Response to Finance and Public Administration pre-budget scrutiny: The sustainability of Scotland's finances

SCVO welcomes the opportunity to respond to questions 12, 16 and 17 of the Finance and Public Administration Committee’s pre-budget scrutiny.  Our submission draws on evidence from: 

• SCVO’s engagement with the Finance and Public Administration Committee.
• Parliamentary records and Scottish Government publications. 
• SCVO support services (funding, digital, membership support, and information). 
• SCVO policy submissions, engagement, and research with the sector throughout 22-23. 
• The Scottish Third Sector Tracker  
• SCVO’s State of the Sector statistics 2022. 

Summary of our response

Scotland's voluntary sector is an employer, a partner, and a vital social and economic actor. It should be of significant concern to the Scottish Government and Scottish Parliament that this crucial sector – which employs over 135,000 paid staff and works with more than 1.2 million volunteers– remains under severe pressure. The pandemic, inflation, and the resulting cost-of-living and running cost crises have strained sector finances and increased demand for the support and services of many organisations.

Voluntary organisations play a central role in achieving Scotland’s National Outcomes, including the three policy priorities set out by the First Minister in the Policy Prospectus, “New leadership - A fresh start”: tackling poverty and protecting people from harm; creating a fair, green and growing economy; and prioritising our public services. Mistaking the voluntary sector’s short-term perseverance through these crises for long-term resilience will impact on progress across these areas in the years ahead.  

The latest data from the Scottish Third Sector Tracker shows that the running cost crisis has pushed the resilience of voluntary organisations to the limit, 67% of those surveyed reported financial challenges. Alarmingly, 92% of respondents working directly with the public highlighted worsening emerging needs. Greater funding levels across grants and contracts that keep pace with inflation are urgently needed. However, a fair deal on funding is about more than additional money. The problems within the sector’s funding environment are multi-faceted and entrenched after years of poor funding practices that have left organisations vulnerable to shocks.

Despite recent political commitments to make progress towards Fair Funding, many voluntary organisations have described this year as their “worst ever” experience in their funding relationship with the Scottish Government and other parts of the public sector, such as local authorities. While SCVO views recent political commitments as genuine and welcomes the continued positive dialogue with the Cabinet Secretary for Social Justice, the Scottish Government’s operational approach to managing available funding exacerbates an already challenging funding landscape.

Such practices, which we detail in this submission (page 10), jeopardise progress across national priorities. Their widespread and growing nature also suggests a direction of travel in the funding of voluntary organisations that sets a concerning precedent. Immediate and decisive action is needed to investigate why voluntary organisations are experiencing worsening funding practices and to realise the Scottish Government’s commitment to deliver Fairer Funding by 2026.

The Committee can support the vital work of the voluntary sector by recommending the Scottish Budget 2024/25 includes the following commitments and actions:   

Multi-year plans

• Multi-year funding across several Scottish Government funds in the 2024/25 funding round to demonstrate progression and report on the impact of this change to inform the development of a multi-year funding model as standard by 2026.
• A clear plan for the exploration of options to implement multi-year funding deals by 2026, detailing the progress it envisages making in financial years 24/25 and 25/26. These plans will ensure accountability and help to manage expectations.

Actions to alleviate financial pressures

• Share with the Committee whether the Scottish Government has issued internal formal grant-management guidance that might explain the recent concerning changes to how the Scottish Government allocates grant funding to voluntary organisations and take decisive action to undo worsening funding practices.
• Align its Fairer Funding principles with SCVO’s definition of Fair Funding – developed through significant research and engagement with the voluntary sector.
• Ahead of the 2024/25 Scottish Budget and annual funding round, review and significantly improve Scottish Government’s grant-making systems to address poor fund management approaches and create a framework for regular re-evaluation to ensure timely decision-making, communications, and payments.
• Establish transparent delivery goals, timelines, and accountability mechanisms – such as reporting and stakeholder groups - to ensure progress on Fairer Funding can be scrutinised by the voluntary sector, the Scottish Parliament, and Audit Scotland, including the Finance and Public Administration Committee.   
• Resource Living Wage uplifts in grants and contracts as part of expanding the Scottish Government’s Fair Work First criteria to ensure that the policy is not unfunded and that the Scottish Government does not expect voluntary organisations to subsidise government funding that does not cover the real Living Wage or provide inflation-based uplifts. 
• Annual inflation-based uplifts for public grant funding and contracts regardless of the type of delivery partner, recognising the impact of rising inflation on the voluntary sector workforce and the need for pay uplifts for voluntary sector staff on par with those offered to the public sector.
• Ensure that voluntary organisations in Scotland benefit from the full Barnett consequentials of the additional support the UK Government provides to charities and communities in England and communicate decision-making on these matters transparently.  

