The trouble starts with a million-pound windfall

Refurbished theatres are costing more to run as the first batch of Lottery `winners' are discovering

In Keep The Aspidistra Flying, George Orwell maintained that art and creativity do not thrive in poverty. You cannot compose poetry while the roof is leaking, he argued. Thanks to the National Lottery, plenty of British actors have got new roofs, and the carpets have been replaced, but many of them still do not have money for the gas meter.

Last week The Green Room, an experimental theatre in Manchester, announced that it would have to "go dark" for three months at the beginning of next year because it faces the prospect of going over budget. This is despite the fact that it received a total of pounds 1.1m of lottery money from the Arts Council for a complete refurbishment.

The case is not unique. The Cambridge Arts Theatre, which along with The Green Room was one of the first theatres to receive money from the National Lottery, is facing a budget deficit and is considering cutting its activities or closing for a period.

The problem for both theatres is that the legislation that created the National Lottery only allows lottery money to be spent on capital projects, not on running costs. This was to prevent lottery money being used to replace existing Arts Council grants: "The money is intended to provide the cherry on the cake," says a spokeswoman for the Department of Culture. "Not to provide the cake."

Some cherry. Already the Arts Council has allocated pounds 804m of lottery money to 1,500 capital projects - all of them building, facilities or equipment-related.

"People working in attics is not the way art should be organised these days," says Jane Taylor, chairwoman of The Green Room. "Before the refurbishment, the theatre space was adequate, but the staff were housed in garden sheds inside unfurbished railway arches. Now we probably have the best technically equipped small-space theatre in Europe."

The problem is that the money theatres can spend on running costs - revenue funding from the Arts Council - is falling or standing still while newly refurbished theatres cost more to run. This year, the Council's budget for revenue funding will be pounds 186m and that is simply not enough to cover bigger, better-heated, more brightly lit theatres.

"There are more crises in refurbished theatres to come," says Sara Selwood, co-author of a Policy Studies Institute report - Culture as Commodity. "These are just the very first tranche to get the capital funding. As well as the bigger running costs from having new, bigger buildings, they tend to miscalculate how much revenue they will be able to take from improved catering facilities." For example, The Green Room hoped to make money from a cafe/bar, but once opened, it found that lots of local cafes and bars had the same idea.

The paradox for the theatres, and the arts generally, is that if the subsidy from the National Lottery results in facilities being shut down, they then lose the "subsidy" they get from their staff. The Policy Studies Institute estimates that the arts benefit from free labour of volunteers to the value of pounds 27m a year - equivalent to just 4,300 jobs. In all, half a million people work in the arts, and most accept lower than average wages for the type of jobs that they do. "It is probably unquantifiable, but it is a source of subsidy because working in the arts is supposed to be rewarding," says Sara Selwood.

In its recent Lottery White Paper, the Government appears to have accepted that the current revenue/capital divide is too rigid. It has already launched the Arts for Everyone - A4E - scheme to fund the running costs of both new work, and work that will take the arts to new audiences. On Friday, the Arts Council announced that it is giving Lottery money amounting to pounds 19m to 112 bodies in a first wave of A4E money. But A4E is still intended for the "cherry" not the "cake". Only when the law changes can theatres expect to get the shillings they need for gas meters that do not feed on either cherry or cake.