The UK is in the midst of both a fundamental integrated review of its foreign, security and development policy and a merger of its two internationally facing departments.
A key issue in both efforts are the resources available. In new research released today, we show that the UK’s (non-aid) overseas spending via the EU—that helped support lower-income EU countries—is a substantial but often overlooked resource.
That spending of £6.4bn per year—over 0.3 percent of national income—will fall steeply after Brexit. Whilst HM Treasury will wish to make a meaningful saving from that spend, it was central to the UK’s international influence and we argue that a portion should be repurposed. Even a twentieth of that spend would transform the UK’s diplomatic capability, enable the UK’s aid budget to focus on poverty and impact, and together underpin Global Britain’s role and influence.
The NATO 2 percent, the UN 0.7 percent, and the intra-EU 0.3 percent
The UK rightly lauds its commitments to spending 2 percent of its economy on defence (actually 2.1 percent) as well as 0.7 percent on aid (official development assistance, ODA).
But in addition to these amounts, it has spent a further 0.3 percent of national income (GNI) overseas—this is not aid but support to mainly southern and eastern EU members. Our analysis looks at the last five years of the UK’s EU spend, building on prior work from the Institute for Fiscal Studies.
We find that, after its rebate, the UK contributed 0.68 percent of income to the EU (“gross”), and 0.40 percent after the EU’s spend in the UK (“net”). Three-quarters of this net spend—0.31 percent—went to economic and rural development in other EU member states—we call this “non-aid overseas spend.”
UK’s past and projected net contributions to the EU (percentage of GNI)
This spend will fall sharply from next year. The Office for Budgetary Responsibility (OBR) estimated in March that the UK’s net EU payments would fall from £8.6bn in 2020 to under £1bn by 2025, just 0.03 percent of national income (this is based on OBR’s forecasts of national income before the significant economic impacts of COVID-19 were clear, but even much lower GDP would leave the broad story unchanged).
Over half a billion a year in four EU members
This EU spend is an integral part of membership, and so is often overlooked in UK foreign strategy assessments (for example those of the British Foreign Policy Group, and the Henry Jackson Society). Still, as recent HM Treasury analysis shows, it is a substantial portion of recipients’ economies.
We examine the recipients of EU growth and rural spending—and estimate that the UK’s share of EU programmes means that it has spent £1.4bn a year in Poland, and over half a billion a year in Romania, Hungary, and Greece.
The economic and fiscal impact of leaving the EU
It’s well understood that leaving the EU will very likely mean the UK economy will be smaller than it would have been within it. My work with the IFS showed that this macroeconomic effect would outweigh any savings from EU budget contributions and so the UK’s public finances would be worse off outside the EU. However, that analysis does not suggest that the money previously spent through the EU should automatically stop. Indeed, the government has guaranteed the same level of £3bn overall farm support for each year of this Parliament.
Of course, with the economic impact of COVID-19, the UK faces a period of substantial fiscal challenge, and any spend that does continue should be able to demonstrate impact and value—the new department would need to make a strong business case for any continued non-aid overseas spend.
Funding the Foreign Commonwealth and Development Office
The Foreign, Commonwealth and Development Office is faced with objectives of promoting Global Britain while losing the influence that came with this £6bn spend and its EU seat. Even before the merger, there were calls for the Foreign Office to receive more resources, which (see chart) have fallen relative to both public expenditure (blue and yellow lines) and GDP.
Source: British Foreign Policy Group analysis of UK Government expenditure reports, 1969—79 & 1974-75 (Jan 1971) onwards
Funding a Global Britain
The UK’s decision to leave the EU will substantially reduce its overseas spending—by an amount well over a third of the aid budget—and the FCDO faces a major challenge to maintain British influence.
Even 5 percent of the non-aid overseas spend we have identified—£319m—is equivalent to a one-third increase in the Foreign Office’s £939m core departmental admin and programme budget. It would also be well within the savings in the UK’s payment to the EU, which will fall by £1.8bn in 2021 alone.
There are well-founded concerns that the merger of the Foreign Office with the Department for International Development will damage the UK’s international standing. The aid budget will do little to support the areas of security, trade, and commerce that are a key part of the UK’s foreign policy—and resourcing these properly will ensure the UK’s aid budget can remain focussed on the poorest countries. So, the UK should:
- Repurpose a small slice of its EU membership payment and properly support its ambitions for a Global Britain.
- Focus the existing aid budget where it can have most impact—on the poorest countries and their development.
- In both cases, spend should be focused to have maximum impact and value, and be highly transparent.
The UK currently spends some 3.5 percent (3.2 percent net) of its national income on defence, aid, and the EU. Brexit will reduce this below 3 percent by 2025—but the UK should ensure that its new Foreign Commonwealth and Development Office has the resources alongside its aid budget to ensure that Global Britain does not become an oxymoron.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.