The unpredictable nature of the covid-19 emergency and the potential for future lockdowns means the financial outlook for 2021 remains volatile. This makes economic forecasting difficult.
Looking back to 2020 might provide some indication of what the coming year will hold. Between February and April 2020, gross domestic product (GDP) fell by a quarter. While the economy bounced back relatively quickly from the first lockdown, the second wave of the pandemic has slowed the UK’s path to recovery. By the end of 2020 the UK economy was predicted to be around 10% smaller than before the pandemic took hold – the steepest decline in centuries.
If the roll out of the covid-19 vaccine goes according to plan, we could see the UK economy bounce back relatively quickly, particularly if people start to spend savings accrued during lockdowns. In parallel with the potential for further restrictions is what the National Audit Office (NAO) predicts will be significant disruption to UK and EU trade following the end of the Brexit transition period in January. This means charities and the people they support should plan for an uncertain and challenging economic environment for the foreseeable future. The legacy of the crisis will impact on the public finances for some years to come.
How is the government responding?
You can’t build an economic framework on shifting sand. This economic uncertainty led the chancellor to hold a single-year spending review in November – rather than the expected three-year settlement – postponing longer-term decisions until the economic environment becomes more certain.
The government decided to bolster the economy by increasing public spending in the short-to-medium term, particularly on health, jobs, and infrastructure. To replace money formerly provided through EU structural funds, the UK Shared Prosperity Fund (UKSPF) will be launched this year. This will begin with £220m for local areas to pilot programmes before ramping up to ‘at least match receipts from EU structural funds, on average reaching around £1.5bn per year’. The extent to which the UKSPF will focus on marginalised communities and the role charities will play in the pilots is yet to be determined.
Record levels of spending are in part made possible because of very low borrowing costs. These could become even cheaper if the Bank of England moves interest rates into negative territory in 2021. While this could make it cheaper for charities to borrow money, it could also reduce the return on investments, savings and pension schemes. The likelihood of this happening hinges on how long coronavirus restrictions last and their impact on the economy.
With a reduced appetite for austerity measures among MPs, longer-term tax rises might eventually be required to tackle the UK’s rising debt. The questions for charities and the people and communities they support to consider are: when would this begin, how significant would any belt tightening be, what mix of spending cuts and tax rises would the government possibly opt for, and therefore which groups will the impact most likely fall on?
Unemployment rising and likely to rise further
Unemployment is rising and is likely to rise further. While more than half of those furloughed during the first lockdown had returned to work by September, 9% had lost their jobs. Younger people, low-paid workers, and Black, Asian and Minority Ethnic (BAME) communities have been hardest hit, with 19% of workers aged 18-24 and 22% of BAME staff losing their jobs. Disabled people are more likely to be facing redundancy as a result of the pandemic – 27% compared with 17% of non-disabled people. This figure rises to 37% for people with a condition or impairment that has a significant impact on their daily life, and 48% of those who are classified as ‘extremely medically vulnerable’ to the virus.
Analysis by the Institute for Government shows there is a regional dimension to job losses with London hit especially hard. This reflects the importance of hospitality, leisure, entertainment and tourism to the capital, with many also working in low-paid and insecure jobs. Charities have been hit hard too. As of August 2020, Pro-Bono Economics estimated that 25,600 jobs have already been cut, and that a further 34,100 more people in the sector could lose their job by the end of the year.
It remains to be seen what impact the current lockdown will have on unemployment levels, but the coming months will likely see a deterioration of an already gloomy outlook.
For the short term, the government has provided a £4.6bn package to help people back to work, and extended its second Job Retention Scheme to March 2021. While the latter has provided a vital lifeline for many organisations, the scheme is ill-suited for charities wanting to support communities during a health emergency, rather than furlough their workforce.
Longer-term, it is unclear how policymakers will tackle to the possibility of a recurring pandemic. The Institute for Fiscal Studies (IFS) says there could come a point when support is withdrawn, and serious thought given to a painful restructuring of the economy and labour market. Some argue that the pandemic is already driving a structural change in the UK economy, with some jobs that have been preserved by furlough now obsolete.
The livelihoods of beneficiaries have been hit hard
Covid-19 has increased the gulf between rich and poor, with worse-off households seeing savings drop and debts rise. Those who cannot work remotely have been hit hardest, both in terms of health outcomes and job and income losses. The livelihoods of BAME communities have been hit harder than their white counterparts. Disabled people are more likely to report household outgoings have increased as a result of the pandemic, with many covering the additional cost of PPE, safer travel options such as taxis, or more expensive food options to enable shielding.
Drops in income have been more prevalent in sectors affected by social distancing measures and among younger workers. The IFS reports that the poorest UK households saw debts rise by an average of £170 a month during the pandemic. Of those still employed as of September 2020, 12% reported being paid less than they were at the start of that year.
Even before the second wave took hold, the Resolution Foundation found that almost one in eight private renters were unable to meet their housing costs in full. During the start of the pandemic, around half of people who used a food bank had never needed one before, with families with children hardest hit. As of November 2020, the Trussell Trust had given out a record 2,600 food parcels a day to children.
