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Nudging Against A Brick Wall?

Britain’s Coalition Government gave another hint today about its Big Society big idea that it hopes will win over the voters, with the launch of an £80 million ($130 million) match fund to get philanthropists to start giving to the arts. Though the fund is a good idea, the government is still tinkering at the edges and more major reforms are needed to get Brits digging deeper for good causes.

Unlike America, where donors have traditionally queued up to sponsor the arts (though less so during the recession), Brits don’t really see opera, ballet, theatre and so on as a big priority for their giving, with only 3% of donations going to the sector. Instead, like many European countries, government has been the arts’ greatest patron. (For an excellent discussion of the pros and cons of these different approaches read Tyler Cowen’s excellent book Good and Plenty.) But, with the public finances in a mess and few votes in supporting opera, art has had to accept a larger than average share of the recent public spending cuts, with the Arts Council (which at the moment hands out £450 million of taxpayers’ cash) taking a 30% budget reduction.

Ouch indeed – hence the new match fund to soften the blow. Critics accurately grumble that most of this money is not additional. But that may not be the point, as long as the match fund can persuade more donors to give. On that, the evidence is promising, judging by the success of a match funding scheme launched by the previous government to get philanthropists to give to universities. Participants at today’s launch, by Culture Secretary Jeremy Hunt at JP Morgan’s London headquarters, also took cheer from the fact that the university match scheme seems to have improved information about the philanthropy going to the sector and encouraged much-needed investment in fundraising capacity by higher education institutions.

This touches on a widespread problem – that too many British charities have been so dependent on cash from government that they have lost, or never gained in the first place, a knack for getting private donors to cough up. In the arts sector, for example, Mr Hunt pointed out that nearly two thirds of the 850 organisations funded last year by the Arts Council pulled in £50,000 or less from private giving. This is not really a surprise when you consider the number of grumbles that in Britain, unlike America, even charities’ own trustees don’t give. And it’s not just the arts. So bad are the Brits at shaking the tin, it seems, that one of the main initiatives recommended by a charity sector-led  Funding Commission is a ‘Better Asking‘ campaign.

The arts match fund is a small but good beginning to the Big Society effort to promote philanthropy, and sets a precedent that could be adopted by other parts of government. And it is just the start of a bigger push. The best Whitehall boffins have been pulled into a ‘nudge unit’, to bring insights from the behavioural economics beloved of Prime Minister David Cameron, to figure out ways to make Brits do more good and less bad, starting with giving more. Much is expected of the Whitehall nudgers, not least because they have the support of Chicago economics professor and nudge guru Richard Thaler.

Yet, despite constant pleading by charity bosses, the Government still seems to be unwilling to consider the most obvious, significant and nudge-friendly way to increase giving – to reform the ‘Gift Aid’ system of tax relief for charitable donations. This scheme seems to have been designed by the Professor Moriarty of Her Majesty’s Treasury: it is superficially generous (almost as generous as America’s tax breaks, in fact); monstrously onerous on charities (mandatory paper return forms, anyone?); and deeply psychologically unappealing to donors (for reasons too dull to go into).

Reform of Gift Aid has been on the table for years but always gets lost in a labyrinth of Treasury resistance. If the Government is serious about promoting giving, then Gift Aid has to change. To make that happen it should appoint an independent commission of enquiry, packed with legal and fiscal brains to take on the Treasury. This commission would also need a leader who is passionate about charity, obsessive, a lover of detail, wise to the tricks of civil servants, and, most of all, not afraid to make enemies. Sounds like an ideal job for former Prime Minister Gordon Brown.

Any reform would take time and, as Culture Secretary Hunt admitted today, even the smartest nudges may take decades to make a real difference, when charities are facing a funding squeeze today. On the whole, like the Government, we are fans of carrots rather than sticks to encourage giving, but there are exceptions. For instance, we continue to be astonished that British philanthropy is so determined to resist a rule that grantmaking foundations should pay out at least 5% of their assets each year. This has been the norm in America for 40 years and it is accepted there that foundations should meet this minimum contribution to the taxpayers of today, who are paying for the generous tax subsidy that foundations receive. Yet in Britain, where the tax subisdy is almost as generous, even the suggestion of a payout rate is frowned upon as contrary to the spirit of philanthropy and, worse, ‘American’.

Many British foundations pay out more than 5%, so such a rule would be no skin off their noses. Yet a significant number do not. In fact, four of the top 10 family foundations in the UK, based on the numbers in the extremely helpful annual Cass Business School study, paid less than the US minimum in the last year for which accounts are available: Leverhulme 3.6%, Esmee Fairbairn 3.0%, Childrens Investment Fund Foundation 1.6% and Garfield-Weston 0.9%. 

If Britain adopted a 5% payout rule, the additional giving required from the Garfield Weston Foundation alone – each year – would be well in excess of the £80 million that was the centrepiece of today’s much ballyhoed arts announcement. Worth considering?

One reply on “Nudging Against A Brick Wall?”

This is an utterly boneheaded suggestion.

Assume an interest rate of 5%.

Foundation A pays out 5% each year and stays the same size. It pays out the same amount each year.

Foundation B pays out 4% each year, and grows by 1%/year. After 24 years, it is paying out more each year than Foundation A. It goes exponential. After only 45 years, it has paid out more cumulatively than Foundation A.

Foundations C, D and E pay out 3%, 2% and 1%, so grow by 2%, 3% and 4%. The respective dates are 31, 37 and 49 years, and 53, 61 and 75 years.

Because it’s exponential, Foundation E (i.e. the Garfield-Weston Foundation) is the best in the long run. After 100 years, it’s paying out 10 times Foundation A. After 119 years, it’s paying out 20 times Foundation A. After 136 years, it’s payout out 40 times Foundation A.

You are advocating a relatively small short-term gain for a catastrophic long-term loss.

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