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Second quarter 2011


•   Through the increased provision of service contracts, larger charities (particularly those associated with social
    care, housing and training) have become increasingly dependent on government funding in recent years.

•   Despite the government’s ‘Big Society’ vision, public spending cuts and pressures on households’ disposable
    incomes are expected to weigh on sector income.

•   Demand for charitable services continues to rise, at a time when a number of major charitable income streams
    are under pressure. According to the NCVO (National Charities and Voluntary Organisations) earned income
    from central government and local authority (LA) contracts and grants has more than doubled since 2001 and,
    as a result, spending cuts across department and local government budgets are expected to weigh heavily on
    sector income. Statutory funding reached £12.8 billion in 2009-10 and now accounts for over a third of sector
    income. Large and medium sized charities generate around 40% of their income from the government, and
    organisations that provide social care, housing, employment and training support tend to be the most heavily
    dependent on public funding, generating on average 70% of their income from local or central government
    funding. Local authority expenditure is expected to fall at an average rate of 4.4% this year and the government
    has urged LAs not to cut spending on voluntary and community groups as fast as their own budgets have been

•   While the Big Society agenda recognises the importance of voluntary services, a survey conducted by the Charity
    Finance Directors’ Group and PKF found that half of charities expect their grant and contract funding to be
    reduced. The March 2011 Budget introduced a number of measures that should encourage household
    donations and it is hoped this will raise around £540 million. Philanthropy will be incentivised amongst wealthy
    individuals through a cut in inheritance tax for those who leave 10% of their estate to charity, and in order to
    maximise the value of smaller donations charities will now be able to claim gift aid on up to £5,000 per year
    without the need for donors to sign gift aid forms. Nevertheless, underlying pressures on household budgets will
    continue to dampen household appetite to donate.

•   The government hopes to increase the role of the voluntary sector in delivering services such as adult social care,
    offender management and community healthcare. Nearly £500 million has been earmarked for the Big Society
    agenda over the next four years and an additional £100 million transition fund will be available to support
    voluntary organisations impacted by public spending cuts. Although some organisations have significant assets,
    most (including the largest) have few reserves and so are vulnerable to the sudden loss of key income.

•   The Association of Chief Executives of Voluntary Organisations (ACEVO) estimates that sector income will fall by
    £4.5 billion over the next four years. As a result, it remains to be seen to what extent organisations that are
    already stretched have the resources to satisfy mounting demand for their services. The number of charities
    facing financial difficulties is increasing. A recent survey from the NCVO has found that two-thirds of charity
    leaders expect that general conditions will deteriorate within their organisation over the next twelve months and
    two-thirds expect to reduce expenditure within their organisation over the next year, with over half (double the
    number recorded in December) expecting to reduce staff numbers over the next three months.

Appendix 1 – Summary of macroeconomic overview                                           UK: Gross Domestic Product
                                                                                         Quarterly % change (annualised)
•    Economic data have been decidedly mixed recently. The official                           6
                                                                                                                                                                       Long-term trend

     GDP statistics indicate that the economy grew by only 0.5% in the                        4                                                                                          4

     first quarter - after adverse weather contributed to a 0.5% fall in the                  2                                                                                          2

     final period of 2010 – but seasonal factors such as the late Easter                      0                                                                                          0

     and doubts about the accuracy of the weak construction output                          -2                                                                                           -2

     data make the statistics difficult to interpret. Business survey                       -4                                                                                           -4

     evidence has been a little more buoyant but has generally weakened                     -6                                                                                           -6

     in the most recent months and probably indicates that growth has                       -8                                                                                           -8

     remained below 0.5% in the second quarter. This is set against an                     -10                                                                                           -10
                                                                                                       90                   95                00                05             10
                                                                                                                                                                     Source: ONS/Haver
     intensification of market concerns about the pace of global
     economic growth (although it is unclear to what extent the current
     soft patch is due to supply disruptions in the aftermath of the
     earthquake in Japan) and the risks posed by the sovereign debt crisis
                                                                                         Purchasing managers' survey
     in Europe.
•    Unemployment stabilised last year but has yet to show a definite
     reversal and prospects remain clouded by planned cuts in                               65
                                                                                                                                A reading above 50 indicates expansion in output

