By Matt Whittaker and Jack Larkham

The cost of living crisis is already with us, though the full scale of its potential for economic harm over the coming months remains highly uncertain. What we know is that broad-based and very sizeable increases in costs are creating considerable pressure on budgets across the income distribution and in all parts of the country.  

We know too that charities and social sector organisations are once again stepping up. And, as the crisis evolves, we can be confident that the charitable response will shift with it. Yet the safety net provided by the social sector is itself under significant strain. Charities and community groups are facing the same cost challenges as the rest of the country and are still dealing with the legacy of the pandemic and its impact on balance sheets and staff wellbeing. Crucially, the nature of this particular crisis likely presents an even greater challenge for the sector, with resources especially constrained by the financial squeeze being felt by households. 

What happens next will depend on international and domestic movements in policy and sentiment. But here we present six charts which set out the current state of play for charity demand and charity capacity as we enter a critical winter period.  

1) Increasing numbers of people are feeling the pinch  

The squeeze on real terms incomes has been in place for several months, with inflation hitting a 40-year high. It’s no surprise then to see any number of surveys highlighting the pressure being felt by the public. Three in four (77%) people reported being “very” or “somewhat” worried about the rising cost of living at the start of October, with two in five (43%) saying it is “very” or “somewhat” difficult to pay their energy bills and one in three (30%) saying the same about their mortgage or rent payments. 

It's equally unsurprising to see increasing numbers of people turn to charities for support with the situation. In the three months to September 2022, Citizens Advice referred an average of 22,990 people a month in England and Wales to food banks or other forms of financial charitable support. As Figure 1 shows, that is one-third (32%) higher than the peak recorded during the pandemic and 85% up on the same period in 2021. Remarkably, today’s figure marks a 157% increase on the numbers recorded on the eve of the first Covid lockdown. 

2) There is an overwhelming belief that those affected by the crisis should be able to access charity support 

If demand for charitable support is high, so too is the belief that such assistance should be readily available. Polling by YouGov in September found that just over three in four (76%) people thought charities should be providing help to those who are most affected by the current cost of living crisis. 

As Figure 2 shows, this sentiment appears stronger still when people are asked about specific support measures. When presented with a list of options, including assistance with accessing food and mental health support, just 3% of the YouGov respondents said that there should be no access to such help. 

3) The public believes charities should lobby for change, as well as providing direct support 

So far, so obvious. But given the narrative often presented in press stories and speeches about the social sector, it is perhaps more surprising to see the same survey respondents saying that they think charities should go beyond providing direct ‘frontline’-style support for those affected by the cost of living crisis.  

While it’s true that signposting (58%), shelter (57%) and support (56%) are the top three responses provided in Figure 3, “lobbying the government” (53%) comes a very close fourth. “Campaigning for change” (45%) also scores highly. Overall, the responses highlight a recognition on the part of the public of the very wide range of ways in which the social sector provides support in both the near-term and the more medium-term. 

4) Financial realities mean people across all socioeconomic groups are more likely to be cutting back on donations than ramping them up 

With demand for help elevated and appetite for charity support in clear evidence, we might expect people to want to see additional resources flowing to the sector. And that is indeed what comes out of the YouGov survey, with over two in three (69%) agreeing that it is “very” or “fairly” important for charities to seek financial and non-financial aid from their supporters during the crisis.  

However, the financial realities being faced by households means that this sentiment doesn’t necessarily translate into action. While a quarter (25%) say the cost of living crisis makes it more likely that they will give to charity, an equal and opposite 27% say it makes it less likely that they will do so. Likewise, the one in five (20%) who say they are more likely to volunteer time are almost entirely offset by the 18% who say they are less likely to do so. 

And the picture is starker still when we turn to the actual financial response reported by those who do usually donate to charities, as highlighted by Figure 4. It shows that one in four (26%) existing financial donors report that the cost of living crisis has caused them to give less money to charities, with only one in ten (10%) reporting an increase. While there is no data here on the value of the changes being made in either direction, it seems fair to assume that this adds up to a scaling back of financial support for charities just at the moment at which they are most needed. 

And Figure 4 further shows the extent to which these cutbacks on donations are being made across different demographic groups. Within every age group we observe more existing donors saying they have cut back than saying they have increased their giving. Similarly, while it’s true reductions are more likely in working class C2DE socioeconomic groups (34%) than elsewhere, it remains the case that one in five (21%) of those in middle class ABC1 groups report having to do the same.  

Importantly, it is likely that these responses relate to nominal amounts.  This means that at least some portion of the contributions being made by the 44% who say they are donating about the same as they did before the crisis will in practice be being eroded by rapidly rising costs.  

Elsewhere we’ve shown that average direct debit giving to charity has been stuck at around £20 a month over the last five years. Yet a contribution of £20 set up in January 2017 will be worth just £16.47 today. Rising costs always act as a real-terms drag on fixed cash giving, but that pull clearly becomes much stronger during periods of especially high inflation.  

And it’s not just the flow of new money coming into charities which is being constrained. The stock of existing funds is also dwindling at a more rapid rate than usual. Multi-year finance deals will be worth less than was intended at the time they were struck – though some grant-making trusts and foundations are taking action to correct for this.  

