Charity income is feeling the pinch

But could smart charities come out of recession in better shape than they went in?

Illustration by Peter Mac
Illustration by Peter Mac

The outlook is not good. As charities prepare their budgets for next year, many will be reflecting on how times have changed. Even relatively recently, they remained upbeat about the future. When the NCVO asked charity leaders in August about their plans, 61 per cent expected to increase spending next year and 42 per cent intended to take on more staff.

That, however, was before the collapse of the Icelandic banking sector, which, for many, changed everything. "The fact that a number of charities were caught really brought it home," says John Low, chief executive of the Charities Aid Foundation. "There's a real sense of anxiety now."

The news soon began to turn to redundancies. Shelter is cutting 43 jobs by the end of the year; up to 45 positions are at risk at Oxfam; and redundancies at the NSPCC could reach 150. Scope has already cut eight, including five senior posts, and says more will almost certainly follow. By mid-October, a survey by the Charity Commission showed four out of 10 charities had been affected by the credit crunch, with a quarter reporting a fall in donations. Of those, one in 12 had been forced to make redundancies. Since then, things have only got worse.

"I'd be surprised if any charity now said the recession wasn't having an impact on them," says Giles Pegram, director of fundraising at the NSPCC. Back in August, he was among the optimists, arguing that past experience suggested his charity would ride through any downturn unscathed. Today, he's far less sanguine.

"There is something fundamentally different about what we are going through at the moment," he says. "The mood out there is very doom and gloom."

There have already been casualties. Cats Protection and Naomi House Children's Hospice, for example, had £11.2m and £5.7m respectively in Icelandic bank Kaupthing Singer & Friedlander. Neither charity knows whether their money will be returned.

"It's been devastating," says Peter Hepburn, chief executive of Cats Protection. "The whole charity is reeling from this."

A survey by the sector's umbrella bodies at the end of October found 48 charities were affected by the collapse of Icelandic banks, with total losses estimated at between £86.6m and £200m.

Other high-profile failures that have hit charities include travel company XL, with its £200,000 a year tie-in with medical research charity Sparks, and Lehman Brothers, which gave about £1m a year to good causes through its UK foundation. As for the foundations linked to British banks - Lloyds TSB, for example, gives 1 per cent of its pre-tax profits through its foundation - it will be some time before the impact on them becomes clear.

This is true of funding from trusts and foundations as a whole. According to David Emerson, chief executive of the Association of Charitable Foundations, it's hard to predict how trusts will react. Those with large endowments could maintain their grants. Others will inevitably cut theirs.

However, most of next year's grants at least are already allocated, so grant-funded organisations and projects will not take an immediate hit. "Come January, funding is not going to suddenly fall off a cliff," says Emerson.

Anecdotally at least, corporate fundraising has already declined. "We're seeing quite a dramatic reaction from the corporate sector," says Tony Elischer, managing director of Think Consulting Solutions. Even advanced discussions are being abandoned, he says.

There has been a measurable drop in legacy income. Scope, for instance, is likely to be down 10 to 15 per cent for the year - mostly the effect of falling house prices on residual legacies. The NSPCC estimates it has lost about £2m this year.

The 'non-essentials'

The great unknown, though, is the impact on individual donations.

Most experts expect to see some reaction from donors, even if it hasn't yet materialised. Pegram, for instance, points out that the NSPCC is fairly dependent on small, regular donations, and thinks these could be vulnerable. "If there are widespread redundancies, it's relatively easy for people to go through their bank statements and chop off non-essential standing orders," he says. "We're worried we might be one of them."

Oxfam, too, says individual donations are the most likely area to suffer. Cancer Research UK admits it's a possibility and says it forecasts fundraising income will fall by 4 or 5 per cent over the next year. Jon Sparkes, chief executive of Scope, says: "It's not happened yet, but if there is a prolonged recession there must be some impact on how much the public can afford to give." During the previous recession in the early 1990s, a CAF survey found that 67 per cent of charities reported a fall in donations.

But charities don't have to see falls before they are forced to make hard choices. Oxfam says it still hopes it might not see a drop, but is making cuts because it is already clear that income won't grow as rapidly as it had been projected to do in happier times.

On the plus side, there are two areas in which charities might see gains. One is charity shops, which are reporting an increase in business as consumers look for bargains. The downside, however, is that clothing donations tend to fall in a recession: Cancer Research UK and Mind have already warned that stock levels in their shops are declining.

The other upside is government funding, which accounts for a greater share of the sector's income than it did during the previous recession and could cushion falls in income elsewhere. "Public service reform is going only one way and that is to involve more third sector organisations, so there's scope for them to really gear up their activity," says Stephen Bubb, head of chief executives body Acevo.

Here again, though, there are risks. At a local level, recessions in the past have seen councils cut discretionary spending, including grants to the sector. That could happen again, particularly if freezes in council tax go ahead. Nationally, a future Conservative government could rethink any plans Labour has to spend its way out of the recession.

The only cash charities can really count on, therefore, is what they save by cutting costs or projects.

But it's not an entirely bleak outlook. Some charities build up reserves during the good years and put off difficult decisions that can't be avoided in a recession. As Low puts it: "You often come out fitter and leaner than when you went in."

So you could think of it like a good workout. Or, if you prefer, a trip to the dentist: you may well feel better afterwards, but it will probably hurt a little.

Increased demand

Besides trying to maintain income, voluntary organisations have to grapple with the increase in demand for their services during a recession.

Even if income stays static, the resources of many charities are likely to come under pressure. The Telephone Helplines Association has already warned that its members are struggling to cope with the increased demand.

It's not just charities on the front line that are affected. Cats Protection, for example, says demand for its rehoming service is surging. And a survey by chief executives body Acevo in September found that 72 per cent of charities had seen an increase in demand for their services.

Stephen Bubb, chief executive of Acevo, says this is the main reason why his organisation is calling on the Government to establish a £500m emergency fund for charities.

"This isn't about getting out the begging bowl," he says. "Asking for money because we've hit hard times isn't going to sway the Government, but we're at the sharp end of tackling the effects of the recession. They have to think about supporting us so we can support those who are most affected."

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