Policy proposal: Reform of nonprofit finance

Policy proposal: Reform of nonprofit finance

Nonprofit organisations and charities are an important part of civil society, and often help groups that would otherwise be ignored or forgotten. Supporting a nonprofit, whether by donating money or time, shows what people really care about, be it issues big or small.

The Problem

A healthy voluntary sector can be a crucial counterweight to government efforts to control society. However, its health is threatened by a disease that needs to be addressed. Since charities are so effective at helping people, governments like to help them out as well and provide some financing. This sounds praiseworthy, but it has dangerous consequences.

There are three problems with government funding of politically active charities, NGOs and pressure groups. Firstly, it subverts democracy and debases the concept of charity. Secondly, it is an unnecessary and wasteful use of taxpayers’ money. Thirdly, in funding organisations that share their agendas, politicians effectively discriminate against those who don’t.

State funding weakens the independence of charities, making them less inclined to criticise government policy. A government can use money to buy silence and to politicise good causes. Politicians can distort public debate and debase the concept of philanthropy. ‘A charity that relies in the main part on taxes’, wrote the blogger Guido Fawkes, ‘is no more a charity than a prostitute is your girlfriend.’

Worse than that, the government sometimes funds and even creates pressure groups with the intention of creating a ‘sock-puppet’ version of civil society which creates the illusion of grassroots support for new legislation. These state-funded activists engage in direct lobbying (of politicians) and indirect lobbying (of the public) using taxpayers’ money, thereby blurring the distinction between government and voluntary action.

State-funded charities and NGOs often campaign for causes that most voters don’t  feel particularly enthusiastic about. Foreign aid, climate change, sin taxes, temperance, anti-smoking, ‘sustainable development’, radical feminism and support for the EU are causes which the political elite believe deserve more widespread support. There is no need to manufacture support for policies which are already popular. Instead, these organisations are likely to argue for causes which are favoured by their political patrons. They typically lobby for bigger government, higher taxes, greater regulation and the creation of new agencies to oversee and enforce new laws. Often, they call for increased funding for themselves and their associated departments. In public choice terms, they are ‘concentrated interests’ compelling the taxpayer to pay for the implementation of their favoured policies, as well as the costs of the lobbying itself.

These ‘sock-puppet’ organisations masquerade as groups of ordinary citizens, while promoting the interests of the political elite.

But this is not civil society; it is the muzzling of civil society.

In buying off and excluding independent voices, the authorities weaken the checks and balances upon which democracy depends, and exclude ordinary people (including experts) in favour of those who are unlikely to challenge those who fund them.

If a charity is a state department, then it should be acknowledged as such, and funded by the taxpayer in the normal way. But if it’s really a quango masquerading as a charity, then it’s disingenuous to present it as part of the voluntary sector.

A government can commission charities to write “independent” reports that validate other “independent” reports commissioned by the government, so that a body of material can be built up to support the government’s desired policy. The taxpayer is thus effectively paying for the government to lobby itself.

This is ‘public choice’ theory in action– state bureaucracies spending money to justify their own existence.

The political elite have an incentive to transmit their message to the public via third parties because voters regard almost anyone as being more trustworthy than politicians. If the government’s message is relayed by ‘independent’ and ‘objective’ citizen’s groups, so much the better.

Notable sockpuppets

The Scottish Government continues to be the primary funder of Alcohol Focus Scotland, with an unrestricted core grant of £472,000 in 2017/18 and £577,000 (78% out of its total income of £736,336) in 2019. This covers all of its staff costs of over £400k, so its employees are all effectively on the public payroll. Scottish Health Action on Alcohol Problems (another group that campaigns to limit the marketing, availability and affordability of alcohol) depended on government funding for 100% of its €200,000 budget in 2019/20, according to the EU Transparency Register.

Both organisations lobbied heavily for one of the Scottish National Party’s flagship policies – minimum unit pricing for alcohol – which was introduced in May 2018. When Alcohol Focus Scotland co-hosted the Global Alcohol Policy Conference in Edinburgh in 2015 – an event sponsored by the Scottish Government and NHS Scotland – SNP leader Nicola Sturgeon gave the opening speech and the organisers paid tribute to her ‘political courage’.

