Economic drivers

The big economic picture

The success of the on-going covid-19 vaccination programme means the government is feeling more confident in making predictions about the state of the national economy.

Although 2022 may see some measures implemented to contain spikes in covid-19 cases, the government is unlikely to reintroduce lockdown restrictions and accompanying support schemes on a similar scale to those announced at the start of the pandemic.

In 2021, gross domestic product (GDP) outperformed expectations and GDP bounced back from a low point in spring 2020.

Following the spending review in October 2021, the Office for Budget Responsibility (OBR) predicted that GDP will grow by 6% in 2022. 

GDP is one indicator of the economy’s health, alongside other more holistic indicators aside from GDP. Strong growth suggests that more people are doing more work and earning more money. This means more tax being paid and more money available for the government to spend.

However, prices are rising, which means the rate of inflation is high. The Bank of England predicts that inflation will continue to rise over the coming months, especially if fuel prices remain high, but that it will slow down within the next year. 

Sustained rises in wages could result in high inflation rates for longer. Charities should keep a close eye on inflation as this could impact staffing and service delivery costs as well as the cost of living and level of need in the communities that charities serve.

The labour market in flux

The labour market recovered beyond expectations in 2021, but in a way that experts find difficult to interpret. At the end of 2021, unemployment was low, but inactivity was relatively high in the same year.

Most people who were economically inactive were not looking for a job. For many, this was due to sickness or looking after family. Vacancies were reaching record highs and a large minority of charities reported that recruitment was increasingly difficult (October 2020 report pdf, 891KB).

This squeeze appears to be driven by people leaving the labour market altogether, rather than moving into different sectors.

Conversely, growing workforces in some sectors have been enabled by new people (re-)entering the workforce, such as mothers of young children.

Analysis suggests that most of the 1.2 million people who remained supported by the furlough scheme until the scheme had finished in September 2021 moved back into their jobs.

However, the pandemic appears to have driven a long-term shift in the types of work that the economy requires, and the coming year may bring further redundancies and more people leaving the labour market.

All of this points to a mismatch between the jobs available and the skills and motivations of working-age people. This could drive wage growth, and therefore inflation, in the short- to medium-term, as organisations compete to attract staff.

It could also provide opportunities for organisations delivering education, training, and support for job seekers if more people begin looking to move into new sectors.

This flux in the labour market could have implications for volunteer availability. Higher numbers of people either in paid work, or inactive due to other commitments or sickness, could mean fewer people have time to volunteer.

NCVO’s Almanac 2021 found that the voluntary sector paid workforce grew by 3% from 2019 to 2020, and 20% since 2010. Charities are economic agents with a collective expenditure of £55bn and play a vital role in supporting people to work.

Charities should consider both how their service users may be affected by barriers and inequalities in accessing work, and what they as employers can do to hire more marginalised people and provide good-quality jobs.

Action on the economy

Government spending from 2022 is set to grow, with more long-term investment in priorities such as the transition to net zero and health and social care. To fund this, taxes are set to rise to 36% of GDP – the highest level since just after World War II. 

The new health and social care levy will be payable from April 2022. As noted by the Charity Tax Group , even if charities can access some relief from the new levy, 'employees will still be liable, and this is likely to have a knock-on impact on charities’ wage settlements and therefore payroll costs'.

Despite maintaining historically low interest rates throughout the pandemic, the Bank of England is expected to increase rates again in 2022 to combat rising inflation.

Increasing interest rates can have disproportionate impacts within and across generations as debt, such as mortgages and loans, becomes more expensive.

Almost 3 out of 4 people in their late 30s and early 40s have more debt than assets, whereas on average people in their late 60s have significantly more assets than debt.

Higher interest rates can also mean that, while borrowing may become more expensive for voluntary organisations, investments (including pensions) should become more valuable. 

Additionally, the new Sustainability Disclosure Requirements (SDRs) and plans to update the Green Finance Strategy in 2022 should make it easier for charities to invest reserves and pensions in funds that align with their values.

Local government finances continue to be under serious pressure. While the autumn budget committed £4.8 billion in new grant funding to local authorities over the next three years, it also allowed for local authorities to raise council tax by 2% without a local referendum and raise the social care levy by 1%.

Where councils choose to do this, it will undoubtedly put additional pressure on low-income and non-working households, as well as reinforce gaps between affluent and deprived councils. 

Regardless, it will not be enough for councils to maintain the level of pre-pandemic services: to meet all pressures through council tax alone, council tax would have to rise by 8%. In response, councils are highly likely to cut services and may be at risk of declaring bankruptcy.

Increasing pressures on households, deepening inequality within and between communities

Households were faced with multiple pressures at the end of 2021, as the cost of living rose, and the government ended the universal credit uplift and furlough scheme.

The real value of out-of-work benefits has been declining since 2011, and the autumn budget included little support for people who are not working.

