Economic drivers

This chapter will help you understand key trends in the wider economy, the economic context within which your organisation is operating and what you need to consider when making strategic and operational decisions.

Inflation remains high, so prices continue to rise

The past few years have provided a crash course in economics, but inflation rates can be confusing for a few reasons:

  1. The inflation rate describes the pace at which prices are rising. When the inflation rate decreases, it doesn’t mean prices are falling but rather that they are rising less quickly (than before). This means that higher prices now become part of the economy.
  2. The inflation rate is typically reported as a comparison between prices now and twelve months ago – so as time has passed, price rises have caused the inflation rate to fall. For example, it was 6.7% in September 2023 compared to September 2022 when prices were 10.1% higher. In a period of sustained high inflation, a decreasing inflation rate can falsely imply that pressure on households, charities, and businesses is easing. This can divert the public’s and politicians’ attention from levels of destitution and poverty, which are still historically high.

New data from the ONS continues to affect costs for all types of households. Alongside this, estate agents Savills estimate that average private rents ended 2023 9.5% higher than in December 2022and are set to rise a further 6% in 2024 before hitting an ‘affordability ceiling’.

Inflation is causing increased operating costs for voluntary organisations. Significantly, it also weakens the value of income as that income can’t buy as much as it did before.

Inflation also means more organisations are likely to exceed a number of thresholds, including the Gift Aid Small Donations Scheme, audit requirements, VAT registration, and more. This could have a large impact on administration and cost.

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Interest rates are unlikely to fall significantly this year

The Bank of England's main tool to bring down inflation is to increase interest rates This makes borrowing money more expensive. With an interest rate of 5.25% in January 2024 this was the highest it had been since February 2008.

Banks increase their interest rates in line with the Bank of England’s, so loans and mortgages have become significantly more expensive over the past two years.

The Bank of England will keep its interest rate high as long as it’s seen as necessary to bring inflation down. Some say that inflation will not fall to the Bank’s 2% target until the end of 2025.

For voluntary organisations with existing loans and/or mortgages, they may have become a much greater financial commitment. Those looking to borrow may need to postpone until interest rates come down.

In contrast, higher interest rates can also positively impact charities with significant reserves in cash.

While gains on savings won't necessarily balance out other effects of interest rates and inflation, they may grow some charities' reserves.

Similar trends may be seen for households. High interest rates may make it harder for people to afford their mortgage repayments, leading to falling behind on payments, missing payments or cutting back sharply on their other spending. Those with larger cash assets in savings may see substantial gains.

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Commercial rental costs likely to rise

Office rental costs are increasing again following slight falls during the pandemic, with modest rises in 2023.

While much of the growth has been in very high-end offices, voluntary organisations that rent space should expect office rental costs to rise when signing or renewing a commercial lease. There are big regional variations, with the greatest growth in bigger cities, unsurprisingly.

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Low unemployment and rising wages may lead to challenges in recruiting and retaining staff

The labour market remains ‘tight’: there are a lot of vacancies and fewer people than usual looking to fill them.

This is partly because unemployment continues to be relatively low 75.7% of 15–65-year-olds were employed in November 2023, compared to 4.2% who were unemployed.

The remaining 20.9% were ‘economically inactive’, meaning they had not sought work in the previous four weeks and/or were unable to start work within the next two weeks. This number has grown significantly since 2020 due to a large increase in the number of people who are inactive due to long-term sickness.

Vacancies have begun declining from post-pandemic high, and economic inactivity has also begun to decrease, which is seen as a sign that the labour market is returning to more normal conditions.

Alongside this, wages are rising across the economy. The ONS estimates that average regular earnings growth for the public sector was 6.9% from August to October 2023 - among the highest regular annual growth rates since comparable records began in 2001. For the private sector, this was 7.3%.

In the year ahead, the National Living Wage will rise to £11.44 from 1 April 2024, an increase of £1.02 or 9.8%. Eligibility for the National Living Wage is being extended to 21-year-olds for the first time.

In 2024, voluntary organisations may struggle to recruit or retain staff without further investment. Continuing high inflation and a tight labour market may see rising opportunities for better pay elsewhere, particularly as the voluntary sector has found this challenging in recent years. In autumn 2023, 45% of voluntary sector employers reported having hard-to-fill vacancies, and 20% anticipated significant problems filling roles.

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Benefits and public services are increasingly squeezed

High inflation has contributed to wage increases over the past year. This also means that more people are paying more tax, especially as tax thresholds have not been changed in line with inflation.

At the autumn statement, the Chancellor chose to use this ‘fiscal headroom’ to introduce new tax cuts, rather than allocating more funding to public services. Despite these cuts, the tax burden is still rising for most people, and around 80% of the cuts will benefit higher earners.

