Do we Value the Charitable Sector?

As the Coalition Government slips worryingly through its third year, the value given to the Third Sector (or the Civil Society) is more uncertain. The Big Society is being challenged as it has not been for many years through financial austerity in national and local government. This has had a dramatic impact on charities in the UK that have been set up to serve the community and who rely on government (national and local) income. In Osborne’s last budget, charitable giving has been hit hard by limiting that which is tax allowable to £50,000 in any one year for individuals.

The charitable sector is strong in the UK, but threatened by this reduced government spending, reduced spending by companies and potential reductions in individual giving as we tumble back into recession.

The variety of charities is vast – from those set up to further medical research, those working to improve health and welfare, those set up to do international development, social clubs and societies, sports clubs and a host of others. Even schools are charities under UK law. This makes it hard to understand the role they have in society.

However, they stand alongside the Governing sector (government) and the products and services sector (business) and the fourth sector or fourth estate – journalism. Maybe that’s also where many NGO’s lie these days – funded to do investigations into society as newspapers once were. The fourth estate now contains many NGO’s – the likes of ONE, Enough, Global Witness, parts of Greenpeace, Oxfam, Save the Children, Amnesty and many others – where charitable work continues alongside the investigations and journalism and lobbying.

The Charitable Sector – Filling the (Massive) Gap

The role of charities is therefore complex – even if in the minds of most funders it is primarily to provide help to those sectors of society that are left out by the State and by the remainder of civil society. Charities exist to drive funds and assistance locally, regionally, nationally and internationally where it is deemed that government does not, cannot or will not.

Whether it is DEC (Disasters Emergency Committee) or similar assisting in emergency international funding, or Oxfam or Save the Children, or local hospices, each has been set up by individuals who saw a gap in care and raced to fix the problem. The whole area of social business has also sprung up in between business and charities. The roles are evolving as niches appear where need is believed to occur – it is a complex and adaptive system that is constantly evolving.

Each society is developing its own way from the bottom up – very few governments are sufficiently totalitarian to impose its blueprint on its people. In North Korea, this may be so but elsewhere government and business leave gaps that the market cannot satisfy and that civil society attempts to fill.

If the role of the charity sector (outside of the fourth estate incumbents) is to fill the gaps that business and government leaves – because they identify the need first, provide funding that is otherwise unattainable, provide better expertise, more focused concern or whatever other motivation – then how should society be developing to maximize its positive effectiveness? While this note focuses on the UK, it is as relevant to the international community.

Valuing the Charitable Sector

 

It is now time that government in the UK (and elsewhere) took a long, hard look at the charity sector and saw it as a real sector of the economy. The last budget was a good example of how taxation and benefits were structured towards businesses and individuals and where civil society (or the Third Sector) was seen as a peripheral activity. This was a slight on that sector.

The seemingly thoughtless and throw-away issues such as the limit of £50,000 on tax-free giving was typical of government not seeing the organized part of civil society as being defined in any special way. It is surely time that civil society – the charitable sector – is defined as separate from the business and individual taxed community and that we establish a set of income and expenditure statements from government that shows clearly how well or badly we are doing in that sector – at least in money terms. This would then clearly show how well or badly governments are also doing.

At the time when the Natural Capital Committee under the newly appointed Dieter Helm is calling for an accounting for natural resources / natural capital, it is time for the charitable sector to be similarly “valued”.

Impact Valuations – What does this mean?

On a basic level, an understanding of the tax taken from the sector (mainly through VAT, plus income tax and national insurance – both company and individual – paid to staff) should be provided annually at least by Government – maybe the office for National Statistics. That can be set against the tax benefits that may arise through gift-aid benefits for those who provide funds to charities. At the very least, an Annual Report should be made by Government (almost a CSR report) but verified and commented on by Charities Commission and maybe more independently-minded organisations). This would be completely different to the current Charities Commission Annual Report – which is a micro-analysis of how it spends its £29.4m. The report has to be a macro-economic one.

Stage two would be an analysis of the sector’s public “goods” – a value of the huge and positive impact that charities have in the UK and internationally. This will be its “Impact” at a macro-economic level.

If natural assets can be “valued” (providing an accounting value as Dieter Helm wants), then so can charitable activities. This is being demanded by many funders before (certainly trusts and foundations) before they fund charities, while individual givers often want to know more about an individual charity beyond the “gut-feel” instinct that propels them to give.

