Expert View: Unrestricted income: No-strings cash will only get rarer

The looming recessionary economic climate could box charities into a corner.

At a time of renewed commitment to third sector independence, and with Ed Miliband, Minister for the Cabinet Office, exhorting voluntary groups to "bite the hand that feeds them", charities may experience even more pressure on their already threatened pools of unrestricted income.

One of the key constraints on unrestricted income has been the contract culture, which has seen a growing number of charities enter into legally binding agreements to provide public services. But other sources of charitable funding also come with strings.

Project-based funding has become the dominant mode of grant funding from foundations as well as local authorities. And although the National Audit Office and some major charitable trusts have more recently championed long-term core funding, this will be seen as a luxury if investment income declines on the back of falling capital markets.

Social investment, now worth about £750m to the sector, represents a new source of growth funding, but the need to show a return on investment may be as great a constraint as any demands from project funding. Corporate cash donations have shown very little growth for a decade now, as companies increasingly look to provide in-kind gifts or support linked to their own marketing or social responsibility requirements.

Large charities are, as ever, in the strongest position, often with more than half their funds unrestricted - in smaller charities it tends to be well below a quarter. However, funds are increasingly tied to specific outputs and, whether technically restricted or not, the amount of general or core funding available to charities has been falling.

Donations from the general public are now the main source of genuinely unrestricted income for charities, so a recession would be a particular threat to the sector's independence. And as property values fall, legacy values will tumble. Pressures on the banking and financial services industries, which have generated a third of the country's economic growth over the past five years, are likely to result in less high-net-worth giving and less reclaimed tax.

Private donations will be the first casualty of a tightening spending environment. If GDP growth slows to between 1.5 and 3 per cent this year, as expected, donations might see only modest growth, from £130m to £260m, making a barely perceptible impact on the sector's need for more unrestricted income.

- Cathy Pharoah is a visiting professor and co-director of the Centre for Research on Giving and Philanthropy at Cass Business School.

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