Economic drivers

The economic outlook

In 2019, the UK economy slowed to its lowest annual growth rate since Britain emerged from the ‘Great Recession’ that followed the 2007/8 financial crisis. Uncertainty surrounding the UK’s departure from the European Union (EU) has contributed to this downturn, but sluggish global growth and other UK structural challenges like poor productivity have also played a part.

Beyond 2020, the nature of the UK’s trading relationship with the EU and the rest of the world will influence the health of the economy. Research by the independent UK Trade Policy Observatory (UKTPO) predicts that leaving our largest trading partner with a free trade deal will have a negative impact on the economy compared to the current frictionless arrangement, even if a trade deal is simultaneously struck with the US. Consequently, mediocre growth is the most likely outcome for the foreseeable future. As some households struggle to cope with a tough economic environment, charities should prepare for continued demand for the support they provide.

Productivity and household income

A key challenge confronting the UK economy is poor labour productivity[1]. Figure 1 shows productivity has flatlined since the financial crisis of 2008, increasing by just 2.9% over the past 11 years – 19% lower than had the pre-crisis trend continued. This is important because the value of wages and living standards broadly tracks productivity growth. Had earnings grown in line with the pre-crisis trend, average wages would have been around a fifth higher than they are now. This equates to more than £5000 a year more for someone working a 35-hour week.

Figure 1: Productivity and wages since the financial crisis

Graph showing productivity and wages since the financial crisis against pre-crisis trends

Source: ONS median weekly earnings and ONS labour productivity

The real value of earnings has been on a steady upwards path since mid-2017[2]. If this trend persists, certain subsectors of the voluntary sector could see their future wage bills increase, particularly when the minimum wage comes into effect on 1 April. Yet the legacy of the past decade has been a change in the nature of poverty: away from the unemployed and towards the working poor (figure 2). Most people below the poverty line are now either in employment or live with someone who is. The rise in the minimum wage will be welcomed by many, such as those working in social care, but a less than favourable short-to-medium term outlook for the UK economy suggests the financial situation of many households is unlikely to drastically improve anytime soon. For charities working in areas such as homelessness, poverty relief and welfare services this will not only have implications for the support they provide, it will also frame many of the policy debates that shape their work and conversations with government.

Figure 2: Breakdown of people in poverty in Great Britain, by household type

Source: Reproduced from graph created by the IFS. Poverty line defined as 60% of median net household income, with income measured after deducting housing costs. Pensioner households here are defined as households containing a man aged 65 or over, or a woman aged 60 or over, in line with the 1997–98 state pension ages.

The UK shared prosperity fund

The government has committed to tackling productivity and inequality with its forthcoming UK shared prosperity fund (UKSPF) which will replace EU funding after Brexit. Charities will hopefully play a central role in the delivery of the UKSPF through the provision of education, training and employment support for disadvantaged communities. How big a role it plays will be shaped by the proportion of the UKSPF allocated to capital expenditure projects – like infrastructure and buildings – versus support for people often neglected by existing state services.

According to the government, the UKSPF will – at a minimum – match the EU funding each nation currently receives, with £500m reserved for disadvantaged people, but questions remain around what time period this figure will be spread over. The European Social Fund alone is worth around £500m a year to the UK, so charities will want any replacement fund to provide at least the same level of support they currently receive. As we wait for the official government consultation to help ensure the UKSPF is appropriately designed, charities should already be clearly demonstrating to local and national policymakers the importance of European funding for their work in addressing inequality and the contribution this makes to a healthy UK economy.

Austerity paused, not reversed

Last September, the government set departmental budgets for one year while Brexit unfolds. This includes an overall increase of 4.4% on day-to-day spending on public services, including health, local authority spending, policing and the environment. While these commitments represent an end to some of the departmental cuts implemented by the previous Conservative governments, they do not ‘undo’ austerity. Overall spending on public services will remain 3% lower in real terms in 2020−21 than in 2010−11, dropping to 16% below 2010−11 levels when health and social care are taken out of the equation.

