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This resource is a summary of our Charity Excellence Insight Briefing - £1bn Public Funding Cuts + Potential Widespread Charity Closures. If you would like a copy of the full report e mail me at charityexcellence@gmail.com.
Our Big Data shows that sector resilience has been falling since late 2021 and our sector predictive model, has forecast the path of the crisis very accurately, sadly. The Cost of Living (CoL) crisis was both longer and deeper than Covid and the public sector funding cut risk we previously warned of had materialised. Cuts to public funding for charities were estimated at £1bn pa, we believe that there is a high risk of widespread charity closures and it might be 2025 before we recover to pre-crisis resilience levels, if then.
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Our Sep 2023 £1bn Funding Cuts report, suggested that the public sector cuts we had been warning about may well derail the fragile recovery we were tracking at the time. It highlighted the risk of widespread charity closures and potential long term structural damage to the sector. Our most recent data (to Apr 2024) indicates that this may now be happening. The dead cat bounce we warned about in our Sep 23 report has happened - Sector Resilience (near term viability – up to 1 year) has begun to fall again and Fundraising Performance has fallen markedly. Performance for other metrics, such as Sustainability (long term viability) and Risk, is also falling.
We had been predicting a slow recovery through the remainder of 2024 but had not built the public funding risk into the model due to lack of certainty in both quantum and timing. The fragile recovery we had been reporting, ground to a halt and resilience has been falling since Q4 in 2023. Sector recovery will depend on economic recovery and, whilst still very weak, the economy is looking better than it was. We think that what happens with the public sector will also be a key factor. The coming election makes the outlook very uncertain. We are hoping to see some, albeit much less of a sector recovery in 2024 than previously, with full sector recovery in 2025. That is assuming no long-term structural damage to the sector has occurred.
Synopsis. The Government is (rightly) investing heavily in growing the economy but the impact of the crises on society has been at least as great and the general public and our public services are already paying a heavy price for that. Our analysis indicates that the 2023 Spring Budget departmental budget increases have not flowed down to charity front line services, effectively creating a £1 billion funding cut in real terms. We think that the risk of widespread charity closures is high and that we will now not see full sector recovery until 2025, if then.
Public Funding. The Spring Budget 2023 included that departmental spending would grow at 4%. However, in our Public Funding survey, only 6% of respondents reported a contract funding increase in line with or above inflation and 94% that grants have been cut of which 39% were either significantly reduced or not renewed.
Impact On Charities. Five percent of 5% of charities told us that believe they will be able to achieve more or significantly more and another 9% that there will be no change. Eighty six percent reported they will be worse off, of which nearly a third (32%) face significant financial challenges and another third (34%) have a serious cash flow problem or have or may have to consider reducing or closing services, making staff redundant, merging or closing their charity. We think the main impact will be on health and social care charities, and to a lesser extent charities working in education, employment and justice.
We think the cuts will:
Overall, the societal costs of increased crime and lost education far outweigh the initial savings from youth club closures. IFS (How cuts to youth clubs affected teen crime and education, 13 Nov 24)
We are not making an abstract philosophical argument. The cost in terms of the financial impact on the public sector and, additionally, on society will be very real.
Possible Responses. We believe that the Public and Government would wish to see the additional funding made available in the 2023 budget being used to support front-line delivery. The most obvious way to ensure that is to ensure charity contracts and budgets should be increased at least in line with inflation. We recognise the current very difficult financial position Government finds itself in, but the current cuts will not deliver real savings, quite the opposite. However, if Government were to take ambitious and robust action by transferring high-cost public services into high value charity delivery, this would not only generate real savings but also much larger savings.
Moreover, we think that Government, the Sector and grant makers coming together and acting quickly, collectively and robustly, also has significant potential, despite the desperate shortage of funding. Unlike the funding needed, this is within our control and, no matter how bleak, we can still make a difference.
Our front-line charities have performed heroically through Covid, the CoL crisis and now this, but they’re heroes not miracle workers. We must now provide them with the resources and support they need.
In the Spring Budget 2023, additional funding was included to increase departmental budgets overall, with additional funding for front line services and charities.
