A bleak forecast from the National Council for Voluntary Organisations predicts that inflation and falling income will lead to a £4.6bn annual shortfall in voluntary sector finances by 2018/19.
The 38-page document A Financial Sustainability Review says the sector will need to find savings of £4.6bn just to maintain the same spending power it had during 2012/13.
The twin trends of shrinking income and rising demand for services have already led many organisations to prioritise short-term service delivery over long-term capacity building, says the report.
It warns that more and more charities are set to suffer from a "capacity crunch", the point at which they have used up all their spare capacity and are unable to free up new resources through increased efficiency.
The effects of inflation alone mean that the sector will have to generate £3.1bn through increased income or efficiency savings by 2018/19. To put that figure into context, says the report, if the savings were to be achieved solely from staffing costs, it would require charities to reduce their spending on staff by 25 per cent.
The report was co-authored by Michael Birtwistle from the NCVO and Andrew O’Brien from the Charity Finance Group, with input from the Institute of Fundraising, the National Association for Voluntary and Community Action, Locality and the Small Charities Coalition.
The report is pessimistic about the outlook for income growth, observing that overall voluntary sector income has fallen from £42.1bn in 2007/08 to £40.7bn in 2013/14 and that income from government contracts has fallen to its lowest level since 2007/08.
Government income is the fastest-falling source, and is unlikely to be easily offset. For example, charitable foundations would need to more than double the amount that they give away in grants to make up for the loss of government income.
In the report, the NCVO appeals to the government to "reconsider the scale, pace and targeting of current spending reductions to ensure the voluntary sector is able to meet demand for services in the long term".
Yesterday it emerged the Chancellor, George Osborne, is pushing most government departments to make plans to cut their spending by up to 40 per cent.
Another appeal to the government came from the Institute of Fundraising. Reacting to the report, Peter Lewis, chief executive of the IoF, said: "With government grants at an all-time low, now is the time for government to work with charities to help them diversify their income streams and find more innovative ways to raise money for the good causes they support, both in the UK and overseas."