Tax

Over the last couple of days there has been a lot of discussion of the Big Society.  David Cameron defended the idea in the Observer over the weekend and wrote that it contained three elements: “devolving power to the lowest level so neighbourhoods take control of their destiny; opening up our public services, putting trust in professionals and power in the hands of the people they serve; and encouraging volunteering and social action so people contribute more to their community.”

Most of the controversy is centred on the third strand.  With spending cuts, many charities are losing grants and that has led to a string of headlines about the Big Society facing a crisis.  Certainly many charities dependent on funding from the public sector are going to see a cut in their income.  Charities receive extensive support from private donations though, so there are other ways of supporting the sector.  The question for policymakers is either how they channel more Government resources to the sector or encourage independent funding.Some people argue you just can’t have a strong charitable or voluntary sector without high spending.  This morning Will Straw quoted Johann Hari saying that:

“The sociologist Amitai Etzioni conducted a major international study of volunteerism. He found that volunteering is highest where state funding is highest, and lowest where state funding is lowest. So high-tax Massachusetts has the most volunteers in the US, while low-tax Mississippi has the fewest. High-tax Sweden has the most volunteers in Europe, while low-tax Eastern Europe has the lowest. Far from “crowding out” volunteers, a big state attracts them, and a small state drives them away.”

Some of those comparisons are obviously a bit dubious.  There are a lot of differences between poor, post-Communist Eastern Europe and Sweden.  And the nature of volunteering, and the extent to which it can be measured, could vary a lot from country to country.  Statisticians could easily count someone volunteering at an old people’s home but not someone caring for their elderly parents.  As a result more developed economies like Sweden and Massachussetts will get too much credit.

We can test that hypothesis in the UK.  This morning the Guardian Data Blog provided data on the number of charities per 1,000 people in different UK regions.  Let’s compare that to state spending as a share of national income, from the CEBR State of the Nation report.

Spending as a share of GDP vs. charities per '000 population

That suggests that across UK regions the pattern is the opposite to that supposedly found by Etzioni, at least with respect to the strength of charities.  They are stronger in better off parts of the UK where government spending is a lower share of income.  More spending is associated with less charity.  From looking at the data, spend per charity doesn’t vary a huge amount so these numbers are pretty reliable.  I’ve removed London as the data is likely to be distorted by national charities and spending on national priorities being disproportionately located in the capital, but the numbers we have would fit the same pattern I think: low spending and a high number of charities.

The R-squared is low, the relationship is pretty weak, but that doesn’t really surprise me.  It improves a bit if you take out Scotland, which is probably an outlier for the same reason London is, and you could improve this simple study using a breakdown by local authorities so that you have more data points.  In reality though, I doubt high or low spending is the direct cause of stronger or weaker charities.  It is an imperfect proxy for other things that actually determine how generous we tend to be.

It seems likely that by far the most important is how much discretionary income and spare time we have.  People put left over money and time, after looking to the needs of themselves and their family, towards charitable work.  If people have more of that they will be more generous.  Hence higher incomes and lower costs (from taxes to utility bills) will leave more room for altruism.

There will be other factors too.  If I was to guess at other factors I would include: cultural and ethnic homogeneity (people are more likely to help people ‘like them’); tax breaks and other policies encouraging donations and volunteering; history – Communism in Eastern Europe almost certainly thinned civil society there for example; and perceived need – which will slightly counteract the effect of higher incomes.  But I think the key is people’s discretionary incomes, so boosting people’s standard of living will yield returns in terms of a Bigger Society too.  When families are squeezed, on the other hand, they will retreat to defend their own interests.

That implies all the policies I have written about recently that could boost economic growth, by reducing the burden on families and businesses, would help strengthen a Big Society too.  Others will have a different view if they think, for example, that more crass Keynesianism is a better economic policy.  It would be a mistake to see the debate over the Big Society as an alternative to the debate over how best to build a robust economic recovery though, the two issues are intertwined.

If we do want separate policies to boost charitable donations and voluntary work though, there are two broad approaches: more state money or stronger incentives for private giving.  The debate so far has mostly assumed the first approach.  The Government hope to balance out cuts in spending with finance channelled from the banks, public sector contracts opened up to charitable bids and thousands of “community organisers” trained at taxpayers’ expense.  The problem with all that is it means charities responding to the priorities of politicians and bureaucrats in Whitehall and town halls, who judge which charities get the grants and contracts.  And it can mean taxpayer funded politics.  I wrote before the election about how the community organisers plan could mean providing substantial public resources to a radical left-wing campaign group.

Encouraging private donations is the way forward.  People will spend their own money more carefully, and more effectively.  They will find the right charities more reliably than a bureaucracy that will find it easiest to engage with bigger charities with the resources to maintain a presence in Whitehall or lobby a council in the right way.  If people have higher discretionary incomes they will be able to afford to give more, so lower taxes in general will help, but specific tax breaks like they have in the United States could make a big difference too.  Cameron has proposed Big Society ISAs, but it doesn’t seem like that idea has much more substance than the Big Society Day mooted before the election.  Incentives for charitable giving are an area where the Government could be more ambitious.