Transparency

• Publish awards to the 360Giving data standard including basic identifier core fields such as recipient name, organisation, and charity number.
• As an interim measure, include all significant spend, not just amounts over £25,000, in the monthly reports the government currently publishes and improve categories to ensure data is useful and accessible.
• Collect information across all government departments and produce a breakdown of Scottish Government funding to all sectors (voluntary, private, and public), by department and budget line. 
• Calculate and publish the Scottish Government’s total direct funding of voluntary, private, and public sector from grants and contracts.
• Within this data, record Fair Funding progress by collecting and publishing what proportion of grants and contracts are:  

1. Delivered on a multi-year basis. 
2. Include annual uplifts. 
3. Accommodate payment of the real Living Wage, including annual increases to this rate. 
4. Communicate funding intentions at least three months in advance and make payments no later than the first day of the new financial year.

Question 12: Where should the Scottish Government protect or prioritise spending in its multi-year plans for resource and capital spending?

Fair Funding is more than multi-year funding. Significant progress is needed to ensure that, while the widely acknowledged poor practice of single-year funding remains the default approach, significant improvements are made in how short-term funding is managed (see page 10). Single-year funding exacerbates long-term funding challenges by creating an annual cycle where uncertainty and inefficiency dominate funding relationships between the Scottish Government and voluntary organisations for much of each financial year. 

A move to multi-year funding is essential. The Scottish Government has committed to multi-year funding for the voluntary sector where possible. SCVO welcomes longer-term planning for resource spending, enabling this commitment to the sector to be realised. Earlier this year, the now Cabinet Secretary for Finance and Deputy First Minister told the Social Justice and Social Security Committee that multi-year funding should be “default” for voluntary organisations, and making as much progress in this area alongside other aspects of Fair Funding is vital.

The Cabinet Secretary for Social Justice has promised to have ‘progressed Fairer Funding arrangements, including exploring options to implement multi-year funding deals,’ by 2026. SCVO understands that Scottish Government will not fully realise the multi-year funding aspect of Fair Funding over the coming year. Still, SCVO, as will the Finance and Public Administration Committee, expects to see meaningful progress and clear actions from the Scottish Government in 2024-25 to meet its 2026 commitment.  

Why investing in the voluntary sector is crucial

The voluntary sector is central to achieving Scotland’s National Outcomes and the Scottish Government’s three critical missions – equality, opportunity, and community. Supporting the voluntary sector should therefore be a priority within the Scottish Government’s multi-year spending plans, including through the shift to multi-year funding for the voluntary sector. Greater investment in the voluntary sector is also crucial for delivering the Scottish Government’s ambitions to eradicate child poverty, meet its environmental commitments and reform public services.

Equality: Tackling poverty and protecting people from harm

Voluntary organisations provide practical and emotional lifelines for people and communities when times are tough (e.g., food banks) and support them on their journey out of poverty (e.g., access to benefits). Our sector supports people into work and helps them to stay there, campaigns against the root causes of poverty, and supports individuals and communities to improve their lives. The Tackling Child Poverty Delivery Plan 2022-26 recognises this, and sets out that the Scottish Government would use the previous Spending Review ‘to provide multi-year funding for the third sector where possible to do so, enabling more sustainable, joined up, strategic planning for the sector.’

Opportunity: A fair, green and growing economy

With a turnover of £8.6billion, Scotland's voluntary sector is a major economic actor. Our sector plays a central role in local economies, employing over 135,000 across Scotland - 5% of Scotland’s workforce. The sector plays a crucial role in keeping people economically active by providing employability support, mental health support, and wider support for people, families, and communities, such as childcare. Voluntary organisations also bring added value to the economy by working with Scotland’s 1.2 million committed volunteers and by bringing fundraised income into vital areas, from service provision to environmental and medical research. Similarly, Scotland’s 6,000 social enterprises contribute to society and the economy by investing profits and surpluses in social and environmental missions. Our sector, like the public and private sector, is central to the wellbeing economy the Scottish Government aspires to, a transition that will require all three sectors to work together.

