The charity sector is not immune from the cost of living crisis. In this guest blog, Richard Sagar, Head of Policy, Charity Finance Group, sets out what the crisis means for charities, how to mitigate this, and says that they will ultimately be expected to do more with less.

With inflation above 7% (and it set to increase in the year ahead), outstripping wage increases and with tax increases and a failure to uprate benefits squeezing incomes for many households, we are experiencing a cost of living crisis not seen for decades. And with 4 in 10 people expecting their finances to get worse over the next 12 months, it is a problem that is likely to be with us for some time.

As you might imagine, the charity sector and perhaps more importantly the beneficiaries they serve, are not immune from this crisis.

Inflation will increase the operating costs for charities, with staffing costs having to increase substantially if they are to remain competitive, and with staff retention also a major concern, we foresee this being a big challenge for many in the sector. When one factors in spiraling energy prices and the increased cost of other goods and services that charities purchase to achieve their charitable objectives, outgoings will need to increase more than previously forecast.

The bad news doesn’t end there for charities, with the effects of inflation not just increasing operating costs—inflation will also lead to their reserves losing their value more quickly than previously forecast. So, if they are calculated on a certain number of months operating costs, it will not take long for the current amount of money set aside to be insufficient.

What’s more, charities will see the value of grant income and donations decline during this period, with Pro Bono Economics calculating that on current forecasts of inflation, a £20 donation in 2021 will be worth £17.60 in 2024, while a £100,000 grant will be worth £88,100 by 2024. For charities whose business model relies on selling services, such as the museum or leisure sectors, one would also expect to see a reduction in their income as people’s disposable income declines.

There is also the decline in funding for government departments to contend with. As departmental budgets are set in cash terms, the planned average real-terms growth in many day-to-day government department budgets, key to the charity sector, will be less than had been initially planned at the previous Comprehensive Spending Review.

This will potentially mean less money available for charities who rely on funding from central government, and perhaps more importantly, less money available for people who rely on income from these departments.

It seems that, overall, charities will be expected to do more with less, even if this is not sustainable either financially or in terms of the well-being of their staff.

Impact on those with low incomes

So far, I have only focused on the impact that this will have directly on charity income, when one takes into account the impact that the cost of living will have on potential beneficiaries, and those on the lowest incomes more broadly, the situation gets worse.

The Resolution Foundation has found that without further support for low-income families, a further 1.3 million people would be pushed into absolute poverty next year.

Support from government to ameliorate these effects for the least well off in society have been lacking. With Joseph Roundtree Foundation analysis of the three major policy announcements from the Spring Statement on working age households (these were an increase in the National Insurance rate, benefits not going up with inflation, and an increase to the National Insurance threshold) finding that the largest negative income change of these policies will be to those on the lowest incomes, with households in the lowest decile of earners seeing incomes reduced by over 5%.

Mitigating the effects of inflation and the cost of living crisis

So, in summary, many charities will see an increase in demand for charitable services, increased operating costs, and will see the value of their income decline.

Unfortunately for charities, there is no silver bullet to mitigate the effects of inflation and the wider cost of living crisis, but that’s not to say there is nothing that can be done. For finance directors and people with governance responsibilities, updating forecasts to consider changes in demand for services, fundraising targets, and setting realistic expectations for wage negotiations with employees will all help. And for charities with larger levels of reserves, they may wish to consider either spending these reserves to help meet increased demand, or to invest this money to attempt to hedge against inflation (in so far as this is in keeping with your organisation’s risk appetite).

CFG, alongside sector partners, is hosting a webinar to help charities do what they can to alleviate the effects that the cost of living crisis and inflation have on your charity and beneficiaries. This will be the first in a long line of work supporting charities, that we plan to make on this issue in the year ahead.

It is only through a strong, vibrant social sector, that we can support those who are least well off through this crisis.

In this blog, Richard Sagar of Charity Finance Group sets out what the cost of living crisis means for charities and their beneficiaries: Click To Tweet

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