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The Road Ahead 2023: The ongoing impact of cost of living

In this series, we examine the key trends that will impact charities and volunteering in 2023. Here we consider what the cost of living crisis could mean for us all in the months ahead.

By October 1 2022, ‘cost of living’ had become one of the most popular Google search terms in the UK – and it continues to affect us all. Here we share what the crisis could spell for the voluntary sector in 2023 – and what measures we can take in response.

The cost of running a voluntary organisation will rise

Inflation is the rising price of goods and services, and the rate of inflation is how quickly prices go up.

In its November 2022 update on the UK’s economic and fiscal outlook, the Office for Budget Responsibility (OBR) estimated that inflation is set to peak at a 40-year high of 11% in the current quarter. This will have a significant impact on everyday costs for charities.

Here are some key implications to factor into your plans for the year ahead.

Rising energy prices

Firstly, high energy prices will continue. Data from the Office for National Statistics shows electricity prices in the UK rose by 65.4% and gas prices by 128.9% in the year to December 2022 – and they’re expected to remain high this year.

Costly consumables

Costs are also rising for things we buy every day. Data from the OBR shows food and non-alcoholic beverage prices rose 14.5% in the year to September 2022 – the highest rate in more than 40 years.

While the rate of inflation is likely to fall, that doesn’t mean prices will do the same. The price of goods will continue to increase, but at a slower rate.

Increase in fuel prices

Data from the RAC Foundation shows fuel prices in the UK reached record highs in 2022. Although prices have started to fall, they’ll stay high for the foreseeable future. And if the government decides to raise fuel duty in spring 2023, costs could rise further.

More expensive staff

The National Living Wage will rise to £10.42 from 1 April 2023, an increase of 92p or 9.7%. While this is good news for low-income staff aged 23 and over, as a sector, we’ll need to adjust our budgets to accommodate the changes.

Voluntary sector income will be at risk

As many of our core costs continue to rise, income streams for charities also remain at risk.

Slow sector growth

Our 2022 UK Civil Society Almanac shows the voluntary sector's income has continued to grow. But growth has slowed, and the gap between income and spending has narrowed.

In 2019/20, combined income fell slightly for organisations with an income under £1m. If those trends continue, the year ahead could be challenging for many smaller charities.

Less individual giving

Our Almanac data shows that 51% of the sector's income comes from the public. Yet, recent trends show fewer people are donating.

The Charities Aid Foundation UK Giving Report 2022 found donation levels for every month in 2021 were lower than their equivalent in 2019. And research by digital platform Enthuse reveals 55% of the public find their financial situation makes it harder to donate.

In its November 2022 update on the UK’s economic and fiscal outlook, the OBR predicts rising prices will erode real wages and reduce living standards by 7% over the next two financial years. This could significantly impact individual giving and make acquiring new donors more challenging.

Changes to legacy income

There are signs that UK house prices are starting to fall. In November 2022, the Halifax House Price Index found average house prices fell by 2.3% in November – the fastest fall in rates in 14 years.

This trend could hit legacy income for many charities.

Less public sector income

Government funding is also falling. Our 2022 Almanac analysis shows income from the government fell by £684m in 2019/20. This funding accounted for just over a quarter of the sector's income (26%) – the lowest proportion since 2004/2005.

Short-term funding

That trend could be set to continue. High inflation doesn't just hit charities’ and households’ costs – it puts government spending under pressure too.

We expect many central government departments and local authorities will reduce spending in the short term, to make up for higher costs elsewhere.

Medium-term funding

In the medium term, the Institute of Fiscal Studies’ analysis of the Autumn Statement highlights shifts for government departmental funding after 2025. This will grow by 1% a year in real terms, versus 3.4% a year under previous plans.

This probably means reduced spending in some areas. So, if your organisation relies on government funding, you should plan to diversify your income or change your delivery.

Sustainability of current delivery

In its article: Recognising social value in public procurement, charity sector think tank NPC estimates that two-thirds of charities delivering public service contracts aren't paid enough to cover their costs.

Commissioners and providers will need to have frank discussions about the sustainability of charitable funds subsidising contract delivery. Otherwise, increasing numbers of charities could step back from delivery.

More widely, recent research by ProBono Economics and Nottingham Business School found 55% of charities are using their reserves to meet operating costs, as demand for their services soars. Trustees will need to consider whether this is sustainable in the long term.

Increasing demand from service users

The Bank of England expects a ‘prolonged’ recession in the coming months. This will directly impact the communities many of us serve, driving demand for support.

Greater and more complex demand

Research from ProBono Economics and Nottingham Business School shows 71% of social sector organisations reported a rise in demand for their services over the three months to November 2022. And many expect this to rise further throughout the winter.

Nearly half (49%) expect demand to exceed their ability to meet it and 19% expect to fall significantly short. Against this backdrop, NCVO members tell us they’re also dealing with more complex needs.

Inequities set to deepen

Similarly, current inequalities exacerbated by covid may deepen in the year ahead. Growing evidence is showing how the cost of living crisis will disproportionately impact Black and minority ethnic people, women and disabled people.

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