Community: Prioritising our public services

Without the voluntary sector, our public services would be significantly diminished. Through direct provision of public services in areas like social care and youthwork, or working with communities to keep people active, engaged, and healthy in a way that prevents them from needing to access statutory services, Scotland’s voluntary organisations are a vital part of our public service infrastructure and must be valued as such. Our sector also adds value to Scotland’s local and national systems by bringing access to fundraised income and volunteer time that is not available to other actors.

By recognising, supporting, and resourcing the voluntary sector, the Scottish Government can support our sector’s significant contribution to achieving the Scottish Government’s priorities. Investing in the voluntary sector is also value for money and should be recognised as such in the Scottish Budget when considering spending decisions. Growing investment in the capacity and sustainability of voluntary organisations is proven to pull greater funding levels from other sources into vital services and projects at a time when the Scottish Government's budget is tightening. Fair Funding strengthens voluntary organisations' ability to do that by supporting organisations to plan for the long-term and build the internal capacity needed to leverage non-public financing from other sources, often realised through added income generation (e.g., from independent funders and donors). 

There needs to be a national assessment of the true value of public investment in the sector. SCVO is engaging with key partners to make the case for this. Many individual charities have carried out Social Return on Investment research to highlight the significant benefits of their work. Children’s Hospices Across Scotland reported its services generated £6.24 in public value in return for every public £ invested. Similarly, a recent report from Fraser of Allander Institute (FoA), commissioned by the British Heart Foundation, found the sector to be one of the most effective in Scotland in driving economic growth and employment, with every £1 million spent on medical research by charities generating £1.33 million of Gross Value Added for the Scottish economy – putting the sector 4th out of 97 sectors– ahead of the construction, retail, and hospitality industries.

The importance of multi-year funding to the voluntary sector

In wave 4 of the Third Sector Tracker, 28% of organisations said the most important aspect of Fair Funding for their organisation was multi-year funding, without which organisations:

• Struggle to plan for the long-term.
• Face barriers in recruiting, retaining, and developing staff and volunteers.
• Are unable to offer secure work, undermining Fair Work aspirations.
• Are trapped in a cycle of dedicating time and resources to sourcing funding.

Annual funding challenges such as these distract from providing the services people and communities across Scotland rely on. In their recent report, Scrutinising social justice: Barriers and opportunities, the Social Justice and Social Security Committee identifies sustainability and the longevity of funding as crucial to the delivery of social justice policies, stating that “insecure and single-year funding for the third sector, which often provides public services that contribute towards social justice, was an issue.” 

Short-term funding also severely undermines job security - one of the five Scottish Government Fair Work Dimensions - across the voluntary sector workforce of over 135,000 people. As a result of short-term funding, voluntary organisations frequently issue redundancy notices. Delayed decisions from Scottish Government departments, particularly when funding is provided on an annual basis, exacerbate these issues. The Scottish Government also dedicates significant time and resources to these annual processes when often there is little change year-to-year.  

Despite commitments in previous Programmes for Government and cross-party support for multi-year funding across the Scottish Parliament, there has been little progress on these issues, and we have yet to see a clear plan on how the Scottish Government will make good on its latest commitment by 2026. To realise the most recent Scottish Government commitment to exploring options to implement multi-year funding deals by 2026, the Committee should consider the following recommendations:

Recommendation: SCVO encourages the Committee to call on the Scottish Government to introduce multi-year funding across several Scottish Government funds in the 2024/25 funding round to demonstrate progression and report on the impact of this change to inform the development of a multi-year funding model as standard by 2026.

Recommendation: SCVO encourages the Committee to request that the Scottish Government provide a clear plan for the exploration of options to implement multi-year funding deals by 2026, detailing the progress it envisages making in financial years 24/25 and 25/26. These plans will ensure accountability and help to manage expectations.

Question 16: How will long-term financial pressures impact on the delivery of national outcomes and climate change targets and what steps can the Scottish Government take to alleviate these impacts?

