A new report by the National Council for Voluntary Organisations (NCVO) has found that cuts to government funding will leave the charity sector with a £4.6bn hole in its finances by 2018/19.
The report, entitled A financial sustainability review: Change and adaption in the voluntary sector as the economy falters, said that government contracts and grants, along with slower growth in donations from the public and the predicted impact of inflation, will leave many charities struggling to maintain spending levels.
Using data from the UK Civil Society Almanac, alongside qualitative and quantitative data from the Charity Finance Group, Small Charities Coalition, Institute of Fundraising, Navca and Locality and more than 106 responses from charities, NCVO found that income from individuals has grown by £2.3bn in the last five years and in 2013/14 represents 48 per cent of total income.
However, NCVO have warned that in order to offset the expected cuts from government over the coming Parliament individual income would have to grow at 3.75 per cent per year – an amount “well above recent trends”.
Sir Stuart Etherington, chief executive of NCVO, said: “This report is a sharp reminder of the scale of the challenge facing charities at the moment. While the headline figures show the charity sector as a whole keeping its head above water, they mask the crushing blows that many small and medium-sized charities have sustained in recent years.
“There is an urgent need for the government to solve the problems of public service commissioning. Too many contracts exclude smaller organisations, being designed in such a way as to privilege national and international commercial outsourcing providers.
The report also warns that government move to contracts rather than grants is “especially challenging” from small and medium charities.
It said: “The particular advantages of grant funding are at risk of being overlooked. If these concerns are not addressed, there is a risk that small-and medium-sized charities are unable to form part of a diverse market of public service providers in the future.”
The charities worst hit by recent government cuts are those with an income of under £1m. They have seen their income from government fall by around 34 to 38 per cent, according to the date from Almanac.
Tony Armstrong, chief executive of Locality, said: “This is due not only to a reduction in overall funding for services but more worryingly reflects an increasing trend of large national organisations snatching local contracts from community organisations because they package services in a way that looks cheaper and more attractive to commissioners.
“These cut-price contracts might look like a great deal on paper, but they continually fail to deliver what’s needed and costs end up spiralling, with community organisations having to step in to provide desperately needed services, while also footing the bill.”
The study conclude that grant making foundations have become a significant part of the new funding landscape, partly because they are one of the dwindling amount of unrestricted funding from statutory sources.