Last week my colleague Ian Mitchell noted that the UK Treasury Department’s rather literal interpretation of the rules around classifying spending as Official Development Assistance (ODA) was in danger of imposing further cuts to the UK’s already-decimated aid budget. How bad might these cuts get? In this blog, I present a plausible set of circumstances—which some in Whitehall are already considering—under which the UK’s status as a serious bilateral donor would be under existential threat. They would take the Foreign, Commonwealth & Development Office (FCDO) from having slightly more than £8 billion in 2019 over which it has full flexibility to spend bilaterally on its priorities in the most effective manner it can, to having just about £2 billion next year. This would amount to a complete gutting of the UK’s status as a major bilateral development presence, essentially depriving its new Secretary of State of one its most potent weapons almost immediately after she assumes the brief. Having cut around half of its portfolio when the Chancellor reduced ODA spending from 0.7 to 0.5 percent of GNI last year, it may have to do the same again, despite the target being unchanged.
Ever since legislation was passed in 2015 to ensure that a minimum amount of foreign aid was spent by the UK each year, the Treasury (and indeed, other non-development arms of government) have expended a great deal of energy on making sure that anything they plausibly can count as ODA is counted as ODA. This is not just harmless creative accounting: because the Government treat the ODA target as a ceiling and not a floor, every pound of questionable development spending that is counted as ODA is one fewer pound available for FCDO to spend on more effective and important development needs At the same time, the Treasury has also been inclined to use all the tools in its arsenal to minimize the impact of the ODA target on its accounting (as distinct from the real state of its finances), by trying to push the Department for International Development (DFID)—and now its successor FCDO—to structure their operations in such a way as to make the reported fiscal deficit and government debt look as good as possible. Rishi Sunak, the Chancellor with a tight grip on public finances, is expected to push these trends even further next year. Without a fight, this will neuter any soft power gains the government hoped to make by merging DFID and the FCO.
Last year, the cuts took the ODA budget down to about £10 billion pounds, of which FCDO secured a little more than £8bn for its development programmes. With an increase in GNI, the aid budget should increase to around £10.5 billion next year. Let’s assume that the fight FCDO won to control the lion’s share of ODA last year will be won again now; this would give the new FCDO Secretary of State Liz Truss around £8.5 billion to play with. Here’s how the Chancellor can undermine her new position immediately and reduce the UK’s bilateral development presence to rubble in six steps. Let’s keep count of how much ODA the FCDO can use flexibly for its bilateral portfolio in pursuit of its mission to be ‘a force for good in the world’.
Step 1 is to score the expected cancellation of Sudan’s debt to the UK Export Finance against the FCDO’s budget allocation. Though the debt is owed to a different government entity, debt relief has usually been counted against DFID/FCDO in the past—we can expect little appetite from any other part of government to change this. There is about £861 million of this debt to be forgiven. Let’s be generous and suggest only £600 billion will count against FCDO next year. That leaves Ms. Truss with a little under £8 billion to work with.
Step 2 is more controversial: to reallocate the SDR allocation from the IMF to the UK to low and lower-middle income countries, but rather than make these new resources additional as all other countries (including some rather prominent ones) are insisting they be, to charge them to ODA. This would be despite the minimal fiscal effort such a reallocation entails: a clear case of taking advantage of accounting rules to minimize the spend on ODA by any means. How much might this be? It’s not wholly clear, but most estimates range from around £200 million to £500 million. Let’s take a central estimate—£350 million, or about as much as might be spent in a good year on a large bilateral country presence (indeed, it would have been the largest in 2019).
Step 3 would be to charge all of the vaccines deployed to developing countries as ODA. This is more debatable—after all, aren’t these vaccines clearly a good thing for developing countries? Two arguments militate against making them ODA, however. First, the benefit of vaccinating the world is larger for developed than developing countries, since the former stand to gain more from a return to the pre-COVID economic system; and more to the point, because while COVID is public health enemy number one in developed countries, it may not even crack the top three in many developing countries. Other diseases still exert a much larger burden on their healthcare systems and economies, and as a result it’s not obvious that if given the cash equivalent of the vaccine values developing countries would use them to combat COVID rather than attend to other diseases for which the treatment will not yield additional benefits for developed countries. Given how straightforward the national interest case for the UK (and any other rich country with a surfeit of vaccines procured) to use them in developing countries is, there’s a strong case to argue that they should not be ODA. Secondly, particularly for surplus vaccines, there is a strong case to argue that the economically correct ‘price’ is zero. Vaccines are likely to account for up to £1 billion in ODA next year. The expectation is that they will be announced as ‘additional’ to the originally expected ODA budget, but not to the actual 0.5 target. The counter ticks down.
