Stephen Fay looks to America for a way through the desperate funding crisis in the arts
No sane person would run a theatre, opera or dance company in this country. Times are bad and getting worse. The government subsidy is to be smaller next year. The Lottery money goes only on bricks and mortar, not scenery and salaries; and the businesses that spend money on sponsorship are already under siege from every new project that must find private funds to match a Lottery grant - starting with Peter Mandelson's exorbitant pleasure-dome in Greenwich.

Suspicions grow that this government prefers popular circuses like the Dome to the more exacting business of staging demanding works of art. Tony Blair takes Cherie to the last performance of Ian Holm's Lear at the National Theatre. Chris Smith, the Culture Secretary, happily sits through Richard Strauss's Ariadne auf Naxos at the Edinburgh Festival. Gordon Brown is a film buff. Yet the impression forms that New Labour thinks the performing arts are not "the people's art". Prince Charles said as much last week when he spoke of a growing feeling that the arts are being given "secondary or even tertiary importance".

The Prince was disturbed because the Royal Shakespeare Company, of which he is president, had announced debts of pounds 1.6m. The Chichester Festival Theatre is in turmoil after making a loss this year of pounds 700,000. The Midland Bank said last week that it will no longer sponsor opera proms at the Royal Opera House because it is too "elitist" - an action that will, perversely, make Covent Garden more elitist.

In bad times rumours multiply and make bad news sound worse. The gravest of these stories is that, after 2001, the Prime Minister and the Chancellor are determined to divert a mass of Lottery money from the arts to health and education. Chris Smith is said by the backstabbers in Downing Street to lack the political clout to stop the rot.

The RSC says its difficulties are owing partly to the strong pound which deterred tourists from visiting Stratford-upon-Avon this summer, but mainly to the standstill in the government subsidy, which has fallen since 1993- 94 by 20 per cent in real terms, costing it pounds 2.6m in all.

The RSC, like all arts companies, ought to stop whingeing about dwindling subsidy. The government grant to the Arts Council will go on falling. Early next month, Smith will tell the Arts Council that its budget for the performing arts will fall from pounds 195m this year to pounds 193m next year, and that it will fall again the year after. We have to accept that, when it comes to government spending plans, Gordon Brown is very Scottish and utterly implacable.

But there is no point in we lovers of theatre, opera and ballet retiring to our tents for a prolonged sulk. Government money has transformed the performing arts in the 36 years since the late, great Laurence Olivier and the illustrious Peter Hall won the Treasury over to the idea of subsidy. A few years later the RSC and the National were head-to-head in one of the most exciting periods in the history of the English theatre. That is also history now; but the extra money - beyond the money raised at the box office - is still a requirement for excellence in the arts. Since it can no longer come in large enough bundles from the Arts Council, other means of raising the cash will have to be found.

If Chris Smith has his way, some of it will come from the Lottery. When it was set up, two guiding principles affected the arts. The first was that Lottery money should not be an alternative to government arts subsidy. The second principle followed from the first: since running costs were to be underwritten by subsidies, Lottery money should be spent only on capital projects.

The outcome is a kind of madness. The subsidy standstill means that good Lottery money is being spent on fine new and refurbished theatres that do not have enough funds to cover their operating costs. The Cambridge Arts Theatre is an example. There will be many more.

Next month, Smith's department introduces the Lottery Reform Bill in the House of Lords. It is intended to free the Arts Council, allowing it to give grants to people and productions as well as to buildings. Lottery funds will also be available to implement broad strategies in the arts, such as the revival of repertory theatres in Britain's great provincial cities. Most are so scandalously hard up that they cannot afford casts big enough to play Shakespeare.

Smith's bill will break down the bureaucracy that now strangles Lottery grants by allowing the Arts Council to propose grants to deserving institutions instead of waiting for them to send in the correct - and costly to complete - application forms.

These are excellent reforms; and Smith is confident that the money provided for the arts will continue to flow after the current contract with Camelot expires in 2001. He tells me that quite enough money is being raised through the Lottery to ensure that the arts will continue to get as much money as has been forecast, even after new funds flow into a "sixth stream" for health and education in 2001.

But sceptics doubt whether Smith has the political weight to deliver this promise, and the recent history lesson for the arts is that the broader the revenue base, the better. In the Sixties and Seventies, the performing arts thought they could rely on the Treasury. Discovering their error in the Eighties, they began to raise money from business. Two or three years ago, when private enterprise failed to provide enough, the arts looked to the Lottery. Perhaps even that cannot be relied on. So where is there left to turn?

Well, has anyone thought about the people?

John Carlin, our Washington correspondent,has. He thinks the Chicago Symphony Orchestra - the CSO - is a model for a vibrant cultural institution. It raises nearly a quarter of its budget (pounds 6.5m out of pounds 25.7m) from individuals as well as from corporations and foundations. Individual contributors are being thrifty as well as generous, for in the United States, donations to the arts are easily and completely tax deductible.

Last month, the CSO inaugurated its dashingly refurbished home. The 93- year-old Orchestra Hall has been renovated and accoustically improved at a total cost of pounds 65m - on top the the SCO's annual budget. Of that, pounds 30m came from business and the foundations. The rest, a remar-kable pounds 35m, came from individuals.

Because these donations are tax deductible, one donor explains that she can contribute $2,000 (about pounds 1,150) a year to various causes, including the CSO, without its affecting her bank balance at all.

Individual giving does happen in Britain. The BBC's telephone campaign for children's charities raised pounds 12m in 24 hours on Friday. Glyndebourne built a brand new opera house in the Sussex countryside by raising money from its audience and never asking for a penny from the government or the Lottery. And ordinary members of British audiences can be wildly generous, too. The ENO's Friends, for example, sponsored Janacek's From the House of the Dead, London's best operatic production of the season so far.

But the steady flow of subsidy and sponsorship over the last three decades means that the habit of individual giving is not ingrained. The tax system does not help, either. Although donations can be given to arts organisations that operate as charities, they are based on laws developed for Victorian do-gooders. The rules are complex and are zealously applied by the Inland Revenue, who behave as if such giving were somehow frivolous.

Chris Smith acknowledges that the system makes it hard to give and promises to take a cautious look at reform with his departmental colleagues and the Arts Council. He is not unsympathetic to the idea, but Smith is conscious that the Treasury will be peering over his shoulder, asking how much making tax relief easy would cost in lost revenue.

That is not an especially promising start, but it is a beginning. It would be a better one, however, if Chris Smith took a bold, utterly incautious look at giving the people a better chance to support the arts.