What the Debt Deal Means for Foreign Aid Reform

It’s almost a certainty that the recent deal to lower the debt ceiling and reduce budget deficits will mean big cuts to foreign aid funding.  (See here and here for excellent analysis on how deep these cuts could get.) But the deal’s effects on foreign aid reform are less clear…and perhaps not as catastrophic as some predict.To recap: the debt deal, or the Budget Control Act of 2011 as it’s officially known, legislated two tranches of spending cuts in exchange for raising the debt ceiling.  The first phase of the bill affects fiscal years 2012 and 2013.  During these two years, the international affairs account is considered a part of “security spending” (along with the Department of Defense, the Department of Veterans Affairs, the Department of Homeland Security, the National Nuclear Security Administration, and the Intelligence Community Management Account).  Security spending is capped at $684 million for FY2012 and $686 billion for FY2013.  To put the FY2012 cap in perspective, the president’s FY2012 request for these six accounts totaled $736.4 billion. The FY2012 House Appropriations topline numbers for these accounts comes to $694 billion. That means the FY2012 cap requires a further $10 billion cut from the already reduced House Appropriations levels.The second part of the Act covers spending levels for FY2014-FY2021.  If Congress doesn’t enact the recommendations by the Joint Select Committee to cut up to $1.5 trillion, across-the-board cuts of up to $109 billion per year will be triggered.  In this scenario foreign aid funding moves to a “non-security spending” classification, leaving the Department of Defense as the sole security account that, according to the legislation, must absorb half of all cuts.No one yet knows what recommendations will come out of the “Super Committee” for the second phase of cuts, but the first phase of caps is a given and will almost certainly mean cuts for international affairs in the coming two fiscal years.  What does this mean for foreign aid reform efforts?The (Potentially) Good:

• Reduced resources will force the administration to prioritize sector and country allocations as never before.  Perhaps making numerous individual choices like whether to put $3.7 million into foreign military financing in Estonia or into further ramping up the Feed the Future program are choices worth discussing and then making.
• Lower spending levels may also necessitate more innovative approaches in aid financing and delivery. Cue Cash on Delivery Aid.
• Less aid could mean the U.S. gets more creative in its development approach, bringing in trade, migration, and further multilateral efforts to leverage other resources.

The (Potentially) Bad:

• Critical reforms at USAID are underway through the USAID Forward initiative.  Many of these reforms are predicated on increased (or at the very least stable) USAID operating expense (OE) account funding. The House’s FY2012 bill cut OE by 27% compared to FY2011 enacted levels.  And again, the FY2012 debt deal cap dictates $10 billion more in cuts.
• Reduced funding could stall or even end current aid programs and projects.  One of the hallmarks of foreign aid reform is increased country ownership, and country ownership comes out of a credible partnership.  Ending or delaying promised programs could put a dent in these relationships.  For example, the Millennium Challenge Corporation (MCC) is currently negotiating compacts with Indonesia, Zambia, Cape Verde, Georgia, and Ghana.  Reduced MCC funding could translate into extremely lengthy delays or reductions in anticipated (and in some cases already negotiated) compacts.
• If international affairs spending takes the brunt of cuts, it could mean the further militarization of development.  For example, the Pakistan Counterinsurgency Capability Fund was scheduled to come under Department of State control in FY2011, but that plan was scrapped amidst lowered funding levels and PCCF returned to its original Pentagon home.  Reduced foreign aid funding could mean the Department of Defense takes over more development duties simply because it has the dollars to do so.

The Uncertain:

• Will the “frontline states” of Pakistan, Afghanistan, and Iraq take the entire development spotlight?  The overseas contingency operation (OCO) account which covers the frontline states is exempt from first phase spending caps.  Could this mean that because these countries are receiving even higher levels of funding they come to represent U.S. development writ large?
• What will happen in a development-versus-defense showdown?  By categorizing both the international affairs and Defense accounts as “security spending,” the two accounts are directly competing with one another.  Who gets cut and by how much to meet the spending cap will be a tangible sign of how development and defense really stack up to each other in a 3-D world.

More aid doesn't mean better development.  But, the old adage “It takes money to make money” seems apt here. It takes money to enact foreign assistance reforms that will make more and better development results per taxpayer dollar.  If the international affairs account suffers disproportionately drastic cuts, not only will development program beneficiaries lose out but any future gains that could have happened under a reformed foreign aid system will be wiped out.  Coupling reformed foreign assistance with non-aid tools like targeted trade and migration policies is a smart path for future U.S. development efforts in a resource-scarce environment.