January 24, 2017    4 minute read

Charities: The Problem With Cash Donations

Tackling Inefficiency    January 24, 2017    4 minute read

Charities: The Problem With Cash Donations

The Cambridge Dictionary defines charity as “a system of giving money, food, or help free to those who are in need because they are ill, poor, or have no home, or any organisation that has the purpose of providing money or helping in this way”. On the surface, this gives a very good impression of charities and their activity. However, the reality is somewhat different when it comes to cash donations.

Are Charities Efficient Enough?

As seen on the chart below, global charitable giving has increased significantly over the past 40 years. In the UK alone the industry is worth £80bn, which is an astonishing figure. By way of comparison: in 2015 the total value of the UK retail sales was £339bn. Retailers create millions of jobs and, arguably, have a positive impact on the economy in many ways. As for charities, it is very questionable that they have much positive impact on anyone apart from those who run them.

2015givingovertimechart

Source: Charity Navigator

 

According to research by the True and Fair Foundation, some of the most popular UK charities such as Age UK and British Heart Foundation only spend half of their income on charitable activities. Given that there are a lot of tax relief schemes for registered charities in the UK, and most employees of those organisations are paid nothing because they are volunteers, the questions is: what are those huge costs that make charities on average only spend 43% of their income (according to the report) on charitable activities?

43% of 17 UK charities’ income is spent on charitable activities

Cancer Research UK, for example, pays over £60,000 in salaries to 219 of its employees, 39 of which are paid over £100,000, and all paid for by the received donations. In fact, there are even some charities which spend less than a tenth on charitable activities, such as the Racing Foundation which only spends 3% on them.

Understandably, some of the biggest charities face costs equivalent to those of a large company, such as rent. But, considering that many charities are located in city centres around the UK, if every £1 of donations 50p must currently be spent on costs of operating (as the research suggests is on average the case for 1020 charities) then it could arguably be more reasonable to move to other, more low-rent areas.

So why would this make charities not worth donating money to? The same research also found that there is “no evidence of economies of scale leading to any efficiencies”; in other words, any donation in a sense ‘sponsors’ inefficiency, which implies that some part of the donation a person makes will be wasted.

But it also implies that if donations are given in the form of food or clothes, they will be more likely to be of help to those in need. By transferring resources towards charity organisations away from industries, such as retail (which exploits as many economies of scale as possible) we discourage innovation, which is one of the main tools for increasing productivity among the labour force. And this negative effect on productivity arguably outweighs the positive aspects of donating cash to a charity, in the long term.

The Private Sector

Looking more at the private sector, integrity and ‘doing good’ are the new ‘trends’ in the 2010s for the financial industry. Arguably, most new implementations by big financial organisations have a simple purpose: to increase net profits. There is nothing wrong in doing this; however, charity campaigns have become increasingly popular and have gradually transformed into ordinary marketing campaigns – which are all over the news and are done firstly to increase companies’ reputation and recognisability, helping to attract new clients and donations and increasing revenues in the long term.

But as far as charitable organisations are concerned, by giving money to them, one is ‘contributing’ towards the salaries of the charities’ managers as much as towards the ‘good cause’. The 50% efficiency ratio of donations to operating costs makes it discouraging and, arguably, irrational to donate money to charities.

Conclusion

There are many other ways to ‘do good’ without spending anything. For example, volunteering for a charity organisation, which has a direct impact by reducing costs for the organisation. The maths is very simple: by working in a Red Cross store for 4-5 hours a week for a year, for example, one ‘donates’ over £1500 (according to the minimum wage) to the charity without spending a single pound, and does not transfer any financial resources to an inefficiently operating industry. The overall lesson is that donating money to a charity arguably has a lot less impact than is usually perceived by the general public.

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