This will have implications for the voluntary sector in two ways. We expect to continue seeing higher numbers of people seeking support from charities as the cost of essentials continues to increase quicker than benefits increase. This is at the same time as other public services are increasingly unavailable.

We also expect even more charities will either have to dedicate more charitable funding to increase the value of their grants and contracts to deliver public services or will choose to withdraw from public service delivery.

Our work investigating the lack of uplifts of contracts and grants for charities delivering public services shows a stark lack of investment, threatening many organisations' sustainability. Many charities are stopping delivery.

For example, 31% said they decided not to bid for a new grant or contract or are considering not bidding for future work. NCVO will continue to push for uplifts to contracts and grants, and sustainable funding for public services.

In the medium term, the government has expected minimal increases in public services. Day-to-day public spending is set to increase by 0.9% in real-terms on average each year from 2025-26 to 2028-29, but analysis shows that many public services will experience a 3.4% real-terms cut each year during the period.

This is all after the next election so may change in future. Charities reliant on public funding may need to consider the longer-term outlook and use 2024 to diversify income and plan for scenarios of further reduced support.

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More local authorities will go ‘bankrupt’

The past decade has seen local government finances under pressure. Central government grants to local authorities were cut by 40% in real terms between 2009/10 and 2019/20. On top of this, local authorities have experienced:

  • high inflation raising their day-to-day running costs
  • rising demand for their core statutory services – especially in adult and children’s social care
  • concerns about mismanagement
  • and many have high debts, which rising interest rates have made unaffordable.

Taken together, many local authorities are struggling and we expect an increasing number of local authorities to issue ‘section 114 notices‘ in the year ahead. These notices warn that the local authority’s expenditure is going to be unlawful – in most cases because expenditure will exceed income, which is not permitted.

In 2023 Woking, Birmingham and Nottingham councils all issued a section 114 notice. A 2023 survey by the Local Government Association found almost one in five council leaders and chief executives in England think it is very or fairly likely they will need to issue a Section 114 notice this year or next.

If issued, the local authority must bring its spending back in line with income, which can require raising council tax and cutting spending. This could result in increased essential costs for households and reduced public service spending.

It also poses risks for voluntary organisations reliant on local grants and contracts. Our UK Civil Society Almanac shows while income from local government has been slowly decreasing over time, it still contributed £7.2bn to the sector’s income in 2020/21. Charities and community groups may face stark and rapid reductions in some areas.

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Public fundraising likely to be challenging

In 2020/21, the public donated £26.5bn – 47% of the voluntary sector’s income. When inflation is accounted for, this represents a decrease of 14%, or £4.4bn, from the previous year. This is in the context of the voluntary sector's income declining for the first time in a decade.

The Charities Aid Foundation’s UK Giving report found that giving increased in 2022, but that this represented a long-running trend of a shrinking donor base continuing.

The same numbers of people are donating larger amounts. CAF also found that monthly engagement with charities through a range of activities had still not recovered to pre-pandemic levels. This includes activities such as volunteering and donating goods to charities.

These downward trends are very concerning, as just under half (46%) of voluntary organisations rely on the public for the majority of their funding. Micro and small organisations with annual incomes under £100,000 are more reliant on public donations than larger charities.

Public donations also make up the majority of income for certain subsectors, including:

  • environmental organisations
  • parent-teacher associations
  • religious organisations
  • and grant-making foundations.

Legacy giving continues to grow, with income reaching a record £3.9bn from 137,000 bequests in 2022. Despite this, there are concerns that legacy giving may grow at a slower rate over the next few years.

This is due to plateauing (or even declining) house prices, along with severe administrative backlogs at His Majesty’s Courts and Tribunals Service (HMCTS), the government department responsible for processing bequests.

Some charitable and philanthropic funders are responding to the pressures on the sector by significantly increasing available resources.

This includes the National Lottery Community Fund which doubled its ‘Awards for All’ maximum funding amount in November 2023. The top 300 foundations increased their giving by 13% in 2020/21.

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Many voluntary organisations face a Cost of Giving Crisis

Income challenges, rising operating costs, expectations for higher staff pay and high demand for services are creating a Cost of Giving Crisis for many organisations.

Organisations may prioritise work based on financial survival in the short-term over work that can be seen as ‘nice to have’ or longer term, but this can have knock-on impacts.

Some may decide that the best course of action is to close. Financial pressure is not the only reason that voluntary organisations decide to close.

It is important to close as well as possible, which should involve creating a closure plan and supporting people, including staff and volunteers, through the closure.

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This page was last reviewed for accuracy on 22 February 2024