Anjelica Finnegan: Fragile economy calls the funding mix into question

Stagnant wages and slowing GDP growth have combined with declines in output to put downward pressure on the economy, writes our columnist

Anjelica Finnegan
Anjelica Finnegan

While we cannot yet know what long-term impact the UK’s vote to leave the European Union will have on the sector and the wider economy, the data presented in the Charity Finance Group’s Q2 Economic Outlook Briefing paints a picture of a fragile economy.

The number of people in work continues to grow, but stagnant wage growth has squeezed disposable income. Growth in gross domestic product has slowed as a decline in construction output, agriculture and production apply downward pressure.

The current account deficit is the largest annual deficit as a percentage of GDP at current market prices since annual records began in 1948. Before Theresa May became Prime Minister, we might have assumed that the government would tackle this increased deficit through further spending cuts in a bid to achieve the elusive budget surplus.

However, the new Chancellor, Philip Hammond, has suggested that the government would be prepared take on a higher deficit to address any slowdown in the economy. As such, the sector might not be hit with further cuts, but it won’t be until the Autumn Statement that we get a clearer view of Hammond’s intentions and what implications there might be for charities.

Reflecting the fragility of the wider economy, the National Council for Voluntary Organisation’s 2016 Civil Society Almanac shows that, although the very largest charities are thriving, there is a "squeezed middle" that is facing significant challenges. Drawing on this data Jennifer Crees, research officer at the NCVO, says that medium-sized organisations have neither the flexibility of the smallest charities, nor the increased stability that comes with being large.  

The 2016 Managing in the New Normal survey, produced by the CFG, the Institute of Fundraising and PwC, shows that the number of charities reporting that they would need to use their reserves to maintain services or pay for operating costs has increased. As the Economic Outlook Briefing’s cover article argues, this becomes more concerning when we consider that, although 70 per cent of charities surveyed said they expected to see an increase in demand on services, more than half of respondents reported that they would not be able to increase their reserves if they wanted to. This indicates that charities have limited room in their finances to accommodate any increased demand.

This calls into question the funding mix for the sector – the move away from grant funding to contracts means that charities are finding it harder to generate surpluses that could be used to build up reserves. Those charities that struggle to diversify their incomes will continue to face increased pressure.   

Fundraising plays an important role in the funding mix, of course. In his first article for the EOB, Ian MacQuillin from the fundraising think tank Rogare argues that charities need to rethink how they resource regular donor acquisition. He argues that a more appropriate funding model for charities is to recruit fewer but better donors.

For those charities that have investment portfolios, Nicola Barber, partner and head of charities at the investment management firm James Hambro, articulates in her article the need to implement a long-term strategy for sustainable investment. This, she argues, will produce good return on investment, especially in the long term. It will also have a positive impact on charities’ reputations, something that is vital for donor support.

Anjelica Finnegan is senior policy and public affairs officer at the Charity Finance Group

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