Does David Cameron want big state charities or big society charities?

Tim Montgomerie

He received a knighthood yesterday and in today's Times (£) Sir Stephen Bubb, head of the Association of Chief Executives of Voluntary Organisations, launches an attack on the Coalition's "tsunami of ill-considered cuts which threatens to decimate the third sector, wreaking havoc on our communities.” He accuses local councils of "Neanderthal" cuts.

Sir Stephen then calls for a new tax on bankers' bonuses to protect the sector from cuts.

But TOTAL money is not the only thing that matters in this debate. HOW money reaches the sector is also vital (a point I made to Ian Birrell for his excellent piece on the big society in Wednesday's FT (£)).

Earlier this week Francis Maude's Green Paper on increasing charitable giving (see links halfway down this page) contained many good ideas but in terms of government policy there needs to be a revolution in how taxpayers' money reaches voluntary organisations and the lack of discussion of this is the big hole in the Coalition's big society agenda.

Many charities receive a third of their income from the state and have done so for many years. This means that pleasing the government machine is by far the most important motivation for such charities. We have ended up with charities that aren't society-orientated but state-orientated, constantly jumping through Whitehall and local government loops, using language and running projects that appeal to risk-averse bureaucrats and politician-determined agendas. Fed constantly by state money and after prolonged exposure to the state's way of doing things the politics of the charitable sector has become very left-wing. That they vote Labour is less important than they are pro-state, pro-regulation and monochrome in their views.

If we want a diverse, innovative charity sector we need a sector that looks to individuals and communities for more and more of its income. Over ten years we should look to replace most direct grant funding of the sector with mechanisms that achieve this change of focus. Voucherisation and matched funding mechanisms where taxpayers' money follows the choice of citizens are two of the most important ways of achieving this. All new money that goes to the sector - through, for example, the new Big Society Bank - should not come directly from the state.

The best way of illustrating this is to think of a disadvantaged community with little power or money. It nearly always has to wait on the approval of the state to launch initiatives. Imagine if local people knew that if they raised £5,000 for a local youth activity or some other defined good purpose they would, as night follows day, receive another £5,000 from the state. They wouldn't have to wait on a lottery board, the likes of Stephen Bubb or another expensive bureaucracy to decide if they deserved the money. There would be automaticity.

Matched funding and vouchers would produce two great changes:

• Charities would look to win the confidence of local communities rather than local or national politicians.  We would see the emergence of smaller, more innovative and more local charities, emerging from citizen initiative. New charities could become part of a rewards programme whereby, as they demonstrated competence, they received loan facilities, the right to manage under-used state assets and, eventually, the right to offer public services.
• Local people would start looking to each other rather than the state for the solutions to some of their problems. They would have real power to build something for themselves. Matched funding arrangements could be income-adjusted so that, for example, wealthy communities received 50p for every £1 they raised for a local project but very poor communities received £2 or even more for every £1 they raised (up to a certain budgetary limit).