Big Choices Ahead for the Third Sector

26/11/2012 13:18 GMT | Updated 25/01/2013 10:12 GMT

The overall fiscal context

The Local Government Association's forecast this week that local authorities face additional funding cuts of over £1billion next year is devastating news and without question, will adversely affect the voluntary and community sector and their beneficiaries.

This latest forecast of further cuts comes on top of the largest ever reductions in local authority grant and expenditure which were a result of the coalition government's Spending Review in 2010. It also comes in advance of the Chancellor's Autumn Statement due next week and the next Spending Review in 2015. The even worse news is that these cuts do not take into account the projected shortfall of £48bn in the government's deficit reduction plan recently identified by the SMF and RSA recently.

Local authorities are also bracing themselves for the impact on their finances and communities of the government's changes to housing benefit and council tax benefit - the latter being significantly underfunded by central government leaving local government and/or claimants to plug the gap. The social and economic impact of the wider austerity, public expenditure and other welfare reforms along with the failure of the economy to grow can only add to the pressures on local authority services. In particular demand for adult social care is predicted to grow significantly over the next few years. The cold, hard reality is that demand pressures are not abating.

In addition, all local authority public sector partners are also having to cut their budgets, as are government departments.

So where is the sector?

The prospects for public expenditure over the next five and likely ten years are dismal for those who believe in collectively-funded, collectively-organised services. Government can adopt a different macro economic approach to deficit reduction and a different balance between tax increases and cuts but whatever there will be less money.

This is of significant interest and concern to many charities and voluntary and community organisations. Many have traditionally relied on local authorities and the wider public sector for much of their revenue through grants and increasingly public service contracts. Consequently, many have seen their funding from the public sector cut disproportionately relative to other areas of public expenditure. Of course some local authorities and others have protected and in some cases even increased their financial support to the voluntary and community sector - but we are talking here about a small minority.

Charities and the voluntary and community sector face a treble whammy.

First, the public expenditure cuts will hit their revenue. Second, charities and the wider voluntary and community sector are seeing donations decline. And third, the impact of the wider public expenditure cuts, welfare reforms and unemployment are increasing the demand for many of the sector's services and support.

The trouble is that what the wider public sector has yet to fully understand is that most voluntary and community sector organisations are unlikely to be able to step in and fund what otherwise would have been financed by the public sector, even if this was a legitimate and prudent use of charitable funds, which actually it probably is not.

Then truth is that charitable income is limited and cannot be guaranteed so there can be few long-term commitments about its use. It is usually given for specific or general purposes rather than to subsidise public services. If charities choose to raise money to compensate for short falls in public funding, then they need to be explicit about this with donors and potential donors. Charitable income has ideally been used to innovate; to push the boundaries of and add to services being financially supported by the state; and to campaign for changes to public policy that would benefit a charity's beneficiaries; and not to subsidise the state.

Tough and tougher times

Many in charities the voluntary and community sector are being forced to make hard choices about how they use their scarce (and in some cases, almost non-existent) charitable income. A growing number of charities rely on the public sector for almost all of their income.

Others are finding that they no option but to close services or to reduce them; make staff redundant; increase their reliance on volunteers; and of course, some are going bankrupt. The tragedy is that some are being forced to go into bankruptcy in order to escape commercially harmful public sector contracts. Frankly, this is an appalling state of affairs at a time when the government claims it wants 'more' third sector public service provision. Mergers, takeovers and administration is and will, I predict, become ever more common across the third sector.

Out of adversity can new opportunities arise

Some new charities have been established to address the social consequences of austerity and welfare changes - for example the fast growing number of food banks,raising all their funds without public sector support. Others are seeing new opportunities opening up as the public sector looks to collaborate with the sector in the delivery of public services - often through some form of competitive outsourcing.

Some businesses which contract to the public sector to deliver public services are wishing to work in partnership with the third sector - although there is the constant anxiety that some are seeking to exploit the third sector as 'bid candy' and/or a poorly treated element in their supply chains. Experience to date has been mixed on the nature of business - third sector collaboration.

Some of the more entrepreneurial charities are using social investment loans to enable them to create the necessary capacity to win public service contracts. However, they will need to be assured of future revenues against which to bid. And smaller organisations may not have the capacity or balance sheets against which to borrow.

The reality is that they and others in the sector all too often discover a massive gap between the policy commitment to third sector contracting and the requirements of expensive, longwinded and bureaucratic procurement processes and procurement conditions, designed for multi-national corporates rather than small, local community organisations. Government and the wider public sector must address this urgently.

Hard choices based on values and mission

Trustees and senior executives of charities (whether large, small, national or local) in the face of the changing and ever harder external environment should be asking some fundamental questions including:

• how can we best use charitable income and resources to fulfil our mission?

• should we subsidise public contracts? And if so on what basis; and how do we ensure that this is not the start of a slide down a long slippery slope to charitable substitution for the state?

• should we use our own money to step in where the public sector has failed to provide and/or has withdrawn public funding but where there remains a need?

• should we withdraw from or seek to minimise the financial impact of an existing contract:, and only bid for and run contracts that are fully funded?

• what should the balance be between service provision and campaigning?

• how far are we prepared to campaign against macro-economic and fiscal policies which are the cause of the more specific symptoms that we find at a service or client level; and to promote alternative policies?

• how far are we willing to campaign for alternatives welfare and other specific government policies that are harming our beneficiaries?

• how can we ensure that we are aware of the impact that our organisation and its activities make?

• should we consider a merger, acquisition or being taken over as the best way of securing the fulfilment of our mission?

In my view, there needs to be firm and resolute leadership from the sector's national organisations. The sector must be prepared powerfully to express its voice to argue against national and local policies (as well as the underlying economic and wider government policies) which are harmful to communities and beneficiaries. It has to make last minute representations to the Chancellor in advance of the Autumn Statement.

It has to be pragmatic in terms of using its resources and service delivery, whether contracted or not, and must take 'informed' decisions on these matters. This requires an increase in the sector's commercial skills and capacity; and a firm resolution to remain focused on mission and values.

The sector also should find common cause with others, including local government, which itself is the suffering from central government cuts; and in return should be seeking involvement in local budget, strategic commissioning and place shaping decisions. There should be joint representations to central government. It must be prepared to work with local authorities forced to make hard and painful expenditure decisions.

The sector has evolved throughout its long noble history. Now, it is time to apply traditional values and principles in a modern setting.

It must decide if and where to compromise, and when to resist - even if this is uncomfortable. This requires strong, focused leadership at national and local level; listening carefully to and involving beneficiaries; and being prepared to change, whilst always remaining true to mission. The third sector should not simply accept what is happening to it and to its beneficiaries. It has to be strong and resolute in speaking out for social justice, equality and decency - the essence of the sector.