There are various ways the government could support poorer households in 2021. Reforms to Universal Credit and other means-tested benefits could help increase the safety net for those worse off. This could include ending the minimum five-week wait for a first Universal Credit payment and retaining the current uplift of £20 a week due to end in April this year. Scrapping the two-child limit on child-related benefits – which the IFS has estimated would make about 700,000 households with children better off by an average of £3,000 per year – and removing the benefit cap which would help about 100,000 working-age families by an average of roughly £2,000 per year, would also be welcomed by many charities. The budget on 4 March will hopefully provide more clarity on the government’s plans to support struggling households.
The state of public services
Public services will continue to be significantly affected by the covid-19 crisis, with many areas facing increased demand. Charities delivering public services relating to loneliness, mental health difficulties, educational inequality, homelessness, unemployment and poverty will experience increasing demand. In parallel, the availability of funding is uncertain, particularly at a local level. In 2020, 59% of charities delivering public service contracts said they had to use other sources of income, such as fundraising, to successfully deliver contracts. Since the pandemic, local authorities have experienced increased financial pressure with several, for example, reducing social care packages in response. Many councils are warning of a risk of bankruptcy. The spending review in November 2020 announced a 4.5% increase in core spending, which is not enough to prevent the financial failure of councils. Without additional funding from government, public services will struggle to meet demand.
From January 2021 central government organisations are expected to use a new framework to account for social value in procurement exercises. Authorities will need to account for social value as they aim to achieve including covid recovery, economic inequality, wellbeing, equal opportunity, and climate change outcomes. While this framework only applies to central government departments and their executive agencies, this new approach may influence the way other public bodies – including local authorities – use and measure social value. Charities will want to consider how they can demonstrate that they are able to deliver social value across these five areas in bids.
There has long been a call for the UK to devolve more decision-making powers to regional and local government. In recent years we have seen the creation of metro mayors and devolutions deals with, for example, Greater Manchester, West Midlands and North of Tyne authorities. The pandemic has exacerbated tensions between central and local government, demonstrated by the centralised approach to contact tracing which was ineffective and slow, and the imposition of local lockdowns which was fraught with challenges. In 2020, the devolution white paper was postponed to 2021. Depending on the ambition of proposals, further devolution could provide the opportunity for charities shape local services and influence local decision making.
Trends in giving
In terms of giving for the year ahead, it may be instructive for charities to reflect on trends seen in 2020. According to CAF, public donations increased by £800m between January and June 2020 compared to the same period in 2019. This was driven by a large increase in the number of people donating or sponsoring ‘hospitals and hospices’ causes during the height of the pandemic’s first wave, while around a fifth of people reported donating to charities which support the NHS. Conversely, there was a significant decline in the amount of money donated to other causes such as medical research during the same period. Meanwhile a decrease in face-to-face fundraising appears to have accelerated the trend towards cashless giving. The year ahead could see a continuation of this trend, with donors increasingly giving via a websites, apps and contactless payments, particularly if social distancing measures persist.
A challenging funding environment for charities
The economic disruption caused by the pandemic will leave many charities under significant financial pressure in the year ahead. The fallout from two lockdowns has resulted in a significant drop in income with social distancing measures affecting trading and fundraising events in particular. As 2021 begins, some organisations will be struggling for survival as they try to support people while their reserves dwindle.
Even before the second lockdown took hold, Pro Bono Economics predicted a significant decrease in both the number of charities and their ability to deliver vital services: 10% of charities say they were likely to close, while 80% expected a negative impact on delivering their planned objectives. A combination of lost income and increased demand has led to an estimated funding gap of £10bn across the sector over six months alone. Charities will be hoping the prime minister makes good on his pledge to provide more support for the sector in the coming months.
In 2021, the energy, creativity and ingenuity of the sector will be put to the test, with charities needing to invent new ways to help people in need. 2020 saw many funders – including trusts and foundations – doing their best to rise to the challenge with emergency support for charities affected by covid-19. This could continue this year, although it’s difficult to predict how long funders can sustain current levels of support. Nonetheless, many will likely continue to transform how they work in response to the pandemic, with funding, evaluation and monitoring requirements adapting as funders and grantees work together to develop new ways of doing things. Where possible, charities themselves should seek to diversify their income streams and collaborate with sector partners where this results in efficiency savings and better outcomes for beneficiaries.
Questions your organisation might want to consider:
- Have you thought about how low growth and the end of the Brexit transition period could affect your organisation’s work and the lives of your beneficiaries over the coming years?
- Do you have plans in place for potential future lockdowns, including the effect these may have on various income streams?
- If your charity has received EU funding in the past, have you thought about how your organisation is positioned to participate on the UK Shared Prosperity Fund?
- How could a potential move by the Bank of England into negative interest rates territory impact on your organisation’s finances?
- Considering the potential for future tax rises, have you reflected on how these might affect your organisation and the people you support?
- If you plan to bid for funding from central government bodies, have you considered what social value you bring in light of the new framework and priorities?
- Are you the familiar with the various ways the government could support poorer households in 2021, including the need to monitor key fiscal events such as the budget in March?
- Have you considered the pandemic’s impact on giving and other funding streams in 2020 and how this could help predict possible trends in the coming year?
Links and resources
- If you're planning to diversify your organisation’s income, have a look at our income diversification planner.
- Plan for and find new funding opportunities during covid-19, including practical information about what funding is available from grant-making charities, government and other sources.
- Keep up-to-date on trends in tax, benefits and household income.
- Trends expected to define fundraising in 2021 and potential challenges the charity sector might face in the coming year.
- For regular updates on charity funding and finance issues, follow our monthly blog.