Daniel Ferrell-Schweppenstedde

Former Policy and Public Affairs Manager

Charities Aid Foundation

Key challenges and opportunities facing the charity sector

31 January 2023

Like many organisations, CAF is considering how the cost-of-living crisis and impacts of a potential recession is affecting the environment we operate in. Civil society in the UK is vast and diverse but there are common challenges many of us are facing.

What would a recession mean for the sector?

The Bank of England expects the UK to experience a significant recession. Charities have always been at the forefront of dealing with the early impacts of economic and societal shifts. There are indirect impacts on charities’ bottom lines, like potential cuts to corporate donations or reduced grantmaking capacities.

Inflationary pressures were already hitting the sector in the second half of 2022. Charities experienced falling income and rising operating costs. Our research shows that more than half of charities worry about their ability to survive due to the rising cost of living, increasing from over a third (35%) earlier in 2022. Energy costs remain a key concern, as support for charities’ energy bills will very likely be reduced due to the recent changes to the Government’s energy scheme.

Public service contracts have gained significance in charities’ income over recent years. The fiscal event in late 2022 came with cuts across department budgets as a reaction to increased pressures on the public purse. The value of contracts could decrease as a result, with an expectation of the same (or sometimes greater) output for effectively less funding. But many contracts were already underfunded and not viable for charities. Besides, the types of contracts charities hold are rarely adjusted for inflation.

Reduced ability to meet demand

Charities are running out of options to continue to meet the high demand for their services. Only half (49%) of the charities surveyed in November 2022 felt confident that they have the funds to meet current service demand. This has dropped from 58% in October. The VCSE Sector Barometer confirmed this trend and shows that protracted levels of demand are now overwhelming charities.

Almost a quarter (24%) said they reduced services but now have no room to cut further. Around half (51%) of charities are using their reserves to cover core costs.

These factors are accompanied by a staffing crisis. The VSCE Sector Barometer shows that 36% of charities struggle to recruit staff and are unable to meet demand as workloads increase. Cost increases are worsening the staffing crisis. One in four (27%) smaller charities having to reduce paid staff over winter months in 2022.

Economic pressures on individual giving

Inflationary pressures are also eroding charitable giving. Our UK Giving report found that donation levels last year were below pre-pandemic figures with fewer people giving to charity. This is worsened by the squeeze on household budgets as nearly five million individuals chose not to make a one-off donation in September.

New data on giving in November and over Christmas shows that recovery post-Covid has not materialised. Nearly four million fewer people were donating to charity during the peak pre-Christmas period – a crucial time for charity fundraising. This comes on top of inflation eroding the value of donations in real terms. Our recent analysis with Pro Bono Economics estimates that a monthly charity donation of £20 started in 2017 will be worth just £14.90 by 2024.

Charities will also have to continue to find new ways to bring younger supporters on board, while keeping older donors engaged. Our research shows that older people are still more likely to be regular givers compared to younger people (38% over 65s vs 20% 25-34-year-olds).

Younger donors are also less likely to give in general. The proportion of those aged 16-24 who never give to charity has significantly increased. It rose from 6% in 2020 to 9% in 2021. The proportion of those aged 25-34 following a similar pattern (6% in 2020; 8% in 2021). In contrast, there have been no significant changes among those aged 55-64 or 65 and above. But there may be a distinction between willingness to support and ability to give. Survey data from Barclays showed that 90% of individuals in the 18-24 demographic said that they donated to charity over the last 12 months in 2021, compared with 80% overall.

Changing donor behaviour

The most common way people report giving to charity is through a Direct Debit or standing order. This has increased year-on-year from 33% in 2018 to 38% in 2021 and early 2022. This is good news for charities, sa it provides a steady income flow, and can be easier and sometimes cheaper than other ways.

But there is also little indication from past research that individuals might adjust their Direct Debits to account for inflation eroding the value of their giving. Charities might be reluctant to ask supporters to change Direct Debits when facing hard times and might fear that donors could cancel payments if prompted. But Greenpeace’s experience shows that talking about the topic can have positive outcomes. Their data on how many supporters cancelled their Direct Debits recently created opportunities for engaging with existing and new permanent supporters.

