According to The Times, the Treasury is pressing for foreign aid to be cut ‘temporarily’ from 0.7% of GDP to 0.5% as part of next Wednesday’s Spending Review. I think this would be a mistake.
By way of background, the International Development Act of 2015 commits the government to spend 0.7% of national income on foreign aid. But this (UN) target can be missed in exceptional economic and fiscal circumstances, including a ‘substantial change in gross national income’ and the risk of breaking other targets for ‘taxation, public spending and public borrowing’, as well as ‘circumstances arising outside the United Kingdom’. In strict legal terms at least the Treasury might be on strong ground.
Nonetheless, cutting the foreign aid target would be a bad idea. For a start, this is money that we can still comfortably afford. The Official Development Assistance (ODA) spend was just over £15 billion in 2019. Even if the 0.7% target is retained, a (plausible) 10% fall in GDP could therefore save about £1.5 billion. Reducing the target from 0.7% to 0.5% might only save another £4 billion.
These are little more than rounding errors in the public finances, especially these days. This year’s budget deficit could easily top £400 billion, or 20% of GDP. The stock of debt has already reached £2,000 billion, or 100% of GDP. If a country is already borrowing £400 billion, saving a few billion on foreign aid isn’t going to make much difference, especially when interest rates are so low.
Put another way, the UK is going to breach its fiscal targets come what may. Claims that we need to cut foreign aid to divert money to spending on domestic priorities are therefore simply wrong: it is not ‘either’, ‘or’.
It certainly make no sense to claim that a temporary cut in foreign aid (lasting only a year or two) will have any impact on the long-term sustainability of the public finances. It will have next to no significant impact on any ‘tough choices’ that might eventually need to be made on spending, borrowing, or taxation.
To be fair, many argue that much of our foreign aid is wasteful and even harmful to the countries and people receiving it. That may well be true. (Here I strongly recommend ‘The Economics of International Development’ by William Easterly and others, published by the IEA.) But this is a separate point. The issue at hand is whether the total aid budget should be cut because of the pandemic.
It has also been suggested that countries receiving aid should take advantage of low interest rates themselves, rather than have us borrow for them. This is a red herring too. The countries that need aid find it very difficult to access international capital markets at the best of times – and even more so now. (Any takers out there for the ‘safe haven’ of Ethiopian government bonds?). On the other hand, the UK’s borrowing costs are even lower than usual.
The politics feel wrong to me as well. It is true that cutting foreign aid is popular with the British public. “Foreign aid is poor people in rich countries giving money to rich people in poor countries” sums it up nicely. Some newspapers have also done a good job of finding past examples of dubious spending (often in China).
However, this is not a fair assessment of the aid budget as a whole. The examples cited by the hostile media represent only a tiny proportion of total spending (certainly far less than the £4 billion that will be cut.) If people were more aware of the role that UK foreign aid is playing in supporting child victims of the conflict in Yemen, for instance, they might think differently. In my view, governments should attempt to correct public misconceptions, not pander to them.
It is also fair to say that, even at 0.5% of GDP, the UK’s aid budget is relatively generous compared to most other rich countries (the average is about 0.3%). But the top of the league is surely where we want to be.
Above all, it’s not a good look for one of the world’s richest countries to be cutting aid to some of the poorest in the midst of a global crisis, let alone at the same time as we are trying to launch ‘Global Britain’ and develop stronger trading links with the rest of the world. Backing away from a UN aid target also looks especially bad when the UK will shortly take over the presidency of the G7 and host a global climate change conference.
In short, foreign aid is an area ripe for reform, but taking an axe to international development spending under cover of a pandemic just isn’t right.
This blog was written in November 2020
Plain-speaking Economics 
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