An Overview of the Impact of Proposed Cuts to UK Aid

Summary

This note highlights a number of relevant figures in relation to the proposed reduction of the UK aid budget from 0.7 percent to 0.5 percent of gross national income (GNI) and looks at potential impacts.

Size and pace of proposed reduction

• The move to 0.5 percent and lower GNI will reduce UK aid by £4.5bn, or 30 percent relative to 2019
• The reduction from 2020 to 2021 of £4.1bn (25 percent) was announced two months before the year began, whereas the growth from 0.5 percent to 0.7 percent took four years (the increase from £10bn to £15bn took six years)

Wider UK international spend

• Outside of aid, international spend through the EU (£8.6bn net in 2020) will fall from 0.4 percent of GNI to near zero by 2025
• The government’s defence spending, at 2.1 percent of GDP in 2019^[1] (above the 2 percent NATO target) will rise by £6bn per year by 2021, to over 2.4 percent of GDP

Fiscal situation

The chancellor said that the UK aid budget would return to 0.7 percent of GNI “when the fiscal situation allows.”

• The Office of Budget Responsibility (OBR) expects the economy to return to its 2019 size by 2022
• On current government plans, the “current deficit” is expected to return to near 2019 levels in 2025
• The saving of £4.3bn is very small relative to UK debt. If maintained for five years, the savings would reduce debt levels by less than 1 percent
• Despite the rise in debt, the UK’s annual interest payments have fallen—from 1.7 percent of the economy in 19/20 to under 1 percent in the coming period

G7 and G20 comparisons

• France and Germany both plan to provide over 0.5 percent of GNI in aid next year
• At least four G7 members plan to increase the absolute amount of aid in 2021
• The UK’s debt as a share of GDP is third lowest in the G7 (and below the US)
• The foreign secretary incorrectly suggested 0.5 percent would put the UK second in G20 for aid as a share of GNI—it would also be below Saudi Arabia and Turkey (the EU is also in the G20, and four of its members are above that level)

Potential impacts

It is not yet clear which programmes will be cut in 2020 or 2021. However, a cut of a 30 percent will have a major impact:

• If plans on aid spending for climate, refugee costs, EU payments, and other areas (see below) are maintained, then remaining bilateral aid will need to fall by over 50 percent

The spending review has set an aid budget of £10bn for 2021. Looking at 2012-13 when UK aid was last at this level, we could expect:

• Spend on the 46 least developed countries to fall by £1.2bn
• Humanitarian spending to be £0.9bn lower; health spending to be £0.3bn lower

Finally, we undertake a very simple illustration of the potential impacts which scale down the government’s own reported aid results. If the government cuts lower-impact programmes, these may overstate the impacts, but conversely, if cuts are steeper, or on higher impact programmes that are easier to cut quickly, they may be higher. A 30 percent reduction in results would include (but not be limited to):

• 5.3 million fewer children a year immunised, resulting in 100,000 fewer lives saved each year
• 4.5 million fewer children a year gaining a decent education

Introduction

This note looks at the size and impact of the government’s plan to reduce aid (official development assistance, ODA) to 0.5 percent of the economy (gross national income, GNI) in 2021.

After looking at the likely size of the reductions and implied budget, it compares this with the UK’s other areas of international spend, and plans in the G7 and G20. It looks at the fiscal circumstances of the UK and concludes with some potential impacts of the planned reduction.

For forward plans, it uses the November update of the Office of Budget Responsibility (OBR) projections of GNI and other fiscal aggregates.

Government aid plans and projected GNI

The UK’s ODA budget is projected in table 1.

Table 1. Expected UK ODA budget and comparisons

Notes: This table uses OBR estimates and projections of GNI to estimate ODA at 0.7% in 2020 and 0.5% in 2021. The spending review suggested a 2021 budget of only £10bn. Figures may not sum due to rounding.

