The Economy

• In October 2024, the Fraser of Allander Institute reported that inflation continues to fall.  Although the rate of inflation may be coming down, prices continue to rise and costs are expected to remain high.
• High costs for items including energy, insurance and wages continue to put strain on voluntary sector budgets.
• Increases in inflation reduce the real terms value of grants and contracts which are generally not adjusted for inflation.
• As households are also impacted by these rising costs, and household budgets feel more stretched, challenges in public fundraising and recruiting/retaining volunteers continue.

• The fiscal environment at UK and Scottish level has been volatile for a number of years, with emergency reviews, delays in budget timetables, and promises of multi-year spending reviews delayed in both parliaments.
• The UK budget in October 2024 was dominated for voluntary organisations by changes to employer National Insurance Contributions and National Minimum Wage.
• The Chancellor also announced that UK Shared Prosperity Funds (UKSPF) would be continued for another year, but reduced by 40%, from £1.5 billion to £900 million. Spending allocations to local authorities have been released.  Longer-term plans for the funding are unclear.  
• The Scottish Government budget in December 2024 was well received by some parts of the sector for commitments to help communities including the removal of the two child cap and the reinstatement of the winter fuel allowance.
• Ahead of the Scottish budget, SCVO called on Scottish Government to ensure that all voluntary sector grants and contracts included provision to cover increase employers National Insurance Contributions, and all other aspects of Fair Funding.  Beyond a reference to continuing to work on fairer funding, the budget did not do this.
• The third sector budget line in the Scottish budget was more or less the same as in 23/24, suggesting standstill budgets for organisations funded by that part of Scottish Government.   The community justice funding line of the budget included a specific reference to voluntary sector funding, which appears to go up.  The culture sector received financial increases, and a commitment to multi-year funding, which will hopefully bode well for voluntary organisations operating in that space.  Implications for other voluntary organisations will not be understood until Scottish Government departments confirm their own spending plans.
• Analysis suggests that Scottish public spending on items other than public sector pay and social security is projected to fall by 0.3% between 2024/25 and 25/26.
• The tight public spending environment is also likely to lead to increased demand for voluntary sector services, as public services tighten eligibility criteria or increase waiting lists.
• The timings of national budgets will mean decisions about voluntary sector funding by some public bodies are unlikely to be made ahead of 1 April.

• At time of writing, it is not yet clear how local authority investment in the voluntary sector will look in 25/26.
• Ahead of the Scottish budget, many local authorities said they would be unable to balance their books in 2025/26.  The Scottish budget provided an increase in funding to local authorities, which was welcomed by COSLA, who warned, however, that it will take more than a one-year settlement to restore the financial position of local authorities.
• Decisions at a UK level about how public sector employers will be recompensed for increases in employers National Insurance Contributions will impact on the funding available within local authorities in 25/26.
• At the end of 24/25 a number of local authorities and IJBs proposed or made in-year cuts to voluntary sector funding, and gave advance warning of anticipated cuts in 25/26

• Independent funders are reporting an increase in applications, and many funds are heavily oversubscribed. 
• Some funds have closed to new applicants due to this increased demand.
• Other funders have tightened their funding criteria, and focused in on particular issues or areas.
• Competition for funding from public sector and independent funders is likely to continue to increase.
• Combined with the difficulty in public fundraising, and the fact that despite rising costs, grants and contracts are not keeping pace with inflation, this puts a huge strain on voluntary organisations.

• 6 in 10 people in Scotland donated money to charity in 2022. However, fundraising remains a key challenge for most charities. 
  CAF’s 2024 Giving report shows a trend towards fewer people donating money in recent years with many citing the cost of living crisis although this has been mitigated by some donors donating larger amounts. For those who do give the key factors in choosing which charities to donate to are personal experience, friends and family, and social media. People also respond positively to donors talking about their giving. 
• Charity shops remain an important way for people to give and interact with charities, with around 1/3 of people donating goods and around1/4 buying goods. 

• As living costs continue to rise, many voluntary organisations will want to reflect this in staff salaries 
• Changes to employers National Insurance contributions will have a significant impact on medium and large voluntary organisations employing staff 
• Increases in the National Minimum Wage may lead to increased costs for some voluntary organisations employing staff, though many voluntary sector organisations in Scotland already pay at least the Real Living Wage. 
• Other changes to employment law proposed by Westminster to strengthen statutory sick pay, establish parental and bereavement leave from day one, and end zero-hour contracts may also have financial implications for voluntary sector employers in coming years (see The Law for further information)  
• Recruitment and retention of paid staff are key issues for the sector, with many organisations reporting difficulty in finding applicants with the skills they need for particular posts.  Given that this issue comes at least in part from the inability of voluntary organisations to keep pace with salary levels in other sectors, the economic situation in 25/26 is likely to see this problem remain and possibly get worse over the coming year. 
• Voluntary organisations wish to offer Fair Work to their employees, including paying the Real Living Wage.  The Scottish Government are committed to Scotland becoming a Fair Work Nation by 2025. As part of Fair Work First, from the 1st of July 2023 those applying for public sector grants have been required to pay at least the real Living Wage and provide effective workers’ voice as a minimum standard. Employers are also expected to make progress towards other Fair Work principles. The Scottish Budget made provision for voluntary sector staff in early years and social care to be paid the Real Living Wage, but beyond this, annual uplifts to the real Living Wage rate, and uplifts for other staff are not resourced. In the Autumn Budget the UK Chancellor also increased to both the National Living Wage and National Minimum Wage, impacting voluntary sector employers who do not yet pay the Real Living Wage. 

For discussion of non-financial issues impacting organisations that employ staff, see the Society section 

• Last year Scottish Government consulted on proposals to introduce costs for Disclosure checks for volunteers.  It is not yet clear whether or not charges will be introduced, along with other changes to the Disclosure scheme, in April 2025 (for more information on those changes see The Law).   

• Strong financial management is always important, but arguably even more so in the current economic climate. 
• During 2024, the Scottish Third Sector Tracker showed an increase in the number of organisations using their reserves.  In Spring 2024, six out of ten organisations that had done so said their use of reserves was unsustainable. 
• An increasing (although still small) number of voluntary organisations are finding themselves in conversation in their board meetings or with their auditors about whether or not they are a going concern.