Charities and the local government: What does the latest research say?

One of the most worrying indicators of the health of the UK economy is the increase in the number of section 114 notices issued by local authorities. It’s complicated, but it means that the local authority is effectively bankrupt because its expenditure has outstripped its income. The local authority then needs to implement a new budget, which involves reduced expenditure and public service cuts.  

To date, fourteen section 114 notices have been issued by local authorities since 1988. Six of these were issued between 2022 and 2023, including the largest European local authority: Birmingham City Council. 

What are the implications for the charity sector? Luckily, Pro Bono Economics (PBE) recently launched a report that answers this question using the latest data from the VCSE Sector Barometer Survey.  

Charities under increasing financial strain 

DSC’s own research into local authority grant making (published in 2023) indicated that local authorities are “struggling just to maintain services which they have a statutory duty to provide” due to high inflation rates and the lasting effects of the pandemic. 20% of councils in England likely to issue a section 114 notice by the end of this year. Charities are often delivery partners with local councilsso are likely to be caught in the crossfire.  

PBE observes that since 2009/10, local government funding to the charity sector has decreased by 23%.  Thus, local government is an important, but dwindling, funding source. Just over half of charities believe that they are at moderate to high risk because 68% of the sector’s contracts are with local authorities. Simultaneously, the charity sector is facing cuts from other sources: NCVO’s 2023 Almanac found that public giving decreased by 14% between 2019/20 and 2020/21. This makes the sector particularly vulnerable. Grant-making trusts/foundations may receive more applications as charities look to substitute their funding, 13% of which had come from local government according to PBE. The report warns that some charities “have not been able to find alternative sources”. 

Charities that do not receive funding from local authorities will also be affected. PBE states that a third of these charities believe the current financial situation poses a moderate to high risk. This is because as statutory services are reduced or terminated, the public is likely to turn to charities for important services such as childcare. Unfortunately, charities, both those that receive funding from local authorities and those that do not, struggle to meet this increased demand because their resources are stretched. CAF surveyed 621 charities between April and May 2023 and found that over half are operating at maximum capacity, with many having to turn away beneficiaries.  

Recently recovered relationship between local government and charities under threat 

The report argues that the COVID pandemic improved the relationship between local authorities and charities because collaboration across agencies was required to respond to the pandemic. An NCVO report published in April 2021 revealed that engagement with local government increased across 36% of organisations surveyed during the pandemic. PBE references a 2023 journal article from the Journal of Social Policy that found that reduced bureaucracy and flattened power structures catalysed this improvement. PBE also points to a survey conducted between January and February 2024 that shows 87% of charities believe that a positive rapport with local government helps fulfil their objectives. 

Sadly, this progress is being eroded. Funding charities may no longer be regarded as a priority because it represents expenditure that can be cut to save money. There is a growing distance between local authorities and charities because, as PBE suggests, local authorities are more likely to stop prioritising external commitments. DSC’s 2023 report reminds us that there is a lack of data about local government grant making so further research into funding relationships between local government and the charity sector is needed. 

Charity sector’s recovery from recent crises is threatened 

Looking at NCVO’s Almanac 2023, it is clear that the pandemic significantly affected the sector’s income. You can read a helpful summary of this latest Almanac here. To make matters worse, the cost-of-living crisis hit the UK in late 2021, following which, CAF reported that 82% of charity CEOs were worried about paying core costs, especially as public giving was strained. 

PBE’s report reveals that the sector was thankfully beginning to catch a breather when the financial crisis in local government came to a head. According to its own research, only 58% of small charities (income under £100,000) expected to meet demand over the next three months in November 2022. In comparison, this went up to 64% in October 2023. Sadly, local government cuts in spending on charities and public services may render any recovery from the effects of COVID and the cost-of-living crisis short-lived.  

Conclusion 

The fates of local government and charities are interlinked and interdependent. Any issue affecting the former causes implications for the latter, and vice versa. Just over 10% of the sector’s total income originates from local government so it is highly problematic that one in five councils are predicted to issue section 114 notices by the end of 2024. Consequently, we will likely see further cuts to public services and charity grants. Charities that receive their funding from elsewhere will be affected by increased levels of demand. It seems that the charity sector can’t catch a break as this crisis comes just as some charities are reporting financial recoveries. We’re a matter of months away from a General Election so it’s critical that all political parties commit to addressing the crisis in local government finance before more damage is done. You can read more about DSC’s call to action here. 

To find out more about how DSC’s friendly research team can help you to help others, find out more here or get in touch with research@dsc.org.uk to schedule a free consultation.