The figure in 2020 is not confirmed. The government had previously identified £2.9bn of reductions which, if implemented, would mean an aid budget of £12.3bn in 2020 and amount to 0.6 percent of GNI.

In 2021, the ODA budget will be £4.3bn/year smaller under 0.5 percent (29 percent reduction) than under 0.7 percent.

Steepness of the decline and commitments

It took four years for the ODA budget to grow from 0.5 percent in 2009 to 0.7 percent in 2013. To get from £10bn to £15bn, it took six years (2013, £11.4bn to £15.2bn in 2019).

The 2021 reduction (of at least £4.3bn vs 2020, or 30 percent) was announced in November, less than two months before it took effect in January 2021.

The UK has already made significant commitments in this period, meaning that cuts will be strongly concentrated in uncommitted areas, including bilateral aid.

Some known commitments in 2021:

• EU ODA (~£1.2bn)
• Climate (~£2.3bn based on annualising five-year commitment)
• CDC (declared budget of £782m for 2021)
• Global Fund (declared budget of £440m for 2021)

In addition to these amounts,  the UK’s contribution to the World Bank (IDA) will be £1 billion on average over the next few years. In-donor refugee costs averaged around £400 million between 2016 and 2019, and in-donor administration costs were above £500 million per year in the last three years. Both are costs that may be difficult to reduce significantly in a short time frame.

If these existing commitments are maintained, and assuming there is no re-profiling between years,^[2] these account for over 6.6bn, leaving £3.5bn for bilateral and other aims. This is substantially below the bilateral spend of £6.1bn spent the last time the UK had a £10bn aid budget (see section below), and would be a 60 percent reduction on the 2019 bilateral aid budget.

When will the fiscal situation allow a return to 0.7 percent?

The government has said it will return to the 0.7 percent “when the fiscal situation allows.”^[3] In terms of the economy, the OBR expects the UK economy to return to its 2019 size in Q4 2022.^[4]

The government’s main fiscal measure uses the current budget—this compares tax receipts with non-investment spending. OBR projections are based on current policy, which may be unduly pessimistic given the absence of tax or other spending reductions. Still, in 2019/20 the current budget deficit was 0.6 percent of GDP or—looking at the period in which the 0.7 percent target was met (from 2013)—the deficit was at or under 5 percent. The OBR expects the current deficit to fall under 5 percent in 2021-22, and for it to fall to 1 percent by 2025/26.

Figure 1. Current budget deficit (% GDP)

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In terms of debt, the OBR expects this to be £2,478bn in 2021/22. The 2021 saving of moving to 0.5 percent is expected to be just under £4.3bn. If we take five years of this annual saving, it would equate to 0.9 percent of this debt.

Even as the UK’s stock of debt rises, the cost of servicing this debt is forecast to remain at historic lows up to 2025/26. The OBR projects that central government debt interest will comprise less than 1 percent of GDP over the period of the Spending Review, below its (19/20) pre-COVID level of 1.7 percent.^[5]

Other G7 country debt levels and aid plans

In each of years 2020 and 2021, the UK is expected to have the third-lowest debt among G7 countries, relative to the size of its economy. Each of the three countries with larger debt than the UK (France, Italy and Japan) have stated their intention to increase their ODA/GNI ratio in 2021. However, France is the only country of these three to overtake the UK in terms of this ratio.

Table 2. G7 Debt as % of GDP projection, and ODA plans

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Sources: Debt figures from IMF WEO (Oct 2020). ODA plans from donor tracker other than for France & UK

Comparison of £10bn vs £15bn aid budget

The government’s proposed 2021 aid budget is likely to be around £10bn (from £15bn in 2019). We look at the last time it was at this level to consider how spending areas could be affected. Over 2012 and 2013, the UK’s aid budget averaged £10.1bn.^[6] Looking at how ODA was allocated across this period provides some context to assess UK aid allocation post-cuts. Table 3 compares the historic £10bn budget with 2019’s £15bn budget.

Table 3. UK aid allocation under a £10bn & £15bn ODA budget