The current situation facing voluntary organisations

The crucial role of the voluntary sector in meeting the Scottish Government’s strategic priorities is well documented, including in the Tackling Child Poverty Delivery Plan and the Covid Recovery Strategy. It is also widely recognised that voluntary organisations are intrinsically linked to the Scottish Government’s National Outcomes and priorities. The Scottish voluntary sector: 

• Includes over 46,500+ voluntary organisations. 
• Extends across a range of priority areas.
• Contributes to all 11 National Outcomes.
• Provides essential support and services to people and communities across Scotland. 

SCVO appreciates the financial pressures facing the Scottish Government; however, creating a sustainable funding environment for the voluntary sector is essential for voluntary organisations to contribute to the National Outcomes fully.

As the Committee understands from previous SCVO evidence, years of underfunding and poor funding practices, followed by Covid 19, inflation and the resulting cost-of-living and running costs crises have put the sector under increasing pressure, exacerbating financial and operational challenges. Wave five of the Scottish Third Sector Tracker found:

• 10% of organisations are uncertain about their future viability.

• 39% found it difficult to plan ahead.

Similarly, the latest Fraser of Allander Institute (FoA) Scottish business Monitor found that businesses in the voluntary sector have greater cost pressures and concerns around these pressures than the rest of the business community. Voluntary organisations were also found to operate in a more challenging recruitment environment.

Inflationary pressures also impact the voluntary sector’s staff and volunteers - our sector employs 5% of Scotland’s workforce and works with over 1.2 million volunteers- and the people and communities the sector works with. In the Spring 2023 Third Sector Tracker, 66% of respondents reported an increase in demand for their services and within the communities they work with:

• 74% of respondents reported that over the last four months, the negative impacts associated with the rising cost of living had become worse.
• Fuel povertyeased slightly, a 5% decrease, but organisations reported that housing issues or homelessness had increased by 6% and unemployment, redundancy and lack of work increased by 5%.
• Only 5% of organisations reported that the needs within the communities they work with hadn’t increased.  

While these figures provide the latest snapshot of how the sector is faring, figures from the Scottish Third Sector Tracker over the past two years reveal the long-term pressure that is being placed on the sector. Scotland’s voluntary sector is often praised for its resilience, but mistaking the short-term perseverance of the voluntary sector through crises for long-term resilience will only lead to greater difficulties in achieving progress across these areas in the years ahead.  

Actions the Scottish Government can take beyond multi-year funding

There are many actions that the Scottish Government could take to support voluntary organisations, their staff, volunteers, and the communities they work with, supporting the delivery of the national outcomes.  While multi-year funding is  essential for the sector, Fair Funding is more than multi-year funding.

Delivering on priority improvements to achieve Fair Funding

When SCVO gave evidence to the Finance and Public Administration Committee in February 2022, we discussed the need for timely decision-making and payments, and the impact of the poor grant management on voluntary organisations, their staff, and those they support. Progress in these areas is becoming increasingly urgent.

SCVO has worked with the sector on Fair Funding, a long-term, flexible, sustainable, and accessible approach to funding, for many years. However, rather than seeing progress on these issues, many voluntary organisations have described this year as the “worst ever” for organisations funded by the Scottish Government. Organisations have shared numerous and varied issues with SCVO which are, concerningly, spread across departments and funding streams throughout the Scottish Government.

Organisations have described the financial and practical impacts of:

• Receiving grant letters weeks, and in some cases, months, after the beginning of the financial year.
• Changes to the language used around what is and is not eligible spend.
• Business plan templates that have little relevance to the work of the funded organisations.
• New additional requirements and expectations being placed on organisations, including the introduction of approaches that focus far more on outputs rather than outcomes.
• Inconsistency in approach and the evidence required across Scottish Government departments.
• A lack of knowledge and understanding of the voluntary sector from the civil servants and grant managers. 

Voluntary organisations also continue to experience delayed payments – even more so than in previous years – leading to significant strain on their operations, including a risk of redundancies, difficulty recruiting and retaining staff and negative impacts on their ability to deliver the services that are so vital to communities across Scotland and achieving the National Outcomes. We are also concerned to hear of several departments indicating that even though decisions and payments have been delayed, no extension of the timescales for projects will be given and monies unspent by March 2024 will have to be paid back to Scottish Government.

