The cost of living crisis and the social sector: planning for impact

Can data help us better understand the impact of rising prices on the social sector?

Many facilities and services valued by the community are struggling financially. From community transport to swimming pools and village halls, just as those on fixed incomes struggle to deal with rising prices, so do organisations that rely upon annual grants or contracts where service levels or costs were agreed upon before the leap in prices. Salford’s Lowry Theatre has seen its energy costs triple –these are now greater than their core Arts Council grant. Rising costs are having a knock-on effect on other support, too. Increasing concerns about the eroding value of charitable donations or volunteers standing down illustrate the sector's fragility.

The problem hasn’t gone away

Encouraging signs that inflation is falling will bring a little comfort to families dealing with the cost of living. For managers running services and facilities that the public rely on, there is also some relief that prices aren’t increasing as quickly. The falling inflation rate doesn’t mean that the problem of making ends meet has gone away, though. If we want organisations to continue to play a role in communities, we need to understand what impact rising prices are having on their ability to operate – and what we can do to intervene.

Rising energy and employment costs are the biggest problem. The ‘social infrastructure’ is where people meet or congregate for events – often buildings with large, open spaces – that are ‘hard to heat and difficult to treat’. Arts, community and leisure venues, not including offices, account for at least 2% of non-domestic buildings. Many operate from older, often poorly insulated buildings – two-thirds were constructed before 1970 when building practices were very different. And workers in sectors such as arts and cultureor charities – never particularly well-paid - are seeking pay increases that add to organisations' employment costs.

Reducing service levels and using reserves are two responses, though these are not always feasible or appropriate. Government is tapering down its support from March 2023 onwards, when its new Energy Bills Discount Scheme replaces the current scheme. With the new arrangements in place, what is the likely impact on the social sector of higher energy costs? And as employment costs continue to rise, what are the implications for the sector?

Counting the costs

Powerful stories have emerged about the impact of rising costson the social sector. We need to supplement these with quantifiable estimates of impact. Sector bodies are generating important insights from industry surveys, but these may not be representative and therefore generalisable.

At MyCake, we are developing a method to produce aggregate-level estimates of the rising cost of energy and employment for sub-sectors or organisations in a grant portfolio. It is based on existing, audited data from annual reports and accounts. It builds on our work to combine and classify data from regulatory and administrative sources. We’re pleased that several funders are working with us on this, including Power to Change and the Esmée Fairbairn Foundation.

We are constructing a regression model that builds on our approach to rating risk and resilience in the social sector. It enables us to estimate costs for individual organisations and an entire sub-sector or portfolio, including where organisations have not reported any energy or staff costs. Alongside this approach for estimating costs, we have developed a tool to enable funders to model different interventions, from flat-rate grants or subsidies to targeted interventions.

Energy and employment costs are a substantial risk for parts of the social sector

The model is at an early stage. Our work so far has focused on specific portfolios of organisations supported by social investors and funders. We are learning several lessons. We estimate that before energy prices began to rise, the median spend on energy was 3.1% of annual expenditure. The mean average spend on energy was 4.7%. There are clearly some energy intensive users in our sample, which is raising the average spend. This group might need targeted support.

While a doubling or tripling of these energy costs may sound insubstantial, average spending doesn’t take into account the energy-intensive users in the sector. Using data from over 1,100 organisations that report spending on utilities, we can see significant variance. A quarter of this group spend less than 1.5% on utilities, while a quarter spend over 6.0% - again, before the increases. We also have data on employment costs for over 3,250 organisations and this too is included in our regression modelling. We will report on this in coming months.

We also know from our analysis of several sub-sectors that many organisations operate at or near the breakeven level. Small changes to energy or, particularly, employment costs – where any increase is magnified by the large share of spending these costs account for – will very quickly mean that organisations shift from surplus or breakeven to deficit. Our model also considers the reserves held by organisations so we can estimate how long the sector can cope with increased costs.

Finally, our model categorises organisations based on the risks they face from higher energy prices and employment costs. This won’t enable us to predict which organisations will fail, but it will give funders and decision makers a tool to evaluate individual organisations and sub-sectors. We aim to populate the tool with more data over time, ultimately modelling the whole social sector. Our model will show changes in resilience in the current year. We already hold data on every registered or regulated organisation in the social sector universe, and we are expanding the data we hold on energy and staff costs to enable broader analysis.

A better financial model of the social sector

Our model doesn’t yet answer all the questions we have been asked. But it does point to an approach that we think is important: the ability to model changes in the sector’s operating environment, such as rising costs or different levels of tax relief, based on systematic data. This won’t replace the surveys and stories from sector bodies such as PBE and NCVO (with whom we are sharing the model) but will substantially add to them by meeting the demands of policymakers in government.

In the meantime, energy and employment costs are a problem now. Funders, including government, should continue supporting the sector, recognising that targeted additional support to energy-intensive organisations will be required. Further analysis from our model will enable a better-informed debate the likely scale of the problem which in turn will drive debate about what to do next, including where and how to target support.

By Karl Wilding & Sarah Thelwall