18 November 2020

‘Global Britain’ shouldn’t take an axe to foreign aid

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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. This would be both poor economics and dreadful politics.

By way of background, the International Development Act of 2015 commits the UK to spend 0.7% of national income on foreign aid. But this 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 the strict legal terms, then, 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 these days. This year’s budget deficit could easily top £400 billion, or 20% of GDP. The stock of debt has already reached £2 trillion, 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 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 for the ‘safe haven’ of Ethiopian government bonds?). On the other hand, the UK’s borrowing costs are even lower than usual.

Politically, the proposal to drop the aid target doesn’t stack up either. It’s pretty obvious from my Twitter feed that many people are attracted by the idea of cutting foreign aid – for whatever reason. (“Foreign aid is poor people in rich countries giving money to rich people in poor countries” sums it up nicely.) But I’m not sure how this would play in the country as a whole, or in Parliament (where a government already on the back foot would face another tough fight).

The timing is dreadful internationally too. It’s not a good look for one of the world’s richest countries to be cutting aid to some of the poorest 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 in my view, cutting development spending under cover of a global pandemic would be a serious mistake.

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Julian Jessop is an independent economist.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.