The new government has made its first significant mistake with regards to charities. It is a school boy error and risks doing real damage to the sector.

The Secretary of State for Culture, Olympics, Media and Sport, Jeremy Hunt, has made an elementary mistake in arguing that organisations should be assessed on their basis of their overheads. Specifically, in a speech yesterday, Mr Hunt said he would be “… asking all grant-giving organisations to reduce their admin costs to 5% of the budgets they distribute.” This builds on an earlier pledge in the Conservative Party’s green paper on the voluntary sector.

Mr Hunt mentioned the Arts Council as reducing its overhead costs to 6.6%, but said it needed to go further. The Arts Council is a public body and, also, a charity. Many grant-making bodies are charities. Assessing the effectiveness or efficiency of a charity by looking at its overheads and insisting these be lower than some arbitrary number is wrong.

Indeed, Mr Hunt’s line was consistent with the formal coalition government’s programme, which states, “We will stop wasteful spending by National Lottery distributors by … restricting administration costs to 5% of total income.”

NPC’s approach to analysing charities, developed over a number of years and based on experience assessing hundreds of organisations, specifically rejects overheads as a meaningful measure of performance. This framework is in our publication The little blue book. As that states, “administrative cost is not a predictor of what a charity achieves” (Box 8 on page 38). In the US a consortium of organisations supporting information about and analysis of charities joined forces to decry the practice of basing judgements on overhead costs. There are no intelligent or thoughtful commentators on charities, or people who work in the sector, who argue this is a good way to think. That is the case in assessing grant-makers as much as it is true for operational charities.

In his speech, Mr Hunt went on, “We must be able to look artists and arts organisations in the eye and assure them that no grants have been withdrawn because too much money is getting lost in the system.” He is absolutely right about this. He might have added that we must ensure the money has been spent well by assessing and evaluating grants, learning from our funding and sharing the lessons with others who might benefit from them. That is how to judge grant-makers—on what they achieve with their funding—and understanding those things costs money. It is what good grant-makers do. Together with simple efficiency of processes, it is how the minister should be judging grant-giving organisations who receive funding from the taxpayer or the lottery.

The Minister for Civil Society, Nick Hurd, is responsible for government policy towards charities. As I argued earlier this week, he should encourage government to take a more challenging position on the sector. But he should also ensure that government does not inadvertently damage charities. Mr Hunt’s comments and policies risk doing such damage. Grant-making organisations, whether public or private, should, of course, be as efficient and effective as possible; and some have historically not been as good in this regard as they might be. But efficiency and effectiveness are not the same as cutting overheads to 5%.

Mr Hurd should have a quiet word with his colleague and tell him about the perils of making judgements based on overheads and encourage him to be more careful in his  policies. Not to do so risks the government developing policies which harm charities and, also, their beneficiaries. And after that quiet word, Mr Hurd might wish to say something publicly to show he understands the right way to think about charities and their costs.

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