Government funding cuts force charities to rethink terms of engagement
November 2010
The £81bn of cuts announced by the chancellor’s comprehensive spending review (CSR) in a bid to ‘turn around the debt supertanker’ of £43bn a year in debt interest came as little surprise.[i]
Political differences are more about timing and degree rather than direction, and making the numbers work is going to significantly change the public sector and voluntary sector landscape.
An unsustainable dependence
The charity sector received £12.8bn of government funding in 2008/09 – over a quarter of its total £50bn income – and, according to CharityFinancials.com around 1,500 of the top 5,000 charities received funding worth in excess of £5.0bn. A closer look at the total amount of annual expenditure in relation to the assets of the organisation (asset cover) shows that of those 1,500 in receipt of state funding, 556 would wipe out the value of their present resources within a year if their current rate of expenditure remains the same. And drilling further down, 04 out of this 556 have statutory funding representing over 50 per cent of their total income. So the cuts will affect their charitable activities, not to mention their survival.
Summary of the cuts
Central and local government. Central government departments are staring at cuts averaging 19 per cent with local authority funding cut by 7.1 per cent each year over five years. Grants from central government to local authorities will no longer be ring-fenced and grant funding will be ‘simplified and streamlined’. The Treasury states:“This means that in total, local authorities will have greater control over more than £7bn of funding from 2011-12 which is moving into formula grant, being unringfenced or is new funding for the SR10 period, so enabling them to better meet local communities’ needs.” There is an inevitable impact on the volume, value and terms of funding agreements between the state and the charity sector. As DSC chief, Debra Allcock Tyler observes: “the headline decisions have been made, but it will be some time until we know the full implications. The most important decisions for most charities will come from the reaction of local authorities, in the wake of significant cuts to their settlements.”
Welfare. The CSR increased the cuts in welfare announced in the Emergency Budget last June by £7bn, bringing total welfare savings to £18bn per annum by 2014-15. Of particular interest to the voluntary sector is the new Work Programme, which is designed to ‘provide personalised support for those with the greatest barriers to employment’. The Treasury spells out the results-based terms of engagement: “Private and third sector providers will be paid on the basis of the additional benefit savings they secure, thereby incentivising higher performance levels and delivering net savings for the taxpayer.”
The State Pension Age equalisation at 65 is being brought forward to November 2018. Both the male and female pension age will then increase to 66 by April 2020. This will affect around 5.1 million people. This is designed to save £30bn and, in theory raise £13bn through increased tax and NIC receipts — optimistically assuming there will be no discrimination against older workers by then and there will be enough jobs to keep them all employed.
Culture, media and sport. Overall resource spending has been cut by 24 per cent over the review period and the core DCMS capital budget will reduce by 32 per cent. The total administration budget for the Department and its arm’s length bodies will be reduced by 41 per cent. Nineteen DCMS public bodies face the chop or ‘reform’ and include the UK Film Council and Museums, and the Libraries and Archives Council. Other bodies facing cuts include Sport England (30 per cent), English Heritage (over 30 per cent) and the Arts Council (over 50 per cent). This will severely affect charities dependent on sports and arts grants.
Charity Commission. The regulator’s funding from the Treasury is being cut by 27 per cent by 2015 and it anticipates the loss of 140 staff as a result on top of job losses already announced. Resource funding reduces from £29.3m for 2010/11 to £21.3m by 2014/15. A public consultation on its strategic review will be opened shortly. A review of the 2006 Charities Act, which sets the Commission's statutory objectives and duties, is expected in 2011 to facilitate a review the legislative framework. Chair Dame Suzi Leather said: "This is without a doubt an extremely challenging settlement for the Charity Commission, and naturally we are disappointed. Clearly a very different approach is now needed - business as usual is simply not an option. We will need to make significant changes to the way in which we engage with charities and the public, the services we offer, and the scope and shape of our regulatory activity. This will not be easy, but we are determined to continue to develop the Commission as an innovative, confident and flexible modern regulator, within the resources available. “
Summary of support measures
Capacity building. The Cabinet Office will make available “around £470m support for the Civic Society organisations sector, including a £100m fund to help charities, voluntary groups and social enterprises make the transition to a tougher funding environment, to work with us to build a big society, and make the most of the opportunities it will bring.” The funding includes provision for and endowment fund (which by definition means the capital can’t be spent) and the National Citizen service. There was also further confirmation of its commitment to a Big Society Bank, although the capitalisation of this remains unclear.
The transition fund is aimed at charities with an annual income between £50,000 and £10m with low levels of reserves and high dependencies on government funding that are particularly at risk of destabilisation by the cuts. As Chris Priestley of Withers puts it: “This offers welcome assistance to the charities worst hit by cuts and fuller details about eligibility criteria and who will be responsible for the distribution of funds is eagerly awaited.”
Housing. The government will be investing £6.5bn in housing over the period – cutting capital spending on new homes from £8.4bn to £4.5bn to somehow deliver ‘150,000 new affordable homes over the next four years.’ The other £2bn is designated for the Decent Homes programme. Part of this reform will be a new scheme that allows social landlords to charge new tenants a weekly rent at between social and market rates for as long as individual circumstances require it. Details are to follow and existing tenants are not affected. The National Housing Federation points out that for new tenancies, average rents could rise from around the average of £85 per week to £250 per week, at the same time as benefits are being capped.
