While donations from the public grew by 7% in the three years to 2004, government funding over the same period increased by 38%. For larger charities, the document says, the state is now the “most important paymaster”.

The report, Charity: The spectre of over-regulation and state dependency, says the independence of charities is being put at risk by the profile of their funding streams, and criticises charities for the way they spend their money.

It attacks large charities for paying an average salary of £83,000 to the sector’s most senior executives and criticises increased spending on fundraising. It deems the function of the Charity Commission “confused”, being both a regulator and an advisor to the charity sector, and calls on the Commission to relinquish its advisory role.

“As the charitable sector becomes more dependent on the state, and further distanced from its voluntary donor base, there is a danger that the vitality and voluntary nature of the sector could be irretrievably undermined,” the report’s authors, Richard Smith and Philip Whittington, warned.

It recommends that where a charity is delivering a public service, the direct financial link between the state and charity should be broken wherever possible. Small charities with high levels of voluntary donations should be subject to a lighter touch regulatory process, and the Commission should be accountable to Parliament and not the Crown.