Should governments step in to bail out charities?



John Copps

John Copps

Imagine a large, well-respected charity delivering services to people in desperate need. The sort of charity that everyone knows and loves and, if it didn’t exist, would need to be invented.

Suddenly, and unexpectedly, it finds itself in trouble. Revenues take a dive and its balance sheet is worth only a fraction of what it says in the books. The treasurer resigns and it is haemorrhaging cash. Funders quickly lose confidence and begin to withdraw support, knowing that by themselves none of them can stop the rot. With general consumer confidence very low, the public are not in a generous mood. Whichever way you look at it, the charity is in dire straits.

What should happen next?

In 2008 when the world’s major financial institutions were in difficulty and private investors could not be found, governments stepped in. Banks were nationalized or part-nationalized on the grounds that letting them fail would inflict too much harm on the economy and cause too much human suffering.

The case could be made that our hypothetical charity deserves the same treatment. But is it ever right for government to bail out a charity? I posed this question on NPC’s blog a few weeks ago and the responses I got fell into two polar opposite camps.

For some, government involved in running a charity was unthinkable. Charities must guard their independence at all cost and remain distinct from government. Under no circumstances was such an action justified.

For others, the question was a pragmatic one. If the world would be a considerably worse place without the charity, then the ends justified the means. If it could not be rescued by a major donor, the public or another charity, then it was government’s duty to step up.

This mirrors the memorable debate in the US senate around the time of Lehman Brother’s collapse. Pre-crisis, private ownership of banks was a sacred cow. But as panic hit the markets, who can forget the quivering rage of senators who had to put their principles behind them.

Fast-forward two years and here in the UK, like every major economy, the government is preparing an austerity package to tackle its budget deficit. As part of the measures to get a grip of the country’s ailing finances, central departments are facing up to 40% cuts.

Worryingly, a number of our big charities depend on government for a large proportion of their income. Business models that stood up in the good times are about to be severely tested. Privately, I know many of the top CEOs are nervous.

With the cuts in public spending laid out by the Chancellor, much of this nervousness is likely to turn out to be justified. We already know that our children will still be paying for the decision to bail out the banks in a generation’s time. I wonder if they might end up paying to rescue charities too?

John Copps is Head of Sector Research at New Philanthropy Capital, London. Email

Tagged in: Financial crisis Government New Philanthropy Capital

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