The charity sector faces a financial “big squeeze” for 2025, a new report from the National Council for Voluntary Organisations (NCVO) has warned.
The umbrella body’s Road Ahead 2025 report said the wider economic outlook for the sector in the upcoming months is still shaped by the compounding effect of the Covid-19 pandemic, the cost-of-living crisis and rising inflation.
Capacity and resource constraints continue to challenge charities’ plentiful “ideas, innovation and commitment”, the NCVO’s chief executive Sarah Elliott said.
The government’s efforts to control interest rates, inflation and its spending – such as cuts to international aid, benefits and welfare and increases to employer national insurance contributions (NICs) – will “significantly” impact the cost of service delivery, the report said.
The report noted that despite inflation dipping to near the Bank of England’s 2% target in late 2024, it has been predicted to rise again to 3.7% in 2025.
The sector must navigate the implications of fiscal policy, such as the spending review slated for June, which may involve further constraints on funding, it said.
One in four charities used reserves
Charities that are affected by the increase to NICs and the minimum wage may have been working ahead of time to prepare for these impacts, but it is likely that they will not feel the full effects for months to come, the NCVO said.
Unlike the private sector, the charity sector cannot pass these costs onto consumers, and does not have the same exemptions the public sector receives, the report noted. This means that organisations must find workarounds to cover their extra costs.
That’s despite the fact that charities are propping up underfunded public services, often using reserves to deliver contracts. One in four charities used their reserves during the pandemic, the Road Ahead report pointed out.
Without planning, charities will have no choice but to once again draw on reserves to fill gaps, which could hinder efforts to bounce back to “full strength”, it said.
Government funding drop
Income from the government made up 26% of the voluntary sector’s total income in 2021/22, a decrease from 30% the previous year, the report revealed.
Charities with income below £100,000, which make up 80% of the sector, are more dependent on the government funding they receive than larger organisations, it noted.
The report recommended that charities, and in particular small organisations, diversify their funding sources and try to avoid reliance on a single revenue stream.
Ensuring equal partnership
Looking ahead, it is important to ensure that charities are not seen as suppliers but as partners of government, the NCVO said.
Ensuring that outcomes of the Civil Society Covenant consultation are realised will help ensure the partnership between the government and the sector is equal, fair and built on lived experience, the report added.
The body acknowledged that it is still getting to grips with the reality of the Labour government's agenda and how charities can play a role in this.
While multi-year local authority funding settlements have been promised, they will not take effect until 2026-27, leaving many councils facing continued shortfalls in the interim, the report said.
NCVO: ‘Sector showing creativity in the face of pressure’
The political landscape in 2025 presents both challenges and opportunities for the charity sector, the report said, adding that strategic engagement with policymakers and a focus on sustainable funding models will be vital to navigate the road ahead.
Elliott said: “As we step further into 2025, the voluntary sector continues to show creativity, confidence and determination in the face of real pressure.”
Charities are tackling some of society’s most urgent challenges, from poverty and inequality to climate action and community cohesion, she added, but are often doing so in the face of rising costs, shrinking reserves and increasing demand.
“The sector is not short on ideas, innovation or commitment – it is short on capacity and resources,” Elliot said. “Without time, space and investment, we risk losing the leadership, creativity and connection that communities rely on.”
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