At the FM’s anti-poverty summit, attendees reiterated many of SCVO’s calls for Fair Funding, describing short term funding as a crisis that undermines resilience. To achieve structural change, sustained long-term action is needed from the Scottish Government and other parts of the public sector. Similarly, attendees described precarious funding arrangements where no inflation increases where provided, and overcomplicated funding processes. The Child, Young People, Families and Adult Learning (CYPFAL) Third Sector Fund has been highlighted as a particular source of significant concern and frustration. Overall, attendees shared that despite the valuable contribution the sector makes to delivering services and reducing inequalities in a holistic way, the sector is considered a less important partner than other sectors and that progress made during Covid was eroding with a return to bureaucracy and delays.

In the context of financial pressures, it is important to be clear that while the sector is underfunded and there is an urgent need for inflation-based uplifts and for funding to accommodate the real Living Wage, greater investment is not the only action that can be taken to achieve Fair Funding. Fair Funding is a long-term, flexible, sustainable, and accessible approach to funding, that is increasingly urgently needed to support staff and volunteers and to achieve the national outcomes for the many communities the sector works with.

Still, while SCVO views the political commitments to deliver Fairer Funding by 2026 as genuine and we welcome the continued positive dialogue with the Cabinet Secretary for Social Justice, the Scottish Government’s operational approach to managing available funding continues to exacerbate an already tough funding environment. The widespread and growing nature of these problems suggests a direction of travel that sets a concerning precedent across Scottish Government and public bodies.

Passing on additional Barnett consequentials

Despite recognising the rising demand for services and the sector’s crucial role, the Scottish Government has not offered additional financial support to voluntary organisations in recent months. This comes at a time when around £10 million in Barnett consequentials was made available due to additional funding for the sector in England in the Spring Statement. Since then, charities and community organisations in England carrying out vital work to help vulnerable people have been invited to apply for a major government support package worth £76 million. In the meantime, pressure on the sector in Scotland has steadily intensified without access to this latest support. We were disappointed to not see this additional funding make its way to the sector in Scotland.

The Scottish Budget is an opportunity for the Scottish Government to take urgent action, SCVO make the following recommendations:

Recommendation: SCVO encourages the Committee to ask the Scottish Government whether it has issued internal formal grant-management guidance that might explain the recent concerning changes to how the Scottish Government allocates grant funding to voluntary organisations and take decisive action to undo worsening funding practices.

Recommendation: SCVO encourages the Committee to ask the Scottish Government to align its Fairer Funding principles with SCVO’s definition of Fair Funding –developed through significant research and engagement with the voluntary sector.

Recommendation: Ahead of the 2024/25 Scottish Budget and annual funding round, the Scottish Government should review and significantly improve Scottish Government’s grant-making systems to address poor fund management approaches and create a framework for regular re-evaluation to ensure timely decision-making, communications, and payments.

Recommendation: The Scottish Government should establish transparent delivery goals, timelines, and accountability mechanisms – such as reporting and stakeholder groups - to ensure progress on Fairer Funding can be scrutinised by the voluntary sector, Scottish Parliament, and Audit Scotland, including the Finance and Public Administration Committee.

Recommendation: The Scottish Government should resource Living Wage uplifts in grants and contracts as part of expanding the Scottish Government’s Fair Work First criteria to ensure that the policy is not unfunded and that the Scottish Government does not expect voluntary organisations to subsidise government funding that does not cover the real Living Wage or provide inflation-based uplifts.

Recommendation: The Scottish Government should commit to annual inflation-based uplifts for public grant funding and contracts regardless of the type of delivery partner, recognising the impact of rising inflation on the voluntary sector workforce and the need for pay uplifts for voluntary sector staff on par with those offered to the public sector.

Recommendation: Ensure that voluntary organisations in Scotland benefit from the full Barnett consequentials of the additional support the UK Government provides to charities and communities in England and communicate decision-making on these matters transparently.

Question 17: In follow-up to the Committee’s inquiry on effective decision making, how can transparency be improved around how the Scottish Government takes budgetary decisions?

