Reduction in disposable income could hit sector finances

Anjelica Finnegan
Anjelica Finnegan

The first quarter of 2016 has been a mixed bag for the sector. Interest rates have remained constant at 0.5 per cent for the 85th consecutive month. For those charities that have a share of the sector’s £2.7bn loans book, this is good news because repayment costs will remain low.

Similarly, inflation has remained close to zero at 0.3 per cent, meaning that the costs of goods and utilities continue to be kept down. However, low inflation also makes it difficult to secure a good return on investments. This might not only have an impact on available finances for the sector, but could also affect the pensions deficits that continue to plague the sector and the wider economy.

The big issue that the EOB highlights this month is falling household disposable income.

Andrew O'Brien, head of policy at the CFG, questions how long households can keep spending given that disposable income has fallen by 0.6 per cent.

With policies such as the National Living Wage and the Apprenticeship Levy increasing costs for employers, and with falling labour productivity rates, wage growth is being suppressed. If interest rates and inflation begin to rise, we could see a more significant fall in disposable income.

Given that it is spending that has nursed the UK economy back to heath, if people begin to tighten their belts again and limit their spending, there is likely to be a knock-on effect for the whole economy.

The EOB shows that charities’ income from individuals is linked to levels of household disposable income. This makes sense: the less money people have in their pockets, the less they have to give to good causes.

This mean that charities could find fundraising and trading with the public become tougher. As the EOB highlights, this might also renew concerns about the reputation of fundraising as people who are feeling the pinch become less tolerant of fundraising requests.

It is against this backdrop that charities are facing increasing employee costs through two of the government’s flagship policies: the National Living Wage and the Apprenticeship Levy.

In my article in the EOB, I highlight the unique challenges that these policies pose to charities, especially to those organisations that are delivering public service contracts or are looking to do so. As we know, government contracts are a major source of income for charities.

However, CFG’s benchmarking survey recently found that large charities are making an 11 per cent median loss on government contracts already. Government needs to ensure that existing and future contracts meet the increased costs that charities will incur as a result of the NLW.

It is against this mixed economic picture that John Langrish, head of investments at James Hambro and Partners, shows that market volatility is set to continue as Chinese economic slowdown, Brexit, a potential Trump presidency and ambiguity over the path of interest rates all create uncertainty.

Langrish argues that charities need to set long-term investment objectives and outlines how they can ensure their investment portfolios are robust enough to avoid being hit by market volatility.

Lastly, in his final article as head of charities for Kingston Smith, Nick Brooks provides analysis of the 2016 Budget. For the most part, the sector was excluded from any significant announcements either to the benefit or the detriment of charities. However, measures such as maintaining the existing 80 per cent rate of business rate relief for the sector, the commitment of £45m of banking fines over this parliament for military and health charities, and the tax break for museums and galleries are to be broadly welcomed.

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

Every quarter the Charity Finance Group, with the support of Kingston Smith and James Hambro & Partners, compiles a free Economic Outlook Briefing for charities. The briefing analyses the latest data and the impacts of economic developments on our sector. You can download the briefing for free from CFG’s website.

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