     employment in the public sector. Inflation has risen to 4.5%, double                   60                                                                                           60

     the target level, partly due to booming commodity prices, the                          55                                                                                           55

     weakness of sterling and rises in indirect taxes. Nevertheless, the                    50                                                                                           50

     majority on the MPC continue to view the rise in inflation as a                        45                                                                                           45

     temporary phenomenon driven by the rise in VAT, higher                                 40                                                                                           40
                                                                                                         A reading below 50 indicates contraction in output
     commodity prices and weak sterling. With no sign of a pick-up in                       35                                                                                           35

     wage or inflation expectations, thus far, and signs that the recovery                  30                                                                                           30

     remains fragile, interest rates have remained unchanged and                                   96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
                                                                                             Services    Manufacturing             Source: CIPS/Markit/Haver

     financial markets have pushed back their expectations of the timing
     of the first rate rise until the second quarter of 2012.
•    As regards the prospects over the next twelve months, the consumer
     sector is unlikely to provide much of a contribution to growth.                UK interest rates
                                                                                    Base rates, per cent
     Households remain heavily indebted and real disposable incomes are            7.0
                                                                                                                                                                           Market implied*

     under severe pressure from a combination of weak wage growth,                 6.0

     rising prices and muted employment growth. Indeed, consumers’                 5.0

     expenditure has fallen in each of the past two quarters according to          4.0

     official figures. And planned government spending cuts – as part of           3.0

     the fiscal tightening – will begin to bear down on the economy in the         2.0

     second half of the year.                                                      1.0

•    Instead, much is likely to rest on the business sector. The rebuilding of     0.0
                                                                                     2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

     inventories has already played an important part in the recovery and,         *Market expectations: 13th June 2011                               Source: Bank of England & Barclays Bank

     probably, has a little further to go. Although it eased in the final period
     of 2010, business investment was 10% higher than a year earlier.
     Businesses do not seem to be about to embark on major new
     investment but surveys indicate positive intentions to invest, possibly        UK consensus economic forecasts: June 2011

     partly driven by the resurrection of projects delayed by the recession.
                                                                                                        Annual % change
                                                                                                                                              2009           2010          2011              2012
                                                                                                    (unless otherwise stated)

     And finally, the earlier sharp depreciation of sterling by 25% should               Real GDP                                             -4.9            1.3           1.5               2.1

     provide companies scope to compete in and exploit export markets.
                                                                                         Consumer spending                                    -3.3            0.9           -0.1              1.4

                                                                                         Government consumption                                1.0            1.0           0.6              -1.2
     Undoubtedly this will be tough and much will depend upon sustained                  Investment                                           -15.4           3.1           -0.3              5.6

     growth in key export markets in Europe (currently threatened by                     Stockbuilding (contribution to GDP growth)           -1.2            1.4           0.2               0.1

     renewed sovereign risks in the Eurozone), but business surveys                      Net trade (contribution to GDP growth)                0.9            -0.9          1.3               0.6

     currently point to a sharp pick-up in export orders. Growth in exports              Unemployment rate %                                   7.7            7.9           7.9               7.9

     has been offset over the past year by as surge in imports but the net               Consumer prices (CPI)                                 2.2            3.4           4.3               2.3

     trade position was strong in the first quarter.
                                                                                         Base rate (end period)                               0.50            0.50          0.50             1.25
                                                                                                                    Sources: HM Treasury; Bank of England; ONS; Barclays Corporate Economics

•    Reflecting the gathering uncertainties, economic forecasts have
     generally been revised down recently and now indicate growth of just
     1.5% this year and about 2% next, suggesting the continuation of a
     protracted but weak recovery.



Prepared by Patrick Redshaw, Head of Economics and Catherine Seymour, Economist, Portfolio Management, Barclays Bank PLC.

All data and factual information referred to in this report were correct as of 17th June 2011

Source of ONS data: National Statistics website:
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