Social care. An additional £1bn of funding has been made available by 2014/15. Councils were last year allocated £14bn for adult social care, the largest non-protected item in their budget. Significant additional funding to support social care, providing support for the most vulnerable older people in society – an additional £1bn by 14-15 for pooled NHS/local authority budgets, and £2.4bn of grants for social care rolled into the ‘formula grant’. This does represent an opportunity for charities delivering social care services – provided the contract terms are right.
Alzheimer's Society interim chief executive Ruth Sutherland said that the charity was pleased that social care had been acknowledged as a priority issue by the government. "However, the cuts in local authority budgets mean there will still not be enough money, as the number of people with dementia and the cost continue to grow. This is likely to have a detrimental impact on the services" , she said.
Education. Although the overall schools budget seems to have been protected, capital spending has been cut so the budget drops slightly from £58.4 to £57.2bn over the period. However, according to Sudhir Singh of Baker Tilly, more outstanding schools who did not apply for academy status in the summer are taking up the opportunity now with around 30 a month currently converting. Although each school shares the services provided by the local authority budget, the internal time spent by the authority is much greater on problem schools than the high-performing ones – which tend to be the ones going down the academy route. Singh predicts: “At some point local authorities will find it difficult to sustain their education departments because when academies take their share of local authority spend out of the pot, the local authority will be left with the schools it has to support most on a fraction of the original funding allocation.”
What this all means to the charity sector
The implications for the charity sector are far-reaching but the areas that are most likely to dominate future planning are:
Service delivery contracts. While there is a general theme of local authorities having more freedom with their budget (e.g grants not being ring-fenced), there is less of it go round. This presents an opportunity for charities to pick up areas of service provision that the local authority chooses to outsource, but not at a price that drives them into the ground. The CharityFinancials figures underline the problems the payment by results deal sets out in the CSR (especially if those results are linked to Exchequer savings). Many charities may not have the capacity or the time to wait for assessment of whether they should get paid for what they have done or not. They have still taken the cost. See also the findings from the recent PKF/CFDG survey.[ii] CFDG’s Caron Bradshaw cautions against charities chasing contracts that leave them no safety margin.
Decline in grant funding. Sudhir Singh points out that that payment by results means sometimes you are not going to achieve the agreed results and reminds charities that clarity is needed that both parties need unambiguous definitions of what ‘results’ really mean in a contract. This means that charities need capital behind them to cushion them against outcomes that fail to cover their costs. He explains: “The old model of grant funding in effect allowed failure because you had income security. Results-based contracts mean you are paid only if you succeed. And the danger of that is that unless you either have the expertise to guarantee success or the capital plus some willingness to take a risk, some services will be withdrawn.”
Social enterprise and social philanthropy. It was unfortunate that Sam Younger’s remarks about having to "move from a grant mentality - the expectation that they will be supported because their heart is in the right place - to a contract mentality” were somewhat misinterpreted by NAVCA.[iii] The Charity Commission’s new CEO was merely articulating a reality that attitudes to funding will have to change. New forms of equity investment and funding to provide much-needed capital should be explored but require a different way of thinking. Singh’s reminder that “entrepreneurs are, by definition, risk-takers and charities, because of their governance structures will be prudent, somewhat slower decision-makers ” raises the fundamental issue that the structures in place to support the sector in this new funding landscape also need to change.
[ii] Managing risk – moving towards the vision. See www.charitiesdirect.com/caritas-magazine/spending-cuts-in-danger-of-crippling-sectors-service-delivery-capacity-and-the-scope-for-resurrection-816.html
Author: Clarissa Dann
Clarissa Dann was the editor of Caritas as well as an HR and management online service,he People Bulletin until July 2011.
She is now the editor of the specialist trade finance magazine, Trade and Forfaiting Review which can be viewed at www.tfreview.com but does write on charity finance and investment from time to time.
Clarissa has a background in legal and professional publishing, as well as business journalism and holds an MBA from
Mark Jackson, 25/10/2010
Dear Clarissa Thank you for sight of your article. I find your comments about whether older people whose pensionable age is changing will be able to find employment interesting. They will have to, and our country will need them to do so. According to Fredrick Nerbrand, head of global investment strategy of HSBC Privare Bank (quoted in the Telegraph on 8 May 2010) at present there are 4.1 British workers per pensioner but there will be fewer than 3.5 in 2020 and 2.8 by 2030. The "baby boomers" are expected to live longer in retirement because of advances in health, but they may not be healthy. We can expect many to have more than one diagnosed disease and there will be a great increase in dementia numbers as they live longer. But, care home numbers have been reducing due to over regulation and since 2009 the number of homes with single adults living in them has risen to 50%. Thus we will have a severe lack of family carers and also care home beds at a time when demand will be increasing. Successive governments must establish a strategy now to deal with what has been called a "demographic timebomb". I do not see that long term thinking in the CSR, with the single exception of the changes to pensionable age making us all have longer working lives. There is nothing to help establish the infrastructure of care that will be needed. A second observation I would make concerns the intended outsourcing of services from the statutory to the voluntary sector. This will have to be policed by Ministers. The loss of the Commision for the Compact is not encouraging. Already we have seen evidence where the public sector will close ranks to sustain expensive jobs, instead of openly encouraging other providers to offer services. There will need to be a complete change of attitude across all middle ranking public sector managers that the state does not have to provide, and that they may well get far better value for money by outsourcing services. In particular this must happen in the NHS, where the decision not to reduce the NHS budget may lead to complacency and the maintenance of the status quo. With best wishes Mark