What the next five years hold for charity finances

The voluntary sector faces a hugely significant challenge to the sustainability of its funding over the next five years. Its income is not growing alongside the UK economy - GDP reached its pre-recession value late in 2013, yet voluntary sector income is flat, and no bigger in real terms than it was in 2006.

The causes of this are many and complex, but at a fundamental level, the sector’s fastest growing source of income, from individual, is not growing quickly enoughto compensate for falls in the fastest shrinking source – government income, overwhelmingly contract delivery. Other sources of income are not changing significantly enough to affect the overall picture this contrast creates.

Our recently published reviewinto the financial sustainability of the voluntary sector projected these trends forward and compensating for the effects of inflation, found that the voluntary sector will have £4.6bn less spending power a year by 2018/19. The chancellor’s recent announcement that the rate of spending reductions would be the same over this parliament as in the last adds weight to this analysis.

This unambiguous conclusion is underlined by some more nuanced implications. The first is that all of the recent growth in sector income has been fees charged for services by charities (see this graph). This isn’t an appropriate funding source for many charities, and we’ve published a bloglooking at the significance of this.

The second nuance is that these aggregate figures mask very different experiences for smaller and larger charities. Whether you look at income, asset growth or staffing levels, smaller charities have consistently suffered disproportionately over the economic recovery (see this blogfor more).

The review found that in attempting to cope with this difficult financial climate, many organisations have cut their back office and management capacity to try to keep frontline services running. This limits their ability to engage with even traditional sources of funding like grants, leading to lower income and a vicious cycle of diminishing capacity and cash flow.

These conclusions make for stark reading, but they are not without remedy. The review sets out the key issues that both policymakers and sector organisations must address urgently to help reverse these trends and ensure a sustainable future for our civil society. NCVO and its partner organisations will continue working to secure the government’s engagement on these issues as part of the ongoing spending review and over the rest of this parliament.