likely have to be achieved by dramatic changes to service levels and delivery.

It seems improbable that reductions in spending of this magnitude will not hit voluntary organisations with a double blow – a rise in demand for services as eligibility criteria are raised by public bodies, and a reduction in funding for the services that organisations are commissioned to provide. The National Audit Office is already warning that cuts are being made with little understanding of their impact (see FT interview [subscription]).

Conclusion: we’re part of the solution

Public spending presents obvious challenges for voluntary organisations, but it also represents an opportunity for the sector to help shape how services for the public are delivered. So, again, we’d like to see the ‘financial events’ over the coming year to address the opportunities we’ve laid out in our manifesto: a shift to preventative spending and a review of public service markets would be high on our list, with a view to creating more effective and efficient public spending and better outcomes for users. We also think that government and our sector can leverage more resources from wider society when we work in partnership, so the trend should be to build on successful scheme such as the endowment challenge, which matches giving to community foundations.

And finally, politicians of all parties are currently burnishing their pro-business credentials. It’s difficult to find a Minister or their shadow not pictured wearing a hard hat or a high-vis jacket these days. Let’s have the same enthusiasm for a sector that employs three-quarters of a million people, spends £38bn every year on goods and services, leverages the volunteer effort of one in four of the population, and ultimately will be core to solving the biggest headaches faced by future chancellors.