We can’t ignore the charity sector’s financial situation

July 13, 2015 at 15:34

Our sector has had a few days to recover from the decisions outlined in the Chancellor’s Budget last week. Although charities were not the focus, the decisions taken within it are going to have a big impact on our operating environment for the coming five years.

Often we talk about the issues facing the sector in isolation; however, this is not how charities will experience them. It seems likely that over the next few years three things are going to put considerable pressure on already fragile financial situation:

1)    More cuts in government income, both grants and contracts

2)    Increasing costs, particularly staffing costs

3)    Restrictions in fundraising with associated loss of income for charities

The axeman cometh

Between 2010/11 and 2012/13, according to the Institute of Fiscal Studies, the Coalition cut £14bn in public service spending. During that same period, the sector lost £1.7bn in UK government income. If the sector saw a similar loss in income following the next round of cuts over this Parliament, then it would lose around £1.3bn in funding from government.

No matter which way you slice it, the sector is going to be coming under considerable financial pressure. Although there is potential to correct this through public service reform and levelling the playing field for charities through changes to the tax system (i.e. irrecoverable VAT), it seems unlikely given the pressures on commissioners to deliver quick cashable savings.

Less bang for your buck

We now have the added pressure of the National Living Wage as outlined by the Chancellor in the Budget. For a charity employing someone on the National Minimum Wage full time, they will have to find an additional £4,688 (current prices) by 2020 in order to pay them. That is a considerable cost burden. From next April, a charity would have to find around £1,150 in order to meet their salary costs for the rest of the year. Although the NIC Employment Allowance may meet some of the costs, it isn’t going to counter-act the costs for most service delivering charities.

The government also hasn’t committed to giving charities more through grants and contracts to pay for this wage increase – although I understand that this is going to be considered in the Spending Review process.

Trying to find savings whilst your income is falling is going to very challenging for many charities.

Moreover, according to the Local Government Association, local councils are going to have to find £1bn to pay for the NLW – which will mean potentially further cuts in grants and contracts.

Tightening income sources

One way that charities can adapt to this is trying to boost other income sources.

This isn’t the place to get into the debate that is taking place over the future of fundraising regulation – however, Mark Astarita, fundraising director of the British Red Cross, has already said that the FRSB’s proposed recommendations to strengthen self-regulation could cost at least £2m a year.

It is likely that additional regulation will create significant costs for other charities as well. Greater restrictions on fundraising will, in the short term, reduce the sector’s income, which in term in likely to limit the sector’s ability to meet demand.

We cannot ignore our financial position

Understanding of the sector’s finances is critical for making the right policy decisions. Government wants to harness the power of the sector to improve people’s lives and deliver services, but we are looking at the prospect of a smaller sector in 2020 rather than a larger one.

Funders are also trying to stretch their resources further by cutting back on grants and contracts, or prohibiting full cost recovery in the hope that charities can raise income from other sources to cover costs. Whilst rational on an individual, if carried out on a systemic level, this can only make the sector’s financial future more fragile.

This is the state of play as the sector heads towards the end of the decade, and all policy discussions need to be viewed through this prism.