Meet our Expert

Kimberley_ScharfKimberley Scharf – Professor of Economics at the University of Warwick

Kimberley Scharf is Professor of Economics at the University of Warwick. She is also co-founder and President of Public Economics UK (PEUK), Research Associate at the Centre for Economic Policy Research (CEPR), and the IFO Institute at the Center for Economic Studies (CESifo). 

“As the UK economy begins to recover, what do you think charities can learn from the recession years? Are there any measures that charities can take to safeguard their organisation against future recessions?”

The answer

Charities need buffers against short-run income fluctuations, in order to protect the continuity of their operations in the face of revenue downturns. The lack of a proper buffer against such fluctuations can lead to short-term myopic responses on the part of charities. This can undermine their mission and compromise their medium-run and long-run sustainability, causing programs to be disrupted and their aims to be overly influenced by transitory changes. Put more simply, having to continuously refocus activities and reorganise the organisation involves adjustment costs that are wasteful in the medium and long run. Ways of dealing with this include diversification of income sources and increased reliance on investment income (e.g. charitable trusts).

At the same time that charities should attempt to neutralise effects of fluctuations on their operations and prevent knee-jerk responses stemming from pressures on the income side of their organisation – and without implying a contradiction with these aims – charities need to be responsive to fluctuations that relate to the needs that their activities serve, i.e. they should try to identify how economic downturns affect the circumstances of the beneficiaries of their programmes and should react accordingly. For example, in bad times, food banks will need to supply more meals for the hungry than they would in good times; responding to their mission as consumption smoothers for individuals in need. Food banks should then build capacity in good times (when less is needed, providing less), which allows for quick response to need in bad times (when more is needed).

In summary, charities that want to thrive and be sustainable in the long run need to have long run plans in place that provide buffers against income fluctuations. At the same time, they need to have enough flexibility to respond quickly to changes in the needs of their beneficiaries. Achieving both of these objectives at the same time requires proper planning, ingenuity and technical know-how.