This macro-economic valuing would give the charity sector an independence. It would mean that civil society could begin to understand just what contribution the charitable sector provides in terms that begin to be understandable.  Nick Hurd, the Minister for Civil Society, would have a far more meaningful brief. Currently, he sits in the Cabinet Office (under Francis Maude) – but, the brief is very wide and less economically focused than it should be. The key, of course, is how we go beyond pure economic modeling (our GDP of quantity not quality) to measure the benefits we receive from natural capital / assets (which the NCC is set up to assist with) and from civil society itself.

Just as the value of education is not the money that the government spends on education per head (based on the Academy where I am Chair, £9.35m of income is spent on 1450 students – a “value” of £6,448 per annum – although at least this has some calculative affect. Even here, of course, the cost is reduced by the government’s take of income tax from staff, National insurance from staff and schools), so the value of charities should be assessed and the (often adverse, sometimes positive) impact of government intervention should be made known.

This is not a simple task, but a critical one. As we enter a world of real austerity (especially in Europe), we are underestimating the cost of cost savings on society – at best, we ignore them.

We are well into the 21st Century – time we thought in 21st Century terms and valued those things that materially contribute. The NCC may be making a start with natural capital: it is a good time to start making real progress on valuing the macro-economic benefits of our charitable sector – before it is too late.

Banks and Time Travel

So, Mr Stephen Hestor of Royal Bank of Scotland was pressured into giving up his bonus by a Parliament that threatened to vote against it.

So, Mr Fred Goodwin gets be-knighted by a committee advising the Queen.

Ancient institutions – the royal family and the House of Commons – are playing that old game (which the politicians invariably lose) about who is in charge – government (be they democratically elected or through birth) or the banks? Governments (at least the democratically elected bits) change with the whims of the electorate – banks and banking survive because money is the root of all our economic prosperity – banking is the provider of dreams.

It is a very old game. Since well before Nathan Rothschild strode above the travails of mid-19th Century politicians who were desperate for his bank’s money to fund their economies and wars, banks and bankers have formed their own super-economy – one that economists and politicians have progressively failed to explain or manage.

While the Royal Bank of Scotland saga focuses on bankers’ pay and the balance of reward between employees and shareholders (i.e. who should gain most from banks’ profitability), this misses the crucial issue completely.

What is it that makes banks and banking so critical to world economies in a way that no other industry is so that we are willing to allow them monopolistic rewards – the rewards akin to a totalitarian regime? More than this, how is the overall financial services industry – of which banks are just part – changing and how does it need to change to best serve people and real wealth producing companies, people and our governments in the 21st Century?

What are banks for?

At a simple level, banks are there to provide the alchemy to the economic system – they are asset transformers (David Llewellyn – the New Economics of Banking – 1999). Banks and financial institutions transform money received into money loaned. They transform short-term into long-term. They make tomorrow’s needs available today by making money work hard.

This transformation process (the essence of monetisation ever since the ending of barter economies) has been a crucial bedrock on which economic growth is based. The wealth effect of the asset transformers has been to bring forward tomorrow’s growth into today or next year’s into this or the next generations into this one. This time travel – the bringing forward of the future – is seen whether it is Governments spending trillions today to pay back in future generations, companies bringing forward projects on the basis of payback in three to five years all the way to purchases made on credit cards to pay back (or not) in a month or six. Banks and financial institutions have developed ever-more sophisticated ways to drive the transformation.

Sub-prime problems in 2008 showed, like most banking crises, the fault line in the world’s financial system – the cracks that often appear in that bedrock.

Pressure builds up just like the earth’s crust before an earthquake as financial institutions offer more and more high risk promises to transform the future to the present. In this case, promises to those who could never repay to buy properties they could never afford. It could have been corporate over-stretching. It could have been government over-spending – as it has now become: a massive sovereign debt crisis in the western economies.

The short-term bonus culture of the banks was and remains a symptom not the problem. The battle between senior bank employees and their shareholders is not the problem. The essential risk nature of banking (and there never has been a safe period when bankers were just bank managers who would not give loans – this is a myth circulated while banks were providing high risk loans throughout the corporate and national world) is that the asset transformation process (this time travelling capacity to bring forward tomorrow into today) is deemed to be so critical to the world’s economic system that banks (and many other financial institutions) are deemed to be vital and their survival guaranteed by governments. This has led inexorably to the current sovereign debt crisis in Europe and the ability of senior banking staff to act as monopolistic winners over both the banks’ shareholders and the rest of the economy. As David Kynaston wrote about the reasons for more recent banking excesses : “the most important is the arrival of the insidiously tempting one-way bet.”(David Kynaston – City of London – 2011)

So what (if anything) can be done to change this?

