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.<\/p>\n\n\n\n
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<\/a>).<\/p>\n\n\n\n Charities themselves also face rising costs of energy and other essentials \u2013 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.<\/p>\n\n\n\n Looking at the effects of past recessions on charitable giving can provide some insights into what might happen to donations in the coming months.<\/p>\n\n\n\n In the 1980s, 1990s and early 2000s, giving in the UK appeared to be largely recession-proof (Cowley et al, 2011<\/a>). 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.<\/p>\n\n\n\n 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.<\/p>\n\n\n\n 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<\/a>). In other words, economic booms were more likely to lead to an increase in donations than recessions were likely to reduce them.<\/p>\n\n\n\n The study also found that donations were more sensitive to changes in the stock market \u2013 movements in the S&P 500 \u2013 than to changes in GDP, and that donations were more responsive to stock market upturns than downturns (List and Peysakhovich, 2011<\/a>). Negative changes in the S&P 500 did not affect donations significantly.<\/p>\n\n\n\n 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 \u2018substitution effect\u2019 \u2013 donations are more valuable \u2013 that can partly or fully offset the \u2018income effect\u2019 that would tend to reduce giving. This might be amplified by charities increasing and intensifying their fundraising activity.\u00a0<\/p>\n\n\n\n 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\u00a0windfall<\/a>\u00a0income \u2013 that is, unexpected increases in income that people may feel that they haven\u2019t earned.<\/p>\n\n\n\n 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<\/a>).<\/p>\n\n\n\n More recent research, which examines the effects of the global financial crisis of 2007-09, paints a more negative picture for charities.<\/p>\n\n\n\n In the UK, data on aggregate donations produced by the Charities Aid Foundation<\/a> 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).<\/p>\n\n\n\n This fall was briefly halted in 2020 \u2013 a positive effect of the pandemic<\/a> \u2013 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<\/a>).<\/p>\n\n\n\nGiving and the economy: recessions in the 1980s, 1990s and early 2000s<\/h3>\n\n\n\n
Giving and the economy: the global financial crisis<\/h3>\n\n\n\n
Figure 1: Total donations (direct donations to charity and sponsorships)<\/h4>\n\n\n