As at the Autumn Statement 2022, the government made available up to an additional £6.1 billion in 2023-24 and £8 billion in 2024-25 to support health and adult social care services, and an additional £2.3 billion in each of 2023-24 and 2024-25 for the core schools budget in England.
The Spring Budget includes an additional £3.1 billion a year by 2024-25 rising to £5.2 billion at the end of the forecast period to help get more people into employment.
Total departmental spending (DEL) will grow in real terms at 4% a year on average over this Spending Review period. Public sector net investment as a proportion of GDP will average 2.5% over the forecast period, delivering over £600 billion of planned public sector gross investment over the next 5 years.
The Government pledged £101.5m for English charities and community groups over the next 2 years. There was also £18.5m for charities in Scotland, Wales and Northern Ireland, bringing in the total to £120m over 2 years.
About three quarters of the funding was allocated for grants in FY 2023-24, targeted at the frontline charities most impacted by increased demand and delivery costs. In Jul 23, the Government opened a £70.9m fund for organisations that offer at least one critical service: food and emergency supplies, emergency shelter, safe spaces, warmth, and financial or housing advice.
The remaining quarter would be used to fund measures over the next two years to increase the energy efficiency and sustainability of charities, and might include new boilers, heat pumps and insulation to deliver more efficient services for vulnerable individuals.
There may still be some budget left to allocate this year but the bulk of the pledged funding for FY 2023–24 has now been allocated and the funding for next year is for new equipment. When set against our estimate of cuts, the net result is a significant cut in funding.
To test and augment our Aug 23 analysis using our charity Sector Big Data, in Sep 23, we carried out a survey of public funding for charities. A total of 266 responses were received. There was significant under representation of charities with income under £100k pa. In our previous surveys, micro charities (under £10k pa) have tended to be under-represented but it might also be that fewer very small charities receive public funding; we don’t know.
Here are some of the key findings.
Our sector resilience assessment to end 2024 and key factors in the longer term.
The graph above shows our new forecast for sector resilience until the end of 2024. The blue vertical line is this month. In recent months we've seen what might be the first signs of recovery.
A Sector In Crisis Already. The crisis for the charity sector began late 2021 and we've been tracking falling sector resilience since then. Donations are about half of our income, which Benefact have reported fell by half last year. Our poverty charities are in serious financial distress. The Trussell Trust has gone from a £40m surplus to a £15m deficit in a year. But the impact has been felt across the whole sector. Hospices have reported a forecast £186m deficit.
Which Might Get Much Worse. Government funding is about a quarter, making it our 2nd biggest funding stream (£15bn pa). Since last year, we’ve been warning about the risk of cuts to Government funding flowing through to charities and it’s now materialising. The Youth Investment Fund is being cut by £31m and the Canal & Rivers Trust has reported a cut in its grant of £300m in real terms from 2027. We do not know if further cuts may be planned.
Widespread Cuts. Our survey covered both public sector contracts and repeat grants, for non-profits of all sizes and sectors. Only 6% reported an increase in line with or above inflation. That is, real term cuts for 94% of respondents. Moreover, 20% reported contracts being cut or not renewed and 39% that grants were either significantly reduced or not being renewed.
Estimated Scale of the Cuts. For prudence, we have assumed that the cuts have offset the increases with a net impact of no inflationary increase in public funding for charities. Using the UK inflation rate in June (7.9%) multiplied by Government sector funding of about £15bn pa = £1.2bn. As a further prudence measure, we have reduced the estimated impact to £1bn in funding cuts pa. There is obviously a wide margin of error in this, but the prudence measures we have taken bias this to any error being greater than £1bn, not less.
The upward trend in the 2024 graph looks positive but the current UK economic growth forecasts are very weak. That's critical for our fundraising. Sector resilience at year end 2024 is forecast to be still lower than when the crisis began, even after a year of 'recovery' and, if the Government cuts are as large as we think these potentially could be, even that may be very optimistic.
In Oct 23, a Bank of England policy maker was reported as saying that only about 20% or 25% of the impact of the interest rate hikes have been fed through to the economy. In its last economic health check, prior to this, it had said 4 million households (had) yet to face increased mortgage costs would (but would) “do so by the end of 2026”. This suggests that the relentless pressure poverty charities have been under is likely to continue.
