Analysis

End of a golden era

Finance | Tania Mason | 5 Mar 2012

The NCVO’s latest Civil Society Almanac shows just how the recession has affected the voluntary sector. Tania Mason reports.

Every two years, the NCVO publishes its comprehensive study of the macro-economics of civil society in the UK. The latest report, published on 5 March, depicts a sector that took a big hit in terms of income, but managed nevertheless to maintain spending on its activities.

The NCVO’s head of research, Karl Wilding, provided civilsociety.co.uk with an exclusive briefing on the research. This report is a summary of his analysis.

Steady growth until 2008

The charity sector saw uninterrupted growth for most of the last decade, until the financial crisis blew up in October 2008. The ‘golden era’ was the middle of the last decade, says Wilding.

But the sector took a hit in the recession, especially its investment income, government grants and funding from the private sector. But the impact of this was mitigated somewhat by the continued growth of statutory contracts and individuals buying more goods and services from charities. These two sources continued to prop up income levels, while other sources tailed off (see chart 1).

However, by the time 2009/10 rolled around, the sector was only just living within its means. Overall income was £36.7bn, up £300m on the year before, but still lower than 2006/07 levels (see chart 2).

And crucially, expenditure was almost as high, at £36.3bn. Ergo, by the end of the decade, the sector as a whole was spending 99 per cent of its total incoming resources.

“Everything that is coming in is being spent, and this is something we should be worrying about as a sector,” says Wilding. “The party is definitely over, and even the recent period of life-support is over.”

He points out too that these figures only go up to March 2010, and don’t cover the past two years. So what might the picture look like for the more recent past? “One reliable piece of data is the employment numbers just released, which took us through to Q3 2011,” he said. “These showed a reduction in the sector’s workforce of 9 per cent.

“This makes me think that what is coming next is quite possibly some grimmer news. Finance directors will have been looking at the expenditure line going up, seeing that 99 per cent of income is being spent, and they will be putting the brakes on.

“At the end of the day the sector is not here for its staff, it’s here for its beneficiaries.”

The middle of a hurricane

Wilding predicts that for the five years immediately after the conclusion of the current Almanac research – so up to 2014/15 – the sector’s resources will continue shrinking. This chimes with the forecasts from the Office for Budget Responsibility, the government’s forecasts of GDP and the planned cuts in public spending.

“If people thought, ‘this has been a tight couple of years but shortly everything will be fine again’, they should think again,” he said. “It’s an unpleasant message.”

But he had some notes of optimism too. “Organisations in the sector are very good at cost control, at running things on a shoestring. If any sector can do this crunching down and still prevail, it is our sector.

“Also, the public has not deserted us and giving figures are coming back, albeit slowly. And inflation is starting to die down, which will help.”

And finally, a word of advice: “We are in the middle of a hurricane, and historically we are good at providing what society needs. In the face of such stark reality, charities should not be afraid to try really radical solutions.”

Income and expenditure

In real terms, overall sector income for the most recent year studied, 2009/10, was £36.7bn. This is lower than in 2006/07. The sector’s income reached a peak in 2007/08 at £38bn, though some of this was due to the one-off impact of the £700m provided that year by government and private sources to the global GAVI immunisation programme. But even without the GAVI effect, in the following year the sector’s income fell by £900m, while expenditure rose by £400m.

These figures show that the sector sustained a big hit in income in real terms in the recession but organisations carried on spending in an effort to meet the rising demand for their services. This meant that by 2009/10, expenditure was 99 per cent of total income for that year.

In cash terms, the sector’s overall income grew by £2.1bn in the last year studied, but £2bn of that is due to inflation. In real terms the rise was just £300m. “Just staying in business because of rising costs is an issue,” said Wilding. “Charities need to devote as much time and energy to reducing costs as to generating income.”

Spending on fundraising fell by £200m in 2008/09 and then again by £100m in 2009/10, suggesting the sector became more focused on the mission when times were hard.

Sources of income

The sector has been a very enterprising sector for the last ten years already. Income growth has been driven by contracts and enterprise.

