Warnings also made over reserves and staff costs

Monthly charity donations of £20 started in 2017 will be worth just £14.90 by 2024 due to inflation, it has been revealed.

New analysis by Pro Bono Economics (PBE) and the Charities Aid Foundation (CAF) also estimates that the £5.7 billion of total donations made to UK charities in the first six months of 2022 will be worth £500 million less by the end of the year, a reduction of 8.5%.

The falling value of donations due to inflation, which is forecast by the Bank of England to peak at 13% later this year, is exacerbated by increasing demand for charity support as a result of the cost of living crisis.

These latest challenges for the sector follow swiftly after the significant pressures placed on charities during the pandemic, which left one in four organisations reporting a drop in income of more than 40%, just as demand for charity support rocketed.

Among its key findings, the new analysis by PBE and CAF, titled The cost of giving: What UK charities need to know about inflation, also found that:

• If charity sector staff costs were to keep up with inflation, the sector would need to find an additional £3.8bn by 2023 and £6.1bn by 2024, compared to 2018/19.
• Grant funding and contracts will also be affected. A three-year £100,000 grant or contract awarded in 2022 will be worth £90,660 in 2023 and £88,300 in 2024.
• Inflation is also eroding the value of charity reserves. A typical charity with an income of £1m in 2021 would need to increase its reserves by £73,430 by next year to ensure the 2021 value of reserves did not fall by 2023 due to inflation.

According to CAF’s long-running UK Giving research, the average charity donation in the UK over the past five years has stood at roughly £20 a month. It is estimated that 31% of all charitable donations are made via direct debit, which fall in value over time.

Using the Bank of England’s latest inflation forecasts, PBE projects that a £20 direct debit set up in 2017 will be worth just £15.30 next year, and £14.90 by 2024.

In addition, the most recent CAF UK Giving data shows that total donations to UK charities in the first six months of 2022 were worth £5.7bn. PBE projects that by the end of the year, this will be worth £5.2bn, a reduction of 8.5% due to inflation.

Rising staff costs will be one of the major ways in which inflation affects charities’ expenditure. The sector spends over 40p in every £1 on staffing costs. Based on current expectations, this means that if the sector’s expenditure on staffing costs were to keep up with inflation, the sector would need to find an additional £3.8bn by 2023 and £6.1bn by 2024, compared to 2018/19.

Furthermore, grant funding and contracts for charities will be affected by inflation. PBE projects that a three-year £100,000 grant or contract awarded in 2022 will be worth £90,660 next year and £88,300 in 2024, according to current Bank of England forecasts.

Inflation is also eating away at charity reserves, which were depleted by the financial strain put on organisations during the pandemic. Nearly one in four charities used reserves to survive the period and the number of charities with an income over £500,000 that have no, or negative, free reserves increased from 9% in April 2020 to 28% in February 2021.

The new analysis from PBE and CAF found that medium-sized charities (with income between £500,000 and £1m) had on average 4.2 months of expenditure held in reserves as cash prior to the pandemic. But by 2023, those reserves would cover just 3.5 months of activity if expenditure by those charities rises in line with inflation. This means that a typical charity with an income of £1m in 2021 would need to increase its reserves by £73,430 by 2023 to make up that gap.

Similarly, large charities (with income between £1m and £10m) had on average 3.78 months of expenditure held in reserves as cash prior to the pandemic. But by 2023, those reserves would cover just 3.1 months of activity if expenditure by those charities rises in line with inflation. This means that a typical charity with an income of £5m in 2021 would need to increase its reserves by £329,650 by 2023 to make up that gap.

The figures look at the UK sector as a whole, and are not specifically Scottish.

Matt Whittaker, chief executive of Pro Bono Economics, said: “Having stepped up to help the nation through the unprecedented challenges posed by the pandemic, charities are now having to deal with 40-year high inflation and the repercussions of the cost of living crisis.

“Donations, grants and reserves are all stretching less far than was previously the case, even as the nation’s demand for charitable support soars.

“It matters in the near term, and it matters in the long term too. The social sector provides indispensable support during times of crisis, but it is precisely during these periods that the financial resilience of charities and community groups is most tested.

“There is no quick fix, but with a new government in place it is important Ministers renew and strengthen their relations with a sector that has such a vital role to play in helping the nation navigate today’s cost of living storm.”

Neil Heslop, chief executive of Charities Aid Foundation, added: “This new analysis reveals that inflation will wipe off half a billion pounds of hard-earned money already given to charities during the first half of the year. Inflation is eroding the value of donations and reserves in real terms.

“Despite falling donations, charities are working hard to help the growing number of families at the sharp end of the cost of living squeeze. Ultimately, charities are having to do much more, with much less money.

“Many organisations were unable to rebuild their reserves before this current crisis took hold. As a result, a third of charities are worried about their very survival, threatening the vital services that communities need over the coming months."