Families on low or fixed income and who are out of work will be hit hardest by this set of pressures. There are around 4m households who are behind with at least one household bill or credit commitment, with the poorest families 28 times more likely to report problem debt than the richest.

Many charities reported increased financial vulnerability, housing issues, homelessness, and lack of employment amongst their users in 2021.

Analysts predict that increasing energy prices will add at least £139 per year to the average household’s bills and that prices will jump by around 14% when the energy price cap next increases on 1 April 2022.

This could see many more households pushed into fuel poverty and result in poorer health outcomes for those affected. Government may take short-term targeted action to support the hardest-hit households.

Although average pay is rising, growth is unevenly distributed across industries and regions. Household incomes are lowest in urban areas in the midlands, north-west and north-east of England, and Yorkshire, while rural villages tend to have the highest disposable incomes.

While median income has steadily increased for the wealthiest 20% in recent years, wealth has been declining for the poorest 20%.

Increases in the national minimum and living wages and public sector pay will neither offset the impact of increasing financial pressures nor reverse trends in unequal income distribution.

New and shifting sources of income for charities

Levelling up

Much has been made of the government’s ambition to 'level up' communities, but the vast majority of funding has been committed to hard infrastructure projects. 

With the first tranche of funding awarded, charities and social enterprises want to see changes to the distribution mechanisms and investments in social infrastructure and civil society.

Giving and philanthropy

The data is mixed with regard to trends in giving and philanthropy. According to the Charities Aid Foundation (CAF), more people donated more money in 2020 than in 2019, but this dropped off towards the end of 2020 and into early 2021.

The number of people saying they've recently donated to charity is also dropping, and two-fifths of people reported they will be cutting back on charity donations.

Despite an increase in the public’s trust in charities, household income pressures and a slower recovery of consumer spending are likely to result in fewer people donating to charities in 2022. 

The Bank of England expects well-off consumers to retain 90% of their pandemic-enabled savings over the next three years. 

This could result in a smaller pool of wealthier donors giving larger average amounts to charities. There is a risk that people who would previously have donated may no longer be able to and may therefore feel less connected to charities in their communities.

Legacy giving (leaving a donation in one’s will) is a significant source of income for the sector and is predicted to grow in the coming years.

Over 1m gifts amounting to more than £23bn were made to charities between 2010/11 and 2019/20, and legacy analysts predict £43bn will be passed on over the next decade. 

As wealthier people are more likely to leave money to charity in their wills, this trend aligns with our expectation that donating will become less common amongst people with less disposable income in 2022.

Digital fundraising

Although trading activities and fundraising events were significantly reduced during lockdowns, there was a 'large and sustained' increase in cashless giving – a trend that is here to stay. 

There is likely to be a sustained increase in digital and hybrid fundraising events, and social media will continue to be a critical space for awareness-raising and income generation.

These trends raise questions about how prepared the voluntary sectors' digital planning is. Although the number of voluntary organisations using digital technology to deliver services has doubled, most have said their staff and volunteers now require increased digital skills.

1 in 5 organisations report current staff/volunteer skills as their biggest barrier to using digital technology more.

The Fundraising Regulator is planning to review the Code of Fundraising Practice in 2022, with a particular focus on digital fundraising and the use of non-charitable platforms (such as crowdfunding sites).

Charities should monitor these developments as they consider how best to adapt their post-pandemic fundraising activities and upskill staff and volunteers.

Grants and partnerships

A number of funding bodies responded to the onset of the pandemic by making it easier for organisations to access and use funds (although accessing and using funds was not a universal experience). In 2022, funders should consider how to build upon this period of greater flexibility and collaboration.

The national awakening to the role of grassroots community action and mutual aid during the pandemic may lead to a strengthened appreciation – and a more favourable funding environment – for such hyper-local organisations. 

This social trend may also strengthen support for the sharing economy. 

However, funding sector leaders have mixed views on funding social movements, and most do not predict radical change for the funding sector over the next five years.

Some charities also receive income and support through corporate partnerships, and there is significant appetite within the private sector to partner more with the voluntary sector.

When planning for 2022, organisations could consider how different sectors can also come together around a shared social purpose - beyond just the money.

Questions for your organisation to consider

  • How healthy are the finances of the local authorities that you work with? What might the implications be for your organisation if they were to cut services or declare bankruptcy?
  • How might high inflation rates impact your costs?
  • How will pressures on quality of life and cost of living, including rising fuel prices, high rates of economic inactivity, and systemic inequalities in access to work, affect your staff, volunteers, and service users?
  • What trends do you see in your donation income – for example, do you mainly receive donations in cash, through certain platforms, or during certain times of the year? How can you maximise the potential of your most common donation sources and expand into new areas?
  • Who are your donors? What motivates them to give? Are there demographics that your fundraising is not reaching? What could you do differently to reach more and different donors?
  • If you receive funding from foundations or trusts, can you discuss with them whether and how they plan to take forward lessons from the pandemic?

Further information

This page was last reviewed for accuracy on 18 January 2022