Step 4 is to max out ‘Financial Transactions’. Financial Transactions are those categories of spend which create an asset which the UK government own—for example, capital increases for CDC, the UK’s development finance agency. Very little or none of the usual FCDO bilateral portfolio will count as Financial Transactions of this type. These FTs are dearly beloved of the Treasury, since they neither count against the fiscal deficit nor against the government debt. This is magic money: it goes out the door, but doesn’t make the government’s financial accounting look bad, because it creates an asset of equal value that the government owns. Never mind that this asset is, functionally, as good as gone for the government: they are not selling their stake in CDC or any similar organisations. This is accounting smoke and mirrors that makes the books look good, but at the cost of more efficient and effective ways of spending. I am a fan of CDC, and keen to see it do ever more ambitious work—but surely, when the rest of the budget is being squeezed so, this is not the optimal allocation for the UK. Given its accounting allure, the best bet is that the Treasury’s first offer will be at least what it was last year, and probably more. That would mean something in the region of £863 million to £1 billion.
Step 5: Continuing the theme of accounting to keep the Treasury’s numbers looking good, regardless of the economic cost, we can expect a fiscally conservative Chancellor like Rishi Sunak to look to push the envelope in other ways. Specifically, the expectation is that he will propose a settlement to FCDO which increases the proportion of its budget allocated to its ‘Capital Delegated Expenditure Limit’ and reduces that for its ‘Resource Delegated Expenditure Limit’ (here is a handy primer in so-called CDEL and RDEL). CDEL is spending which, like financial transactions, creates an asset, but in this case the asset is not then owned by the UK government. CDEL adds to the national debt, but because it is used for investment that (should) generate growth, it does not count against the fiscal deficit. This is a particular fiction when it comes to the ODA budget, because most of the assets created are abroad, and as such would hardly make a direct effect on UK growth in the way that might be true of, for example, transport infrastructure here. CDEL can be used for good things—some multilateral funds, some infrastructure funds abroad—but you cannot spend it on most UK government priorities such as healthcare, gender equality, trade promotion or girls’ education (unless we pivot to building schools, thus making a mockery of the FCDO-World Bank Smart Buys in Education initiative, which identifies this as a ‘bad buy’). Forcing up the CDEL allocation makes FCDO less nimble, less flexible and less effective. Some fear that FCDO may have to deal with CDEL allocation of 40 percent, up from around 20 percent last time around, but this would be so destructive to the existing aid portfolio that it seems unlikely. Let’s say it increases to around 30 percent. That would still be substantially more than £2 billion. This is still ODA, but again—railroaded away from most of the stated government development priorities.
Step 6: Add to this the allocations made to the British Council (the UK’s cultural relations vehicle, which the recently released FCDO annual report suggests will increase in 2021-22, so we can assume an upward trend) and other fixed costs of ODA provision, including staff paid for by the ODA budget in embassies, accounting for at least £1.25bn pounds (a conservative estimate, given that the most recent annual accounts suggest a figure of £1.7 billion for these two items in 2021-22) and not much remains.
From having £8 billion pounds and a department well-respected around the world to administer it in 2019, the UK has taken a series of steps almost designed to crush its own reputation on international development. Leaving aside the merger (indeed, Stefan Dercon and I argued it could be used for good), the ODA cuts forced FCDO to reduce its resource spending on its strategic priorities to around £4.5 billion pounds (as Annex C in the annual accounts show, including Conflict, Security and Stability Fund spending under this category), at enormous cost to good development work. Any fat in the portfolio has gone, as has most of the meat. Cutting the effective budget in half again will be the final nail in its coffin.
To be a force for good in the world, you need to be a force. Unless Liz Truss manages to stop the Chancellor from bullying her department out of its spending power, the UK will become a near non-entity as a bilateral development actor as early as next year.
This blog benefited from excellent comments by Ian Mitchell and Euan Ritchie. Any errors are the author’s.
Disclaimer
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.