State-funded lobbying does not get much more blatant than this, although the similarly named Obesity Action Scotland comes close. Founded in 2015 and wholly funded by a grant from the Scottish Government, it campaigns to restrict advertising on unhealthy food, bans on price promotions such as buy-one-get-one free and ‘regulations to control portion size’. It says that all this – plus food reformulation and the sugar tax – ‘will only be the start’ of restrictions on the free market in the name of obesity prevention. All of these policies were included in a consultation document put forward by the Scottish Government in October 2017. Obesity Action Scotland publicly welcomed the proposals and drafted an encouraging consultation response. Its only complaint was that some of the measures did not go far enough. Not surprisingly, all of their demands were met when Scotland’s Diet and Healthy Weight Delivery Plan was published the following July.


This kind of activity is relatively new in the area of food, but has long been practised in the field of tobacco. Today, both the Scottish and Welsh governments fund their branches of Action on Smoking and Health (ASH) more heavily than Whitehall funds the English branch. ASH Scotland (an ‘independent charity’) received £672,441 (68% of its 2019 income) directly from the Scottish Government. It managed to attract only £2417 (0.2%) in voluntary donations.

What must be done

The perfect solution is of course to immediately ban all spending to all charities.

Failing that, the Scottish Libertarians suggest the following measures to help restore the independence of the voluntary sector, safeguard taxpayers’ money and rebalance civil society in favour of grass-roots activism.

The government has to stop giving unrestricted grants to charities. Taxpayers’ money can only be used to carry out clearly defined public services. Government money should only be given to provide services that the state would otherwise provide. If the restricted grant is provided for services, those services must be clearly defined and assessed upon completion. This certainly does not include unspecific services such as ‘raising awareness’ and ‘advancing the education of the public’. If the state needs to advertise itself, the public should be informed that it is coming directly from government.

At the same time, the government also must not provide any “core” funding. For example, the Scottish Council for Voluntary Organisations is supposed to represent Scottish charities but its basic functions are financed courtesy of the taxpayer with a core grant of £925,000. How can a voluntary sector which can’t fund its own representative body inspire any confidence? How can such an organisation be impartial?

Political advertising by government departments must be prohibited. It is wasteful and inappropriate for any arm of government to spend taxpayers’ money campaigning for legislation which has neither been subject to a public consultation, nor debated in the Parliament.

All payments made for lobbying must be immediately stopped. This includes firms and consultants engaged in the likes of ‘political consultancy’, ‘stakeholder management’, ‘strategic communications’, ‘public affairs’, ‘policy tracking’, ‘advocacy’, ‘strategic counsel’ and ‘engagement with public policy makers and opinion formers’ and other euphemisms.

A corresponding clause must be inserted in all grant agreements, which will explicitly prohibit lobbying costs as an eligible expenditure. That would include payments that:
• support activity intended to influence or attempt to influence Parliament, government or political parties, or attempting to influence legislative or regulatory action,
• the awarding or renewal of contracts and grants, or using grant funding to petition for additional funding;
• using grant funds to directly enable one part of government to challenge another on topics unrelated to the agreed purpose of the grant;
• expenses such as for entertaining, specifically aimed at exerting undue influence to change government policy and so on.

Finally, all public spending for any non-profit organisation over £10,000 must be audited.



Special thanks belongs to the Institute of Economic Affairs for its successful campaign to deal with sockpuppets in England. It’s time to do so in Scotland.

Please note that this is a policy proposal that will be discussed at the upcoming AGM. Comments are of course welcome!


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5 Comments on "Policy proposal: Reform of nonprofit finance"

  • george morton says

    Very well written and informative.

    On “voters regard almost anyone as being more trustworthy than politicians”, I would limit that to politicians of influential parties.

    On acronyms, pardon my ignorance, but wot is the IEA ?

    • Admin says

      Thank you, it’s the Institute for Economic Affairs!

  • Admin says

    The topic of charity CEO compensation is also worth considering. See e.g. this for comparison: https://en.wikipedia.org/wiki/CEO_compensation_among_charities_in_the_United_Kingdom

  • Stuart Whitby says

    While I entirely agree with the statements and recommendations made in this article, I’d ask for the following as a consideration.

    I would hope, some day, for a small government, which covers basic services only. I would still ask for taxes to be paid to fund many of the activities currently carried out by government, but with each individual earmarking contributions by percentage to their choice of charities at the time they prevpare their tax return. Those charities can operate in competition with each other to provide services, with open and auditable statements of income, costs, balance and percentage of funds going directly to provision of service.

    I’d like to ensure that this possibility is not excluded by the suggested policy.

    • Admin says

      Hello Stuart,

      there are countries where similar schemes already operate, like Slovakia and this is indeed an idea worth exploring – care to create a proposal for next time?

      In any case, this is not explicitly excluded by by this policy and is at the worst its adjustment, or rather extension…. but it can be certainly brought up at the AGM as an idea going forward.


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