The £13.8bn real-term increase in day-to-day spending will reduce the strain on some public services, but longer-term spending and fiscal decisions will probably need to wait until Britain’s trading relationship with the EU and other countries is clearer. The postponed full three-year spending review later this year – and to a lesser extent the budget on 11 March – will determine whether austerity is truly over or just paused. Local authorities have seen government funding reduced in real terms by almost half since 2010–11, while 1 in 10 councils are now using their reserves at a rate which has been estimated as not sustainable for more than three years. Since 2009–10 there has been a 17% fall in councils’ spending on local public services.

A particular focus for charities will be whether the government decides to review the long-term sustainability of local government finances which fund much of the support the sector delivers. Faced with rising demand and diminishing resources, councils will be increasingly forced to shift spending away from preventative services in order to meet crisis needs. Continued pressure on budgets could intensify the trend towards increased competitive tendering for the delivery of services, driving some charities to compete with the private sector and even each other.

Figure 3: Real-terms percentage change in day-to-day budgets, 2019−20 to 2020−21

Source: Reproduced from graph created by the IFS

The state of public services

Central and local government are estimated to spend £191.1bn on GPs, hospitals, adult and children’s social care, neighbourhood services, police, prisons, courts, and schools by 2023/24. This may be enough to meet demand and maintain standards. However, many services have declined in performance and pledged funding won’t be enough to make improvements.

Funding reductions have occurred unevenly across the country and across service provision. One in seven councils, mostly in the north of England, faced budget cuts of over 40% between 2010 and 2017. Social care services account for over half of service budgets, yet there will be a social care funding gap of £4.4bn in England in 2023/24. 83% of councils have cut funding for youth services in half. This picture will continue unless there is a shift in how funding is raised and redistributed.

Charities and voluntary organisations will grapple with large scale transformation programmes which continue at pace. These include the development of primary care networks (PCNs) and integrated care systems (ICNs), and changes to the National Probation Service and the Courts and Tribunals Service. The NHS is rolling out a large-scale social prescribing programme. However, for this to be effective and sustainable, the funding and resource implications will be significant and ongoing, and proposed funding may not be sufficient.

The outsourcing of public services has faced intense scrutiny, particularly following the collapse of Carillion and more recently Interserve. In 2020 we will see central government push further for better standards using the Outsourcing Playbook, and implement a new approach to accounting for social value.

Local authorities are increasingly exploring alternative models to deliver services, including insourcing services, developing local authority trading companies (LATCs) and procuring employee-owned mutuals. Some have radically shifted how they work, such as the Wigan Deal and the alliance contract model used by Plymouth Council to address homelessness. Changes to local arrangements may provide opportunities for charities and voluntary organisations to collaborate with local councils and other organisations. This may create instability in funding and working relationships with decision makers and commissioners, as well as supporting staff, citizens and volunteers to adapt to different services.

The future of giving

The number of people giving is showing signs of decline. CAF’s UK Giving 2019 reports a year-on-year drop in people saying they have given money to a charity or sponsored someone from 69% in 2016 down to 57% in 2018. While the total amount donated to charities has remained largely static – with legacy donations actually displaying signs of growth – there are several drivers linked to wider political currents and changes in consumer behaviour that charities should be aware of in the coming years.

GDPR regulations and the rising costs of fundraising mean fewer people are being approached for money, particularly through face-to-face and direct mail fundraising. People are choosing to support causes in different ways with mass movements, ethical consumerism and crowdfunding all growing in popularity. There has also been a decline in trust in institutions – including charities – while a decade of austerity has left people with less disposable income to give to good causes.