In autumn 2023, some of the very large charities, such as CRUK and Marie Curie, announced that they were investing in fundraising and significantly increasing their income targets. We’ve previously warned of the risk of large charities using their capacity and capabilities to create digital moats. We think there is now a growing risk to the smaller charities.
Ultimately, how 2024 turns out will be driven by fundraising income and that will be driven by the economy. In Oct 23, the Bank of England warned that the economy will be on the brink of recession by mid 2024 and that it intends to keep interest rates high for an extended period to tackle stubborn inflationary pressures. It's also a General Election year which brings significant uncertainty. However, in terms of the strategic factors we have identified, we think there will be:
We should hope for some sort of economic recovery but plan for a bleak year.
While big spending has softened the impact of the crises since 2020, there is a risk it will discourage investment and send the UK into a long-term negative spiral. The amount the UK owes now exceeds GDP for the first time since 1961. In July, the OBR (Office for Budget Responsibility) warned that debt could balloon to more than 3 times GDP over the next 50 years, unless action is taken. If credit agencies were to downgrade the UK’s rating that’d have a further negative effect. That would further impact almost all of our income streams and increase the pressure on public sector budgets and services.
In the Nov 23 budget, the Chancellor made £20 bn in tax cuts. The IFS has warned this will be mostly funded by deep reductions in public spending planned from 2025. The government has committed to funding for key areas – including the NHS, schools, defence and overseas aid but unprotected departments would face deep reductions in their budgets. Those likely to suffer the most are further education, local government, prisons and the courts (Guardian 23 Nov 23).
The tax giveaway is likely to drive even deeper cuts in charity funding and increase demand. Given the 2023 cuts of £1bn to charity funding may see increasing number of charities closing, it seems likely that we may now be facing long term structural changes in the sector. Sector involvement in key areas like education is likely to fall, possibly markedly, and the only charities likely to thrive will be those with a strong public appeal, economy of scale and the ability the exploit the coming AI revolution.
We may see the digital moats we have been warning about for some time with super large charities taking an even greater fundraising market share from smaller charities. 2022 saw the first fall in charity numbers in more than 30 years and, with charities massively underfunded and potentially out competed by super large charities, that may just be the first number in a possibly growing trend.
We could change that, if the sector were to take responsibility for its own future by beginning to act strategically - rethinking grant making, working in a genuinely collaborative way and enabling all charities to exploit technology. We've been saying this for some time and, sadly, that seems unlikely.
Six percent of survey respondents told us they were confident things will improve or significantly improve and 13% expect things to stay the same. However, 65% expect things to become worse or much worse.
Two percent feel the situation will improve long term and 13% that it will deteriorate.
We think the greatest impact of the cuts in public funding for charities will probably be on larger charities, primarily in health and social care, but also education, employment and justice. The impact is already being felt but it seems likely it will continue to grow as contracts/grants come up for renewal in the coming year.
The Government funding being made available for front line poverty charities will hopefully bring some relief to those already in acute financial distress. However, the large cuts in other areas are effectively moving the funding gap to other parts of the sector, not helping to close it. We do not know if further large cuts are planned or not.
Moreover, the scale of the cuts overall is so large that we believe it will impact across the sector and increase competition for everyone in an already hugely difficult funding environment.
We have been increasingly hearing about charity closures and increasing media reports of redundancies, and we’ve noted an uptick in Charity Commission closure data. However, the data is simply not available to identify any increase in closures, let alone estimate numbers. Consequently, our assessment that the risk of widespread closures is now high is based on our analysis of the key risk factors.
Charities often have specialist expertise and the staff and infrastructure that enables them to fully exploit this. Even if resources are transferred to others on closure, much would be lost and, in a resource starved sector, it’s questionable to what extent this might realistically be achieved anyway. Small charities in particular also have local community knowledge, a well of goodwill and local support, and networks of communication and trust, often built up over years.
Once charities close, this perishable infrastructure (concept – Matt Radford) is lost and, even if funding is subsequently re-instated, it won’t be, except perhaps in the much longer term.
Charities, particularly the small ones that support marginalised groups, have the trust of and access to the most marginalised whom the public sector often cannot reach. Significant levels of charity closures would be likely to result in increasing numbers of the most vulnerable being further excluded.