Earned income v voluntary income

The revenue sources that have kept growing despite the recession are earned income, such as memberships, selling of services, trading etc, and income from government contracts. In a nutshell, people tended to buy more stuff from charities in the recession, whereas voluntary income - money that was given to the sector for which nothing is expected in return - declined. Says Wilding: “This suggests that members of the public don’t desert charities when times get tougher, but they do try and get more from them in return.”

Total voluntary income, which includes gifts from individuals, legacies, and the National Lottery, plummeted from £16bn to £13.9bn, or £2.1bn less in real terms between 2007/8 and 2008/9, with a slight recovery the following year (see chart 3). This drop was driven primarily by the loss of government grants (see chart 4).

Trusts and foundations

Trusts and foundations, however, did manage to keep their grants distribution up. In chart 3, the line labelled ‘voluntary sector’ is effectively grants income from trusts and foundations. This has been flat or improving slightly since 2006/07, suggesting that grantmaking foundations tried their best to protect the sector from the worst of the recession. This revelation goes some way to support the argument from the Association of Charitable Foundations that demands for a minimum 5 per cent annual payout are unnecessary, as the foundation world will always try to do its best by the sector.

Says Wilding: “The sector is spending 99 per cent of its total incoming resources, but we think foundations were spending 110 per cent of their income in that last year.”

Grants

There was what the NCVO refers to as a “grants crunch” in 2008/9 – a big squeeze on grants income from all sources. Wilding has a number of theories for why: the shrinking of investment income on the endowments of grantmaking foundations; the retracting of funds from the private sector as companies sought to cuts costs; the continued preference from government of contracts over grants; and possibly the start of the diversion of National Lottery money to fund the Olympics. It was also the end of the last Comprehensive Spending Review period and statutory bodies were getting nervous about future cuts.

Income from the private sector fell by nearly 25 per cent, or £500m, over the two years from 2007/08 to 2009/10.

Statutory income

Removing the GAVI effect, the amount of money being pumped into the sector by government has increased every year since 2000, even in the recession. In the most recent year studied, 2009/10, this stood at £13.9bn – just over a third of total income.

However, the growth has been driven entirely by contracts, at the expense of grants.
Grants from statutory agencies reduced by £800m in 2007/08, then by another £400m the following year.

The value of government contracts, meanwhile, has continued to rise steadily, almost doubling since 2004/05. By 2009/10, £10.9m of all funding from statutory sources came via contracts, while just £3bn was derived from grants.

Investment income

The amount that is internally generated by the sector from investments such as equities, property and interest on deposits, fell overall by around 30 per cent, or £1bn over the most recent two years studied, from £3.4bn in 2007/08 to £2.4bn in 2009/10 (see chart 5).

The only stream to hold up during this period was rental income from property. Income from dividends, common investment funds, government bonds etc took a huge hit in both years.

Expenditure and reserves

The recession was felt most keenly on charities’ balance sheets. In real terms, the value of the sector’s reserves plummeted in 2008/09, from £50.1bn to £37.4bn (see chart 6) as stock markets crashed and the value of assets tumbled.

And though they recovered somewhat the following year, overall, the sector’s reserves were still lower at the end of the decade than they were at the start. “In terms of the sector’s sustainability, it is worse than we thought it was, and worse than it was a decade ago,” said Wilding. “The sector is bigger, but not stronger – despite the fact we’ve had a golden age where income has exceeded expenditure, our reserves are lower than when we started.”

But he also points out that the recession has proved the value of building up reserves, in that the sector has largely been able to maintain its activities thanks to the robustness of its reserves. “Basically, the wise advice of saving for a rainy day has worked, and with this evidence funders should finally accept that it is good practice to build up strong reserves, and not penalise those charities that do so.

“Charities that build up reserves can have a higher impact over a longer term. Having a solid reserves policy is crucial to their long-term sustainability.”

 >>Back to top<<

Images

Directory: National Council for Voluntary Organisations (NCVO)
Who's Who: Karl Wilding