No economic recovery for charities – new report

Charities have not seen the recovery experienced by the economy overall, a new report today shows (PDF, 830kb).

While the rest of the economy has grown, the charity sector's income has flat-lined since 2009.

On current projections, charities will be faced with a £4.6bn shortfall in income by 2018/19 - the result of cuts to government contract and grant income, tepid growth in donations from the public, and inflation.

The charity sector grew strongly in tandem with the rest of the economy in the early 2000s, then shrank as the economy did during the recession, but its fortunes have decoupled from GDP since, with no signs of the growth seen in the wider economy.

Small and medium-sized organisations have been hardest hit, with charities with incomes between £100,000 and £1m seeing the biggest falls in their income and assets. Such charities saw an overall fall of 38% in their income from government sources between 2007/8 and 2012/13.

The report's other findings include:

  • Almost all of the growth in charities' income from individuals has been earned rather than donated, as charities seek to commercialise their services in order to sustain their funds while donations flat-line.
  • Income from individuals is unlikely to compensate for the falls in income from government sources.
  • Many charities are experiencing a 'capacity crunch', with cuts to back-office and management capacity limiting their ability to access even familiar sources of funding, compromising their long-term sustainability.

The report is the product of a 12-month review into the charity sector's funding, led by NCVO with input from other charity sector organisations.

NCVO also announced today further research to look at the drivers behind the trajectories of medium-sized organisations. While medium-sized charities have struggled overall, some have thrived during this time. The research, supported by Lloyds Bank Foundation, will examine a cohort of medium-sized charities to see what factors determine how they have coped or otherwise with recent economic trends.

Sir Stuart Etherington, chief executive of NCVO and chair of the financial sustainability review panel, said:

'This report is a sharp reminder of the scale of the challenge facing charities at the moment. While the headline figures show the charity sector as a whole keeping its head above water, they mask the crushing blows that many small and medium-sized charities have sustained in recent years.

'There is an urgent need for the government to solve the problems of public service commissioning. Too many contracts exclude smaller organisations, being designed in such a way as to privilege national and international commercial outsourcing providers.

'Many charities have demonstrated considerable success in growing their earned income from individuals, and we should celebrate this. But we also have to remember that charging fees for services is by no means a practical or sustainable option for all. Quite simply, cuts to public service contracts mean that charities can do less for those they exist to support.'

Caron Bradshaw, chief executive of Charity Finance Group, said:

'This review is an important reality check on the charity sector's finances. In the wake of a Budget with more spending cuts which will create greater demand for our services, this review finds charities' finances in a fragile state. We cannot afford to ignore the multi-billion pound funding gap identified here, which requires partnership between government, funders and the charity sector.

'In order to navigate the next five years, charities will need to show considerable financial leadership, investing time and resources in understanding their business models and identifying risks and opportunities. Alongside this, we need more investment in charities' capacity, particularly financial capacity, so that they are able to adapt under growing financial pressure and chart a course towards sustainability.'

Tony Armstrong, chief executive of Locality, said:

'Despite community organisations reporting increasing demand for services, this research highlights that they are earning less from government contracts than at any point since 2007/08. This is due not only to a reduction in overall funding for services but more worryingly reflects an increasing trend of large national organisations snatching local contracts from community organisations because they package services in a way that looks cheaper and more attractive to commissioners.

'These cut-price contracts might look like a great deal on paper, but they continually fail to deliver what's needed and costs end up spiralling, with community organisations having to step in to provide desperately needed services, while also footing the bill.'

John Barrett, acting chief executive of the Small Charities Coalition, said:

'The Small Charities Coalition has seen a significant growth in the number of requests from members for fundraising support. We hope this review will help all those involved in the sector to identify sustainable actions to address the challenging funding environment.'

Peter Lewis, chief executive of the Institute of Fundraising, said:

'As this review illustrates, while many charities who are able to invest in fundraising are continuing to grow their support from the very generous British public, smaller charities are benefiting the least from the economic recovery. With government grants at an all-time low now is the time for government to work with charities to help them diversify their income streams and find more innovative ways to raise money for the good causes they support, both in the UK and overseas.'

Notes

Download the report, A financial sustainability review: Change and adaptation in the voluntary sector as the economy recovers (PDF, 830kb)

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