While cash is still a popular way for people to donate, the pandemic seems to have accelerated digital giving. Online giving reduced slightly in 2022 compared to the pandemic, but remains higher than pre-Covid. Whereas cash giving has stayed subdued far below its historical norms.

Charities will have to find the right balance between online and offline approaches in their fundraising and how they engage supporters. Continued investment in digital capacity to deliver services and fundraise remains relevant.

Can digital deliver?

Digital is now essential to participation, service delivery and fundraising. New digitally-enabled networks gained further momentum during the pandemic. We are still grappling with what this means for participation post-pandemic, and how traditionally organised fundraising charities should position themselves.

There is a wider trend of interactions moving online such as with online shopping. And while many charities have been able to benefit, there is still a digital deficit in parts of the sector. Data from our Charity Landscape 2022 report showed that 80% of charities with an income of £5 million or more said that they had invested in IT and online solutions during the first year of the pandemic, but only two thirds (64%) of smaller charities did the same (those with an annual income of less than £1 million).

Charities must think first and foremost about the needs of the communities they serve. Remote working and digital service delivery could increase their efficiency and reach. But the loss of in-person contact could come at a cost in different ways, and service users might still want to access services with a human touch.

There are also vast differences in charities. Many provide services that cannot be delivered online, or their service users could face digital exclusion if they switch services over permanently. However, it seems that digital ways of working are here to stay, and most charities will need to consider  delivering services that include in-person and digital.

The need to mobilise volunteers

During the pandemic we saw an outpouring of volunteering and mutual aid. The question was always whether this was a permanent trend or if new volunteers could be tapped into. The good news is that willingness to volunteer remains high. For example, this winter, one in 10 people (9%) said they would be very likely to volunteer a day of their time to a local charity, group, or club if they were personally asked. This amounts to an estimated 34 million hours of volunteering time.

There could also be a volunteer boom in 2023 driven by younger people. Research by Pro Bono Economics shows that charities could benefit from up to 2.5 million new volunteers aged 18-34 in the next year. This May, we will see the Big Help Out on the Coronation Bank Holiday, which several large charities have already signed up to.

Charities might need to adjust their volunteering offering to respond to what appears to be a growing ‘participation premium’ – people wanting to feel that they are actively doing something to cause change, instead of ‘just’ giving money. In normal times, events and other group activities would be suitable options. But charities now might be competing for people’s time with other activities that are now possible after months of lockdown.

There could also be an increased opportunity to bridge the volunteer gap through corporate giving. Payroll giving and volunteering opportunities potentially appealing to younger and more socially conscious employees.

Charities’ ability to make their voice heard

One of the core principles underpinning the UK’s civil society is the freedom for charities to advocate on behalf of the communities they serve, and to campaign for the change they deem necessary to achieve their charitable mission. But there have been worrying criticisms of charities that engage in political advocacy or comment on Government policy and activities. This risks damaging public trust in charities. But it is vital that charities can speak up in areas important to their mission. This can lead to important improvements in policy and is part of the democratic process.

There may be a need for a flagship Government programme that incorporates civil society to harness local action. The Government’s ‘Levelling Up’ agenda aimed at addressing inequalities across different regions still provides such possibility. For now, it remains focused on local infrastructure, but many have highlighted the need to tackle social issues and give civil society a seat at the table.

What can charities do?

The pandemic and the impact of the cost-of-living crisis have brought about two major realisations. How dependent society is on the contribution of civil society and civic spirit, and the extent to which the external environment can have a long-term impact on the charity sector.

There are areas that charities might need to revisit over the coming months to make sure they have invested sufficiently to balance current need to deliver services with future preparedness. These considerations include increasing financial resilience and sustainability, managing costs and moving towards renewable energy sources, embracing the social economy and partnerships, and increasing engagement with donors.

As always, CAF stands ready with services and solutions to support the charities and social organisations we're here to serve.

Our Cost-of-Living resource hub features expert guidance on topics ranging from cost savings, to supporting staff and strategies for managing cash flows. 

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