But reserves too will stretch less far than was the case just a few months ago. New data from the NCVO Almanac shows that charities entered the pandemic with an average of 6.5 months’ worth of expenditure in reserve. That average may well have fallen since, with the Charity Commission finding in 2021 that one in four (23%) charities had used their reserves to continue operating through the turmoil of Covid. Whatever its level on the eve of the cost of living crisis, it will almost certainly have fallen sharply in the face of accelerating monthly costs. Our estimate is that inflation may have eroded roughly half a month’s worth of reserves on average.  

5) Things are likely to get worse before they get better 

The public has previously shown itself to be good at looking through temporary income hiccups, continuing to give to charity when it expects any pressure to be relatively short-lived. The reported cutbacks in donations noted here will in part reflect the widely held expectation that the challenges associated with the cost of living crisis will persist for some time to come.  

The precise evolution of the crisis will rest on our domestic policy responses and on developments in Ukraine and across the globe, but it seems very likely that the situation will get worse before it gets better.  

In part that’s due to the cumulative effect of the income squeeze, with financial pressures always getting harder to weather the longer they persist. But rising interest rates will also increasingly play into the challenge for many households. Falling home ownership rates and a strong shift into fixed rate mortgages have slowed the pace at which Bank of England rate decisions feed through into household costs, but they will nevertheless start to land over the coming months. With a consistent one in five respondents to the regular ONS household finance survey reporting year-on-year increases in their borrowing/use of credit over recent months, rising consumer credit costs will also eat into budgets. 

While interest rates remain some way short of their levels in earlier decades, the significantly higher stock of debt held by households mean the impact of each percentage point rise is higher than was once the case. Figure 5 presents an illustration of the current position.

It shows the evolution over the last 34 years of the household debt servicing ratio – that is, the amount households pay in interest on their secured and unsecured debts as a share of their disposable income. The ultra-low interest rate period that has characterised the post-financial crisis era has helped to lower this ratio over time, such that it stood at just 3.5% in the second quarter of 2022. However, the Bank of England’s base rate has more than doubled (to 2.25%) since then, and it is currently expected to approach 6% by the middle of 2023.  

Base rate rises don’t feed one-for-one into commercial borrowing rates, with the ‘effective interest rate’ (EIR) being paid by households depending on wider conditions in the credit market and the mix of products held. However, for illustrative purposes it is worth speculating as to where the EIR might head over the coming months.  

The last time the base rate topped 2% as it does today, the EIR was roughly 6%; the last time the base rate reached 6% the EIR was 7%. If effective borrowing costs reach somewhere in the range of 6% - 7% this time around, then we can expect the household debt servicing ratio to jump back up to the sorts of levels last recorded around the time of the financial crisis. Repayments as a share of income would also broadly match those recorded in the late 1980s when the Bank’s base rate was comfortably in double figures.  

If the markets are soothed by the new Chancellor’s reversal of the majority of the September mini-budget then borrowing costs may not rise quite as far as had been projected, but they nevertheless remain on an upward trajectory. The end of cheap credit will undoubtedly add to the pressures being faced by many. At the very least they are contributing to a level of uncertainty which will make households more cautious in their approach to giving. 

6) Self-rationing of charity support might simply store up problems for the future 

Set against the various challenges facing society and the social sector in the current climate, there is one potentially counterintuitive final finding from last month’s YouGov survey which might give us some cause for concern.  

Figure 6 presents the details: namely that the cost of living crisis is causing more people to report being less likely to seek help from a charity than more likely. Overall, 16% of respondents say the crisis increases the likelihood of their seeking help (with only 4% stating they were “much more likely”). In contrast, 23% say they are less likely to reach out for charitable support (with 19% saying they are “much less likely” to do so). 

While we have no means of understanding what is driving these responses, given the answers provided elsewhere in the survey we might speculate that it reflects a form of self-rationing. That is, some respondents may be displaying a determination not to add to charities’ burden at a time when they are already facing significant demand (similar to the approach taken towards the NHS at the height of the pandemic).  

If that is what’s going on, then it’s worth noting the differences in responses recorded across the age groups. A net balance of younger age groups are more likely to seek help (with 29% of 25-34 year-olds reporting they are more likely, compared with 16% saying they are less likely). But the balance flips in a very significant way for older groups. Among those aged 55 and over, one in three (34%) say the cost of living crisis makes it less likely that they will seek help from a charity (with only 6% saying they are more likely to do so). 

The concern is that ‘muddling through’, rather than seeking appropriate charitable support, may mean people are storing up further problems down the line – perhaps especially so among older age groups. And, with the new Chancellor confirming that public services spending is set to fall over the coming years, there is the added risk that self-rationing of charitable support is compounded by reduced access to state services. In addition to attempting to meet more demand with fewer resources then, some charities may face the further challenge in the coming months of working with older groups in particular to ensure that they remain engaged with the social sector around them. 

There is of course no easy answer to all of this. The economic shock of recent months has made the country poorer overall, meaning there are simply fewer resources to spread around. Difficult decisions are inevitable. But that’s not a reason for fatalism, or for concluding that there is nothing to be done. 

Early in the pandemic, research for the Law Family Commission on Civil Society found that 82% of people in Britain thought that charities and community groups had played an important role in the country’s response to Covid. As the latest crisis takes hold, all the indications are that people are again recognising the indispensability of the safety net provided by the social sector. Policymakers should do likewise, ensuring that they work closely with the social sector to design a response that is as appropriate and well-balanced as it can be.