An important Budget for charities

We’re having an unusual number of large set-piece speeches from the chancellor this year, but this will be the first entirely Conservative budget for almost two decades. Recent Budgets have had only a few measures directly targeted at charities, such as LIBOR fine and VAT relief giveaways, and some tinkering with the gift aid small donations scheme. We can expect a similar pattern tomorrow, with the bulk of announcements that will affect charities doing so indirectly, via welfare spending cuts and reductions in departmental spending. The bulk of departmental spending cuts won’t however be detailed until the autumn statement – so tomorrow is only part of the picture.

The £12bn question

Osborne’s pledge to cut £12bn from the welfare budget was made almost two years ago, but tomorrow he should, finally, set out the detail of the reductions. Speculation following the election that the Conservatives would not go through with the full £12bn seems to have been unfounded. This is the chancellor’s biggest opportunity to make spending reductions during this parliament, as politically speaking they will become harder and less palatable to make as time goes on.

The government has committed to not cutting the state pension or pension benefits, and will freeze, but not cut child benefit from April 2016. This leaves tax credits (£30bn), housing benefit (£26bn), disability allowance and incapacity benefits (£37bn combined) as the most significant remaining slices of the welfare spending pie.

The Institute of Fiscal Studies (IFS) chart below shows that the distribution of spending in these unprotected areas is heavily weighted towards lower income households, and working-age households with children. It will therefore be difficult for the chancellor to cut in these areas without affecting these groups. Reductions to tax credits will in particular affect working people on low incomes, and any increase in the personal tax allowance is unlikely to compensate for such cuts.

Distribution of unprotected welfare spending

The chancellor has already announced a reduction in the benefit cap from £26,000 to £23,000 in London, and £20,000 outside of London, affecting around 90,000 households. He has also said that from 2017/18, around 340,000 higher income households who live in local authority or housing association properties will be charged market rents.

Beyond these measures, there aren’t many solid details of how and to what extent spending in these areas will change, but potential policies discussed in the national media include restricting child tax credits to the first two children or pegging them back to 2003/04 levels in real terms, removing housing benefit for under 25s and cutting employment and support allowance.

Charities that work with beneficiaries on low incomes can expect many of them to be affected by further reductions in income. Voluntary organisations that fund services using income from benefits (in particular, housing benefit) may be affected due to the reduced incomes of some beneficiaries, due to either the benefit cap or eligibility changes. Demand for debt advice services could also rise.

The £30bn question the chancellor won’t be answering – yet

In his last Budget, the chancellor announced £13bn in cuts to government departments, but much as with his welfare savings, he didn’t give any further details. These cuts won’t be announced until after the autumn spending review, which all departments will be working on over the summer.

However, the IFS thinks that the chancellor’s calculations are off, and that if he is to meet his target of fiscal surplus by 2018/19, then he will need to find £30bn in savings outside of the £12bn of welfare cuts. This translates as a 15.4% average cut to unprotected departmental spending (i.e. outside of the NHS, schools and foreign aid) over the next three years. The Social Market Foundation has also launched a report saying that the spending reductions announced so far are short by about £15bn.

Among these, cuts to local authority funding will be of particular concern to many charities, both in terms of the direct effect on their beneficiaries, and for the potential implications on public service contracts. A JRF report published earlier this year found that the most deprived local authorities saw the greatest funding cuts over the course of the last parliament, and we know from the last five years that cuts to local government funding have tended to be ‘front-loaded’ at the start of parliaments. On the flipside, less departmental spending is likely to translate into less commissioning, affecting charities whose income is based on government contracts or grants, both at a local and national level.

The bottom line is we won’t get a clearer picture of some of the biggest spending reductions until later in the year. What we might see reannounced tomorrow are around £3bn of ‘in-year’ savings that have been trailed over the past couple of months. Of most interest to charities will be a £230m reduction in the Department for Communities and Local Government budget (which won’t be passed on until next year) and a £200m reduction to the public health budget, passed on to local authorities this year via reduced Department of Health grants.

Ones to watch

Big ticket expenditure aside, there are a few further issues worth keeping an eye out for tomorrow:

  • The March Budget contained VAT reliefs and a second round of LIBOR fines for certain charities – it’s possible there could be a further round of giveaways.
  • The government has committed to not raising the rate of income tax, national insurance, or VAT, which between them account for around two-thirds of all tax revenue. If Osborne sticks to this, charities can expect their expenditure in the latter two of these areas to not be affected.
  • We’ve previously highlighted the implications of the government’s proposed extension to right to buy for the voluntary sector. While the proposals will be brought forward via a housing bill later this year, we may get more financial details on the plans in the Budget.
  • The Treasury’s consultation on business rates reform closed on 12 June, so it’s possible the Chancellor could indicate the direction of travel for the government’s review in his speech. You can read NCVO’s joint response here (PDF, 410KB).
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Michael Birtwistle Michael is our senior policy officer, covering issues around charity tax and finance (including social investment) and the impact of the economy on the sector.

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