For the third time in as many years, the United Kingdom’s aid budget is experiencing severe challenges. Following changes to tax and spending announced last week by the country’s new Chancellor of the Exchequer Kwasi Kwarteng, the development sector faces a third round of cuts to planned international programs — as the pound plunges to record lows.
The 2021 U.K. aid cuts, from 0.7% to 0.5% of gross national income, had already caused a smaller development pot this year — with the U.K. aid budget now estimated to be in the region of £12 billion.
But the international development and humanitarian programs to be funded from that amount are now at further risk.
The reasons for this are complex — a perfect storm of political and economic factors — not just internationally but also at home.
The country is facing a cost of living crisis driven by a collapse in the currency and a jump in energy prices triggered by Russia’s invasion of Ukraine, combined with weak growth, spiking inflation, and continued fallout from Brexit. This takes place against the backdrop of a febrile political climate that has just seen the country appoint its fourth prime minister in eight years.
Last Friday, the government of the latest incumbent, Liz Truss, held a “fiscal event” which saw unprecedented measures, including a £45 billion tax cut — the largest reduction since 1972, according to the Institute of Fiscal Studies — sending out a clear signal that it wants to prioritize domestic issues and keep government spending to a minimum, and that it has no problem increasing debt to do so.
All of these factors have created a difficult political environment for the 0.5% aid budget. And even before the current turmoil, that figure was being treated by the Treasury as a cap, rather than a minimum spending target, despite the lack of any laws requiring this fiscal approach. On current financial trends, the country is unlikely to meet the fiscal tests introduced by the previous chancellor, Rishi Sunak, to return to a 0.7% aid budget until 2027-28 at the earliest.
The main cause of direct concern for the aid budget is the amount being used by the Home Office to pay for an influx of refugees, primarily from Ukraine, Afghanistan, and in small boats. Estimates of how much this will be, by Center for Global Development, Save the Children, and the ONE Campaign, found a figure of between £2.5 billion and £3 billion. A Home Office spokesperson advised Devex to apply for a Freedom of Information request to find out the amount — which takes around 20 days, but can also be sidestepped by the government.
Cuts of at least £919 million will need to be made to international programs to pay for the Home Office costs, according to an analysis by CGD — which also estimated there would be over 158,000 aid-eligible arrivals in the U.K. this year. The research also found no other countries from the Group of Seven major economies were funding refugee costs from their existing aid budgets, and that the U.K. has nearly doubled how much aid it reports per refugee compared to 2019, from an average of £11,200 to £21,500 in 2021. The only other country in the OECD-DAC to claim more last year was Hungary.
Ballooning Home Office costs are already believed to have caused the freeze of “non essential” aid funding in July. The government will “prioritise spending that is vital to protect against immediate threat to life and wellbeing, will prevent people falling into humanitarian need, or will prevent delays to accessing healthcare, primary education, sanitation and clean water, in addition to considering the value for money of any decisions,” said Vicky Ford, the minister for international development.
Ford said the freeze did not reduce existing programming. “We have continued to meet our contractual arrangements for activity which has taken place.” The Foreign, Commonwealth & Development Office did not respond to an email from Devex asking when the freeze would be ended.
While it is not against the rules imposed by the Organisation for Economic Co-operation and Development's Development Assistance Committee to spend aid on first year costs for refugees, many experts think that it should be additional to the 0.5% budget to avoid disruption to planned programming and because the money is not being used to help low-income countries and refugees in the U.K. pay back into the economy through taxation.
Russia’s invasion of Ukraine has created vast and unanticipated humanitarian need. At least £1.5 billion has been spent by the U.K. government on humanitarian relief and economic support for Ukraine.
Politically, it appears there is a growing appetite for the aid budget to be used for Ukrainian reconstruction, despite the ongoing conflict. Politico reported the newly created international development minister role, held by Vicky Ford, is “expected to focus on reconstruction in Ukraine.” The U.K. is also hosting a conference dedicated to Ukraine’s recovery in 2023, FCDO Minister Graham Stuart told Parliament on Sept. 6.
More generally, Truss is known for her a strong geopolitically realist view of the world and said as foreign secretary that aid should challenge “malign actors.”
The reduced budget available is made worse by the fact that much of the U.K. aid budget is made up of existing commitments, which are not eligible for the kind of salami-slicing the Treasury is keen to impose.
While the belated international development strategy, released in March to disappointment among some aid experts, committed to reduce multilateral spending, these reductions will take time, so any reductions will fall upon an extremely limited discretionary spend, which typically funds things such as NGO programming.
There is a sliver of good news for domestic U.K. organizations. The CGD analysis also said that because of falling aid contributions to the European Union, and potentially growing gross national income, up to £1.2 billion more could be made available.
The reduction in the aid budget is compounded by a number of other factors that add to the difficulties of the country’s beleaguered development sector.
There appears to be growing evidence in NGOs’ annual reports and accounts that the U.K. public had also started to reduce its giving in 2021, and there is every reason to believe that this has continued into 2022, and potentially grown worse.
Development organizations have been hit by a sharply rising cost base, with inflation hitting energy prices, travel, and wages.
While inflation is at 10% in the U.K. as a whole, it is worse in some of the areas nonprofits work, such as food. Ian Mitchell, senior policy fellow at CGD and lead author of the analysis mentioned above, says food prices have risen 25% globally.
One problem is that grant funding has not kept pace. Many organizations arranged multiyear grant packages based on costs agreed before inflation took off. They are now having to make up the difference from their own pockets.
And all of the above has been made worse by the collapse of the pound, which means donations can buy far less.
The result, according to Bond, the U.K. network for NGOs, has been “complete financial turmoil.”
Rowena Warren, director of U.K. finance and resources at Ripple Effect, the NGO formerly known as Send a Cow, explained how this is playing out in practice.
She said high inflation rates in East Africa, combined with extreme food insecurity in the region and the falling sterling rate, had affected the ability of British NGOs to purchase local supplies and services such as transport.
“In the short term, we are mitigating this risk by holding funds in both sterling and dollar accounts and transferring funds to country operations when the rate is favourable. If rates continue at a similar level for the next 12 months, we expect that foreign exchange losses will mean our operations cost us an extra £250,000, which is currently unfunded,” she said.
Given the U.K.’s domestic difficulties, and the history of animosity toward aid and development from some influential parts of the political and media class, the long term prospects — at least under the current Conservative government — could be challenging. Media commentary critical of sending money overseas appears to have been creeping up, particularly among right-wing pundits.
The closure of DFID and the 0.7 aid budget cut also came about during a time of political and economic uncertainty.
Truss has promised to increase defense spending to 3% of gross domestic product by 2030. While there needs to be spending on weapons that have been sent as military aid to Ukraine, the commitment is “very significant, a major commitment even over 8 years,” said Mitchell.
While this commitment is contingent on Truss winning the next election, which must take place by January 2025, how 3% defense spending will be interpreted by policymakers remains to be seen. There could be scope for global health to form part of the country’s strategy, which could be funded by the aid budget, said Mitchell.