The government is introducing a new rule prohibiting charities from using public funds to campaign to change government policy. This new clause, which will be inserted into all contracts, has been greeted with howls of outrage from the voluntary sector, and also from universities. It’s seen as a threat to free speech, a move to gag potential critics, and as purely politically motivated.

I won’t comment on the motivations, which have not exactly been disguised, or on some of the practical challenges this clause poses for researchers and umbrella bodies whose raison d'être is to advocate.

But I wonder whether the problem isn’t that government has gone too far, but rather that it hasn’t gone far enough. As a citizen and taxpayer I find it odd that government should use my money to subsidise special interests to make their arguments. This is why I have some sympathy with the government’s position. But I don’t see why charities should be the main focus. Anyone who has worked in government will have seen the sheer scale of the lobbying machines of private companies, and particularly ones wholly dependent on government. As a rule, the more dependent the industry is on taxpayer funding, or special regulatory privileges, the more it spends on lobbying.

Which industries spend the most on lobbying?

The most glaring examples include the nuclear and pharma industries which spend extraordinary sums persuading decision-makers to sustain very generous subsidies. Defence firms like BAE are not far behind – quite logically, since government decisions have more effect on their profits than anything else. In a slightly different category are the highly regulated utilities and financial institutions. These all pay for large teams, lavish corporate hospitality and sponsorship on a far larger scale than charities. Indeed, a fairly reliable rough guide to how much any company depends on government privilege is the ratio of its presence at party conferences to its turnover. If it’s high you can be fairly sure that their position is highly dependent on relationships and insider knowledge.

No-one knows quite how much is spent in this way. Data from The Hansard Society suggested that the UK lobbying industry had a turnover of £1.9bn in 2009, and was the third biggest in the world. More recent figures for the financial services industry alone suggest a figure of £92m.

Of course, all of this activity is perfectly rational. It pays off for the companies to lobby to keep the markets they’re in less competitive than they would otherwise be. In this respect they are not unlike the courtiers of past eras who hovered around kings and emperors seeking favours.

How does this affect the wider economy?

Although it is rational, this isn’t healthy for the economy as a whole.  Economies can either be organised so that the greatest returns go to those with the best insider contacts, or they can be organised so that the greatest wealth and returns go to those who create the most value.  William Baumol is probably the most articulate writer on this subject and, as he points out, one of the strongest arguments for an open, capitalist, market economy is that it incentivises creating true value, rather than the pursuit of privilege. As he also points out, however, all societies tend to drift back towards unequal access and capture by special interests unless firm steps are taken to prevent this.

In the US, success in getting Congress to add a key sentence to legislation that offers a tax break can deliver far bigger returns than investing in R&D. The result is a creeping corruption that has to be constantly guarded against. Anyone seriously committed to open markets should see this kind of abuse as ultimately against the public interest. Ministers would be a lot more credible in introducing new rules for charities if they went on the attack more generally to stop the use of tax-payers’ money, and funds which derive from special privileges, to lobby government.

A few simple steps could transform the situation. The first would be to establish a public list of companies that are either substantially dependent (e.g. over 25 per cent of revenues) on government contracts, or substantially dependent on public regulation (i.e. operating in heavily regulated industries). For these companies, government would introduce requirements for transparent reporting of any spending on lobbying activity directed to government, parliament or key stakeholders. Government could require any such budgets for lobbying to be specifically sanctioned by shareholders, and they could introduce heavy fines from the Competition and Markets Authority for any disclosure failures. They could require any meetings between relevant civil servants and ministers, and companies on this list, to be recorded and open to FoI rules. I’m sure there are other, relatively simple rules which would also be quite easy to introduce.

Many commentators have criticised the Lobbying Act as largely inadequate in that it covers only perhaps 1 per cent of lobbyists, doesn’t require lobbyists to disclose who is funding them, at what level, and on what subject, and also has very weak sanctions1. Amazingly, parliamentarians are still allowed to receive personal payment in return for providing advice to lobbyists. Perhaps it’s not surprising that there have been 14 major lobbying scandals since David Cameron pronounced that “lobbying is the next big scandal waiting to happen”.

Tough rules to constrain lobbying would have a very beneficial effect on the economy. They would force companies to redirect energy from persuading officials and politicians, towards making better products and services. Companies would still be able to provide plenty of information, and to make their case, but it would be a lot harder for them to curry favour with prime seats at Wimbledon or the Royal Opera House, champagne receptions or gourmet dinners.

If ministers are serious about nurturing an open, competitive economy, as well as an open civil society, they need to make it much harder for big, incumbent corporates to spend the proceeds of government funding, or monopoly positions, on campaigns and lobbying. If they don’t, then it will be reasonable to conclude that the restrictions on charity are, after all, not much more than a partisan move.