Charities should reflect on these trends when developing fundraising strategies. This might require reviewing communication methods with new and existing supporters, including engaging with a new generation of donors as other pools shrink. Increased pressure to demonstrate impact – in terms of where money goes and what it achieves – should be expected, while adopting new technologies such as contactless cards and apps may also want to be considered. Some charities may need to review their organisational culture, including attitudes to risk and innovation.

Philanthropy under scrutiny

Philanthropic giving is coming under increased scrutiny. Some argue that the system that generates the wealth which makes philanthropy possible is also responsible for some of the social and economic problems that it seeks to address[3]. Initiatives funded by philanthropists have had a significant impact, yet it is argued these same people perpetuate an economic order that exacerbates inequality, while focusing on causes that are aligned with their own social and political preferences[4]. Whatever their political opinions, people are becoming increasingly suspicious of powerful elites in an age of growing economic inequality. For instance, in Britain, the total wealth of the top 10% is five times as much as the whole bottom 50%.

So far, the growing scrutiny of philanthropy has largely been confined to the US which has a different tax system, regulatory environment and culture of philanthropy, so direct comparisons to the UK are problematic. Nonetheless, recent events have shown that the UK is not immune to the growing scrutiny that philanthropic giving is facing. The Sackler Trust – a philanthropic organisation that is a major funder of UK arts and education – recently paused new donations after a backlash over its connections to a maker of opioid drugs, while some philanthropists have faced criticism for donating to the Notre Dame fire appeal rather than homegrown social issues like the Grenfell fire.

Charities should be conscious of emerging debates about how wealth, power and philanthropy interact. It’s possible to lose public trust and confidence if the source of income conflicts with a charity’s ethics and values. This includes how charities approach investment opportunities to ensure funding doesn’t support companies that conflict with their own purpose and values, or those of their supporters.

Moving forward

Questions your organisations might want to consider:

  • Have you thought about how limited growth and planned cuts to government spending could affect your organisation’s work and the lives of your beneficiaries over the coming years?
  • Will the change in the nature of poverty – away from the unemployed and towards the working poor – impact on the support your charity provides to certain beneficiary groups?
  • Are increases in the minimum wage and persistent wage growth likely to affect your charity's wage bill?
  • If your charity currently receives EU funding, are you highlighting its importance for supporting disadvantaged communities to policymakers, ahead of the UK shared prosperity fund consultation
  • Are you aware of opportunities to be involved with social prescribing initiatives?
  • Considering shifts in the ways people support causes, have you reflected on your organisation’s fundraising strategy, including engagement with a new generation of donors and the adoption of new technologies?
  • Do you have systems in place to check whether the sources of donations and other funding streams are compatible with your organisation’s ethics and values?
  • Listen to CAF’s Giving Thought podcast to explore trends in global philanthropy and civil society. Latest editions include ‘2020 predictions for philanthropy and charity’, ‘Non-profits and philanthropy in a polarized world’ and ‘Philanthropy, diversity and inclusion’.
  • Find out more about the political, economic, social, technological, legal and regulatory opportunities and risks on the horizon for fundraisers and future-proof your fundraising.
  • If you're planning to diversify your organisation’s income, have a look at our income diversification planner.
  • If you’re thinking about social prescribing, NCVO will host a webinar on how to ensure that social prescribing is inclusive as part of our membership of the Health and Wellbeing Alliance. Follow updates on our webpage or email catherine.goodall@ncvo.org.uk to find out more.
  • Engage with our community wealth building session at our Annual Conference on alternative models of funding and building sustainability locally.
  • Learn more about social value and how you can measure your organisation's social value or impact.

Footnotes

  1. Higher productivity allows companies to produce more profits and pay higher salaries to employees. This in turn is directed back to the economy through increased consumer spending, higher exports, and more business investment.

  2. For example, see Rob Reich, Just Giving – why philanthropy is failing democracy and how it can do better and Anand Giridharadas - Winners Take All: The Elite Charade of Changing the World.

  3. Anand Giridharadas - Winners Take All: The Elite Charade of Changing the World.