Like households and businesses, charities are facing rising costs. At the same time, many will see demand for their services grow as the economy weakens. While recessions don’t necessarily lead to a fall in donations, the funds available to charities are declining in real terms.
The rising cost of living and the threat of a recession will be a major concern to the charity sector. Demand for the services of many charities that help the most vulnerable is likely to grow.
Indeed, even before the inflationary pressures of this year had emerged fully, the pandemic had increased demand. Over half (57%) of charities reported a growth in demand for their services in a survey published in November 2021, of which only 4% expected this to decline (National Council for Voluntary Organisations, NCVO, 2021).
Charities themselves also face rising costs of energy and other essentials – and potentially increasing wage pressures. Those that rely on public donations may also be concerned that people will cut back on their giving as their own budgets are squeezed.
Looking at the effects of past recessions on charitable giving can provide some insights into what might happen to donations in the coming months.
Giving and the economy: recessions in the 1980s, 1990s and early 2000s
In the 1980s, 1990s and early 2000s, giving in the UK appeared to be largely recession-proof (Cowley et al, 2011). The value of donations increased in times of economic growth and did not fall at the same rate as the economy during periods of recessions.
Total giving was positively correlated with GDP growth over this period, but the positive relationship was driven by boom times (particularly the 1980s boom). Further analysis shows that the boom caused givers to give more, rather than increasing the number of donors.
Evidence from the United States shows a similar pattern. Analysis of data for the period from 1968 to 2007 found that overall donations were affected by fluctuations in the economy. But they were more sensitive to economic upturns than to economic downturns (List and Peysakhovich, 2011). In other words, economic booms were more likely to lead to an increase in donations than recessions were likely to reduce them.
The study also found that donations were more sensitive to changes in the stock market – movements in the S&P 500 – than to changes in GDP, and that donations were more responsive to stock market upturns than downturns (List and Peysakhovich, 2011). Negative changes in the S&P 500 did not affect donations significantly.
What might explain these different effects of macroeconomic conditions on donations? One explanation is that the increase in need during economic downturns leads to a ‘substitution effect’ – donations are more valuable – that can partly or fully offset the ‘income effect’ that would tend to reduce giving. This might be amplified by charities increasing and intensifying their fundraising activity.
Another factor behind the strong positive effect of boom times, particularly the rise in the stock market, is that people may be more likely to donate windfall income – that is, unexpected increases in income that people may feel that they haven’t earned.
Evidence from laboratory experiments confirms that people are more likely to donate bonus income rather than similar amounts of earned income. Further, research shows that this behaviour may reflect a social norm about what is the morally appropriate thing to do (Drouvelis et al, 2019).
Giving and the economy: the global financial crisis
More recent research, which examines the effects of the global financial crisis of 2007-09, paints a more negative picture for charities.
In the UK, data on aggregate donations produced by the Charities Aid Foundation show a small fall in nominal donations in 2008/09, with signs of a recovery in 2010. But more striking than any short-term recession effect is the fact that the value of donations has steadily declined since 2010 both in real terms (2021 prices) and as a share of GDP (see Figures 1 and 2).
This fall was briefly halted in 2020 – a positive effect of the pandemic – but in 2021, donations as a share of GDP were at 0.48% compared with 0.62% in 2004 (and 0.68% in 2005). This is consistent with previous evidence that the number of households donating to charity has been in long-term decline (Cowley et al, 2011).
Figure 1: Total donations (direct donations to charity and sponsorships)
Source: UK Giving, Charities Aid Foundation; various years
Figure 2: Total donations (% of GDP)
Source: UK Giving, Charities Aid Foundation; various years
In the United States, giving also fell during the global financial crisis, according to analysis of data from the Panel Survey of Income Dynamics between 2001 and 2013 (Meer et al, 2017). The research shows that the fall was driven mainly by a reduction in the share of households making a donation.
Further, the decline in giving could not fully be explained by reductions in income and wealth, and giving had not recovered by 2012. The study concluded that other factors, such as changing attitudes towards donating or increased uncertainty, may be at work and that these could permanently lower charitable giving.
The finding from survey data – that the financial crisis negatively affected donations beyond an income effect – has been mirrored in a laboratory experiment. This study compared the outcomes of what are known as dictator games – in which people decide how much of a pot to keep for themselves and how much to give away – played before and after the global financial crisis had begun (Fisman et al, 2015).
The researchers found that people who took part in the dictator games prior to the economic downturn were significantly more altruistic than those who took part in identical experiments after the onset of the recession.
The economic slump made people behave more selfishly and this was true even when they themselves had not been directly affected. The study also found that participants exposed to recessionary conditions were more likely to favour efficiency (choices that maximised total resources) over equity (fair outcomes) when there was a trade-off (Fisman et al, 2015).
A related study discusses possible reasons for the mixed evidence on the relationship between inequality – specifically, changes to inequality levels within a country – and support for redistribution (Stantcheva, 2021).
In principle, one would expect higher inequality to increase support for redistribution, but this is not always the case. Indeed, this research concludes that people’s perceptions of inequality matter more than the reality (Stantcheva, 2021).
This includes perceptions about the degree of inequality and social mobility in a society, but also about the identity of welfare recipients and beliefs about immigration. Even priming people to think about immigration may reduce their support for redistribution and welfare spending. People’s beliefs about the effectiveness of policies to tackle inequality and help recipients also matter.
Although these findings relate directly to redistribution by government, they may have important lessons for charities. In times of recession and rising inequality, a clear narrative is likely to be important for maintaining donation levels.
What are the implications of these findings?
Charities are right to be concerned about donations over the coming months and years. Taking a long-term perspective, the evidence shows that recessions do not automatically reduce giving, but UK charities appear to be facing a decline in the real value of donations, at a time when their costs will be rising.
A big caveat to this analysis is that most of the studies referred to in this article focus on donations made by typical households, while total giving is becoming increasingly concentrated in the hands of the very wealthy.
In the United States, for example, an estimated 1% of the population gave close to 40% of total donations, while the top 0.01% accounted for a striking 14%. Many of the wealthy elite saw their wealth increase during the pandemic and they are likely to be immune to the cost of living crisis.
The wealthy have the resources to help those in rising need, but many may prefer to take direct control of their philanthropic activities. They may choose to direct their resources through their own foundations rather than to long-established charities, which will have implications as the cost of living crisis continues.
Where can I find out more?
- UK Giving Report: from the Charities Aid Foundation.
- The new state of donation: three decades of household giving to charity.
- New research shows increased charity demand for services and support from sector infrastructure organisations during the pandemic: Report from the NCVO.
- Perceptions and preferences for redistribution: Report by Stefanie Stantcheva for the Institute for Fiscal Studies (IFS).
Who are experts on this question?
- Sarah Smith
- Kimberley Scharf
- Johannes Lohse