The Threat to the Time Travellers

As Llewellyn’s paper in 1999 suggested (and this was before the banking mayhem of 2008), banks are undergoing major changes that technology (for example) is forcing. Banking (for so long run by insider networks who knew each other and government ministers intimately, went to the same schools and spoke the same language) is now more open to other institutions (whether supermarkets or Virgin) and trading companies are better equipped to tackle the markets directly (corporate bond issues being the main way of doing this).

Yet, traditional banking methods and the banks’ place in the economy (especially in London) feels similar to what it has done for 200 years even if the competition is growing from other institutions and from overseas (Chinese banks – owned and dependent on the Chinese State – especially). Defence of our banks by our government against the newly developing nations financial institutions is one impediment to progress.

This could be a tipping point, though. Money and monetary systems will remain the kratogenic blocks on which economies slide and which cause massive earthquakes from time to time, but the banks’ position within these systems will change. Digitisation and the spread of wealth into the developing nations of China, Brazil and elsewhere will fracture the monopoly position of western banks and the West’s financial institutions. This may well be a good thing as monopolies are inherently massive impediments to improvement and sustainable growth.

A problem is that western economies that are dependent (or believe they are) on their banking system (London and New York especially but Paris and Frankfurt and elsewhere hate the prospect of losing their monopolies) will fight tooth and nail to prevent or at least slow the pace of change.

The other impediment to change is that those who are in charge of the change process – governments – don’t really understand the nature of banking. Tinkering at the edges (whether bonuses or knighthoods) is a waste of effort. Enlarging capital bases and splitting the casino elements of banking (which would be allowed to fail) from the more traditional lending elements of banks is moving to the right lines if (and this is the critical issue) there is an understanding of how this addresses the massive risks that banks are engaged in (and always have been). Many have argued that this splitting (providing only banks which are less susceptible to macroeconomic shocks should be given last resort assistance) is a cornerstone requirement.(Rochet, J-C Macroeconomic Shocks and Banking Supervision – 2008)

The enlarged capital bases and splitting of key activities into Chinese wall separated entities are hints of the crucial risk factors but not the answer in themselves. For risk and uncertainty are two entirely different features. Risk can be assessed, uncertainty cannot – a set of unknown unknowns. Individual bank risk at the micro-economic level may be manageable through higher capital ratios but take all the banks together and does an amalgam of micro-economic management techniques bulk up to a macro-economic solution?

As digitisation and competition (from other corporations and from newly developing countries) grow, it will lead to more opportunities to time travel. Yuan-based promises are no different from $ or € or £. The risks just get higher.

The critical issue is to manage the degree of tomorrow’s future wealth that we are willing to risk having now. Just like burning oil and gas today has a direct impact on our future generations, so monetary time travel can suck in tomorrow’s wealth. Just ask the Greeks (and Portuguese and the 50% of young Spanish without jobs) whether they agree with monetary time travelling – taking too much of the future for consumption now.

This is a hard call. Growth (at least that measured in the altogether faulty way that we measure GDP – quantity not quality) is at the core of our being. Banking has fuelled that core essence. Reducing the scope of banks and other financial institutions to bring tomorrow into today is a huge macro-economic decision that national banks (like the Bank of England) have to take on responsibility for.

National Banks – their role in macro-economic management of the Banking System

This is not just about bank regulation – it is about the how (at a macro-economic level) the risks and uncertainties are managed on a national and on a world-wide basis. Systemic and earth-shattering breaks in the system can only be better managed when international macro-economic indicators are understood and somehow controlled.

Transaction taxes, capital ratios, splitting bank operations are, I repeat, micro-economic devices. Macro-economic devices now need to be devised and international mechanisms established that regularly evaluate the banks’ individual exposure to macroeconomic factors. (Buch, Eickmeier, Prieto – Macroeconomic Factors and Micro-level Bank Risk – 2010). Building a model of this exposure using 21st Century macro-economic modeling techniques and used within an international banking framework, could be the starting point to better management of extreme banking risk.

But, it will take a transformation of international mindsets and international agreements to take 19th Century economic and political models into the 21st Century. Technology has moved on and presented individual banks and financial institutions with the ability to further manipulate economies and left governments in their wake. This needs some rebalancing and governmental management institutions need to be set up to oversee the critical part banks play in our world and to establish the macro-economic monitoring systems that are needed to avoid economic collapse.