It’s time to rip up the current fiscal rules for UK aid

_{Sources: FCDO reporting to the International Aid Transparency Initiatives, accessed September 2024
Notes: 2024 spend does not represent all of Q3 spending, it is spending up to August end 2024;  Data does not include former FCO components, plus other aspects of FCDO spending, such as CSSF; ODA to Ukraine and Afghanistan is impacted by reporting restrictions to IATI. However, this exclusion is likely to accentuate the pattern, given large disbursements to both countries in 2021 to 2023, which have decreased in 2024.} 

THE RISK OF FURTHER CUTS IN 2025

In addition, budget cuts made this year have largely been achieved through deferring promised funding into future years. The result is a budget squeeze in the coming years:

• The FCDO now has almost no unallocated budget for 2025 financial year (Figure 2).
• Historic low levels of spending on children are set to continue.
• The FCDO has reduced space to commit robustly to the many upcoming multilateral replenishments, most notably on global health and the World Bank’s 21^st replenishment of its International Development Association (IDA21).

Figure 2 – Multilateral payments set to dominate FCDO spending in 2025 and continued low bilateral spending on sectors highly relevant to children

_{Source: Source: FCDO reporting to the International Aid Transparency Initiative (IATI), accessed May 2024; FCDO annual report and accounts 2022 to 2023.
Notes: i) Certain budgets with FCDO are not provided within their submissions to IATI. Therefore, it was assumed that elements within FCO’s former portfolio would remain the same as Figure 2, whilst other areas would decline (e.g. EU budget attribution). Humanitarian assistance is estimated to continue at £1 billion. Certain multilateral spending not detailed within IATI was estimated based on recent funding announcements or upcoming replenishments being the same as previous levels ii) percentage figure in brackets represents changed compared to 2019.}

WHAT NEEDS TO CHANGE

Something must change to stop the endless cycle of in-year budgetary cuts and adjustments to UK aid. the proposed changes to the overall fiscal rules and policy offer a great opportunity to do so in two ways:

1.       Bring coherence with overall fiscal rules and those on ODA 

The Labour government’s proposed changes to overall fiscal rules will cause growing incoherence with those imposed on ODA. For example, the manifesto commitment outlines the current budget moving to be balanced, not sustainably in surplus as ODA tests currently require. In addition, certain proposed changes to public debt measurement would differ from those on ODA, where debt levels could fall faster.

The simplest solution would be to remove ODA-specific tests and rely on overall fiscal and economic indicators, just like defence spending.

The other solution would be to revise the ODA tests to bring coherence with overall changes.

Either option would not only better reflect the new government’s definition of when the fiscal situation improves, but almost certainly offer a more tangible pathway to return ODA spending to 0.7% of GNI.

2.       Align new thinking on investment spending with ODA too

The government is set to significantly boost investment spending in the UK, making a clear distinction that this can be covered by debt, unlike day-to-day spending. This would leave the fixed ODA budget at 0.5% at odds with this approach, given a significant proportion is investment spending. Taking its investment in British International Investment (BII) as an example, this requires minimal fiscal effort and is designed to make a profit, which could be reflowed back into FCDO ODA spending.

Therefore, surely now is the time to alter how ODA budget is constructed, so that there is a fixed ceiling of 0.5% GNI focused mostly on day-to-day sending, but certain investment spending, such as funding to BII, is additional to this.

THE UK GOVERNMENT MUST DO THE RIGHT THING

Next week, the UK government has a clear choice to make - continue treating ODA spending as an outlier and ugly duckling of UK fiscal policy, and widen the disconnect between them, or treat them as the equals that they should be.

If it chooses the first option, it will result in continued inefficient and ineffective spending and lessen its potential impact on the world’s most vulnerable children.

Whereas the other option provides a framework to achieve the opposite and to demonstrates global leadership at a critical point in time.

I know which one I’d choose.