Our analysis indicates that the cuts are a false economy that will harm society and, at the same time, increase costs public sector costs, not deliver real savings. We also believe that outsourcing public services would deliver not only real but more savings, and that there are other steps that could be taken to mitigate the impact on charities and their beneficiaries.
Charity Value for Money. We have only 1m staff, who are paid less than their public sector counterparts and about 10m volunteers who are not paid at all, and charity overheads are usually far lower than the public sector. We deliver services at a fraction of the cost and, in doing so, represent huge value for money.
Increased Harm & No Savings. Not uplifting a contract by inflation will save a bit on paper. However, if significant numbers of (other than very small) charities close, most wouldn’t re-open and the work they carry out would simply be transferred to a public sector already at breaking point and at far higher cost. Our public services could either accept that far higher cost, or more likely not and create a growing bow wave of need that would cost even more longer-term. The current cuts will cause far more harm and at potentially much greater financial cost to public sector budgets.
Building Back Better. The Government could deliver on its pledge to do so. It's desperately short of funding but that's even more reason for not making an already very bad situation far worse. To avoid that and save far more money, it should be done the other way round by transferring more public services to charities. If this was done in a way to enable charities to achieve the economies of scale they often lack, the savings would be even greater. That'd take pressure off public services, save their far larger overheads and avoid the potentially huge impact of the latest cuts.
Influencing Government. Yes, it would be extremely difficult, but the Government has promised to deliver ahead of the General Election. We believe that our analysis shows the real cost of the current round of additional funding cuts and the tens of millions of charity staff, volunteers and their beneficiaries who will pay for that will have a vote next year. Government might just be open to persuasion to stop the expediency of cutting numbers in spreadsheets and, instead, act strategically to deliver real positive change.
The Public and Government would wish to see the additional funding made available in the 2023 budget being used to support the front-line delivery it was intended for, not funding additional civil service posts. Not least, because Government is already again seeking to cut these. We would argue that it is in everyone’s interests for Government to ensure that civil service pay increases are only funded from within the existing pay budget, not by cutting funding for front line services.
We would also argue that Government should recognise the false economy in cutting sector funding and, instead, take ambitious and robust action to invest in the sector by transferring high-cost public services into high value charity delivery. Doing so would not only generate real savings but also much larger amounts in savings.
Sector Collaboration. We also think that genuine collective collaboration at sector level is a huge, missed opportunity. We should work collectively to make the case and then speak with one voice to persuade Government of the need for action. Equally, we should do the same to ensure that the deployment of our very limited sector level resources is properly coordinated and focused on supporting front line charities, rather than acting as individual organisations.
Grant Makers. Could also play a key role by working collectively to ensure that the funding they provide is coordinated and focused on the greatest need. That could include how funding is deployed. For example, tackling the huge administrative cost to hard pressed charities (and themselves) of submitting and managing funding bids, the types of funding provided (core and infrastructure) and identifying the sector pressure points, where funding would have greatest impact.
AI. We also think that AI is potentially one of the biggest opportunities for the sector in decades. Our Charity AI Steppingstones Strategy focuses on collaboration to catalyse widespread AI adoption and is already being very well received. We can’t possibly solve the huge problems we face but believe that it’s better to light a candle than rage against the darkness.
On 27 Mar 24, ex-Prime Minister Gordon Brown wrote in the Guardian outlining some big ideas on how we might address the challenges we face and in April Big Society Capital and 30+ other organisations wrote to the Financial Times calling for next government to take 4 steps to unlock private investment to drive growth & reduce poverty.
We believe that, if Government, the Sector and grant makers were to come together and act quickly, collectively and robustly, the impact of the cuts could be significantly mitigated, despite the desperate shortage of funding.
Unlike the funding needed, the above is within our control and, no matter how bleak, we must act because we can still make a difference.
Our front-line charities have performed heroically through Covid, the CoL crisis and now this, but they’re heroes not miracle workers. We must now provide them with the resources and support they need.
To help everyone, all of the recent cost of living crisis reports we've found to use in our own work have been uploaded into Data Finder. These will come up in searches automatically, or use 'Cost of Living' as a search term in the Key Word search to see all of these. For a much larger volume of associated data sources use the Poverty & Deprivation search category.
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