Vaibhav Ashwin Kumar is a guest writer for the Warwick Economics Blog, and studies Economics and Politics at The University of Manchester.
On the 25th November 2020, Chancellor Rishi Sunak announced a decision to cut the UK's overseas aid spending from 0.7% to 0.5%, which is estimated to save approximately £4 billion a year. This announcement elicited mixed reactions from politicians, with some calling it a realistic decision that prioritises UK finances, whilst others have criticised this move coming at the height of a global pandemic. To me, this was an interesting decision that reneged on the Conservative manifesto of the 2019 General Election, so much so sparking the resignation of a Minister.
The current pandemic has widened the ever-present inequality in society and such a policy decision only exacerbates this problem. UK’s overseas aid spending benefits those in poorer countries who are often dependent on such foreign aid for their survival. Covid-19 has had a catastrophic effect on the world’s poorest countries, who unlike their developed counterparts, have weaker public finances. In fact, The World Bank stated that the end of 2020 was forecast to bring about the first increase in extreme poverty in two decades.
This decision is certainly an outcome of the severe economic crisis triggered by the pandemic, resulting in record-high amounts of Government borrowing. On multiple occasions in the past, Chancellor Rishi Sunak has vowed to balance the books and this move possibly indicates a gradual movement towards achieving that objective. However, I believe it is important for the Chancellor to note that in the midst of an unprecedented pandemic the immediate priority should be protecting jobs and securing the income of households, both at home and overseas. According to me, this decision shows the inherent conflict between protecting the national interest versus serving the global interest. Further, if this policy were to be viewed in conjunction with the increase in defence budget by £16.5 billion (which was announced only 1 week earlier on 18th November), there is a noticeable and clear emphasis on prioritising the national interests. With the UK being on the lookout for international trade deals in a post-Brexit world, this decision is unlikely to help the prospects of achieving one. On the contrary, this policy decision projects the UK’s nationalistic tendencies and possibly reduces the likelihood of earning the favour of other countries.
An important question raised by some prominent politicians is whether this decision diminishes the UK’s power and influence in the global economy. This could be a potential outcome given the fact that China and France are looking to fill this gap. France has already highlighted their intentions to increase aid contribution to 0.55% of national income in 2022. In my view however, the UK, as an eminent financial and industrial hub, will continue to remain a key player in the global economy. Moreover, as Chancellor Rishi Sunak has also pointed out, even after the UK drops to 0.5%, it "would remain the second-highest aid donor amongst the G7 nations". It is also likely that the UK will revert back to spending 0.7% of GDP once the post pandemic recovery begins.
Whilst the Chancellor’s focus on ensuring strong public finances is commendable, overseas aid constitutes only a miniscule amount of the UK’s overall spending. Therefore, it is unlikely that this cut will have any drastic impact on public finances or the sustainability of government borrowing. This leads me to believe that this policy is primarily designed to support UK finances in the short-medium term while attempting to limit the politically unpopular move of tax rises, which would impact the public at large. It will be interesting to see whether this assumption holds true in the upcoming Spring Budget and what, if any, adjustments are made in relation to taxes!