As financial pressures intensify, it is crucial that the Scottish Parliament and other bodies can grasp the Scottish Government’s spending decisions and what this means for progress across priority areas. Transparent funding is vital to understand the Scottish Government’s investment, not only in the voluntary sector, but all sectors. This clarity allows groups such as voluntary organisations, civil servants, and scrutiny bodies (including Audit Scotland and the Scottish Parliament) to understand the government's decisions, funding distribution, and budget alterations, and to engage with the government about the effects of these choices, whether they are positive, negative, or neutral.

The Committee’s inquiry on effective decision making emphasised the agreement that transparency is essential for political accountability. The Scottish Government was encouraged to routinely publish timely information on the decisions it takes including the options considered, those discounted and why the decision has been made. The Committee also asked the Scottish Government to make clearer links between spending priorities and the National Outcomes. Other similar calls from committees of the Scottish Parliament include:

• The Equalities, Human Rights, and Civil Justice Committee recommending the alignment of the Scottish Government’s approach with core principles of human rights budgeting, encompassing data transparency, participation, and accountability.
• The Social Justice and Social Security Committee stressing the necessity for improved data collection to help target new and existing social justice policies effectively and to meet service delivery needs.

In response, the Scottish Government committed to improving transparency through corporate reporting, in-year budget revisions, and long-standing membership of the Open Government Partnership. The policy prospectus, ‘New Leadership - A fresh start’, stated that transparency must underpin delivery to ensure the Scottish Government's accountability. Fiscal openness, as highlighted in the Scottish Government’s Medium-Term Financial Strategy, plays a crucial role in achieving fiscal sustainability, and SCVO welcomes the wider work with civil society in Scotland’s Open Government Partnership National Action Plans.

SCVO welcomed commitments in the Scottish Budget 2023/24 to increase transparency around public finances and we acknowledge the work of the Scottish Exchequer as part of the Open Government Action Plan (2021-25). Voluntary organisations, being primary users of fiscal data, must be part of efforts to identify the actions needed to ensure fiscal data is transparent and accessible and reveals the extent to which the Scottish Government is delivering the Fairer Funding principles needed to support a sustainable voluntary sector, as committed to in the Policy Prospectus, New leadership - A fresh start

While monthly reports published by the Scottish Government on spend over £25,000 offer insight, they lack a comprehensive breakdown beyond the amount, name of grant recipient and the department that is allocating funding. There is no easy way to “follow the money,” such as the amount awarded to each recipient over a year, disaggregating how much goes to all sectors (voluntary, private, and public), and there is no additional information on grant length. The Scottish Exchequer Fiscal Transparency: Discovery Report revealed inconsistencies in financial data, hindering clarity in decision-making. Improvements to how grant data is recorded and published would reveal both the amount of funding that flows to the sector and make the current data easier to assess.

Transparency can be significantly boosted by publishing grant data in user-friendly formats. The UK Government’s initiative of providing a Government Grants Register and using the 360Giving platform is commendable. The Scottish Government can mirror this approach, ensuring alignment with the 360Giving data standard. Adopting the 360Giving data standard would facilitate publishing awards to the 360Giving platform making the data more accessible and allowing Scottish Government awards to be viewed as part of the bigger picture that includes UK Government grants, lottery grants, and independent grant funders.     

SCVO recognises the challenges that surround making changes to data infrastructure and that the gold standard will not be delivered in a short time. However, progress must begin somewhere and delays to improving the Scottish Government’s data infrastructure will only extend the time it takes to reach a suitable standard. To make progress on budget transparency and improve decision making, the Scottish Government should commit to the following:  

Recommendation: Publish awards to the 360Giving data standard including basic identifier core fields such as recipient name, organisation, and charity number.

Recommendation: As an interim measure, include all significant spend, not just amounts over £25,000, in the monthly reports the government currently publishes and improve categories to ensure data is useful and accessible.

Recommendation: Collect information across all government departments and produce a breakdown of Scottish Government funding to all sectors (voluntary, private, and public), by department and budget line.

Recommendation:  Calculate and publish the Scottish Government’s total direct funding of voluntary, private, and public sector from grants and contracts.

Recommendation: Within this data, Scottish Government should record Fair Funding progress by collecting and publishing what proportion of grants and contracts are:    Delivered on a multi-year basis.  Include annual uplifts.  Accommodate payment of the real Living Wage, including annual increases to this rate.  Communicate funding intentions at least three months in advance and make payments no later than the first day of the new financial year.