September 21, 2004

Charitable donations depend on economic fundamentals

BY STEPHEN S. POLOZ

(DCN SPECIAL)

As the annual fall charitable giving drive gets under way, it is worth reviewing the macroeconomic fundamentals and considering what the prospects are.

Economists have a bit of trouble explaining charitable donations. After all, economics is based on the principle of maximization, which is a technical term for greed. People work hard so they will have more, not to give it away. Altruism or philanthropy does not fit readily into such a framework.

Whether it is for the recognition or some other reason, people give a lot of money to charity. In Canada, tax files show that charitable donations were nearly $6 billion in 2002 (the latest data), which is more than 0.5 per cent of GDP. During the 1990s and into the first two years of this decade, the average growth rate of donations was 6.0 per cent per year, faster than average GDP growth of 4.3 per cent.

Americans give even more of their income to charity— around $137 billion (U.S.) 2002, or 1.5 per cent of GDP. Experts believe that this difference stems mainly from the fact that Canadians have higher expectations than Americans that their governments will take care of those in need. Like Canadians, during the past 12 years average growth of America’s charitable donations was 7.5 per cent, well above the average GDP growth of 5.1 per cent.

Economists generally agree that charitable giving can boost economic growth. People who give money away have a higher rate of saving than those who receive it, who spend it all. Interestingly, people tend to give more to charity when the economy and stock market are strong, although charities tend to need more money when the economy is weak. Essentially, people donate not when it is most needed, but when they can. Not surprisingly, then, the big growth years for charitable giving in Canada were 1996 (up 13.3 per cent) and 2000 (up 12.1 per cent), when the economy and stock market were strong. Those were also big growth years for U.S. charities. In 2001, by contrast, when economies were weak and stock markets fell, donations rose only 1.4 per cent in Canada and actually declined in the U.S.

Canadian giving picked up in 2002, but American donations continued to shrink as the economy and stock market floundered. This divergence appears to have continued in 2003, as U.S. donations fell further while data from Canada’s United Way/Centraide show donations grew 5.0 per cent.

This brings us to 2004— the global economy is running in high gear, and the outlook for Canada and the U.S. is for moderating, but continued solid growth. Indeed, fundamentals are the best since 2000, which sounds good for charitable donations. The fly in the ointment might be the stock market, which has been lackluster this year, but at least it has held last year’s gains.

The bottom line? Charitable giving has its ups and downs, making it very difficult for agencies to plan their efforts. But the present economic environment is about as favorable for giving as we have seen since 2000—on balance, we can expect decent growth in this season of giving.

Stephen S. Poloz is senior vice-president and chief economist for Export Development Canada. spoloz@edc.ca The views expressed here are those of the author, and not necessarily those of EDC.

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